Many Americans rely on Social Security alone to get them through retirement.
Preparing and saving money for retirement can be a daunting task for many Americans. It takes decades and prudent financial planning to prepare for retirement.
You could probably get by on Social Security alone, but you would have no room for financial error.
Here are four reasons you shouldn’t count on Social Security alone for retirement.
Social Security could become insolvent sooner
Social Security was projected to become insolvent by 2035 before the pandemic. However, the future insolvency date of Social Security changes during economic slumps or changes in federal fiscal policies.
The coronavirus pandemic crippled the American economy for a year, involuntarily unemployed tens of millions of Americans, and required two presidential administrations to issue mass economic aid to citizens.
In dire economic times, something has to give, even on the federal level.
Now, Social Security is projected to become insolvent by the year 2033. By this date, less than 76% of those qualified for benefits will be paid.
The Disability Insurance Trust Fund component of Social Security is projected to become insolvent by 2057.
Still, this new projection is about eight years sooner than some pre-coronavirus era projections.
Social Security’s insolvency date is always changing according to the economy and politics of the moment. However, the pandemic has changed the economics of the world. Pay attention to this date as your retirement nears.
Higher COLA adjustments
Social Security benefits are always automatically adjusted to compensate for inflation. It’s called the Cost of Living Adjustment information, and Social Security benefits have been adjusted relative to inflation since 1975.
COLA adjustments are made when deemed necessary. For context, the COLA adjustment in January 2009 increased benefit checks by 5.8%, a year after the economic crisis of 2008.
In January 2010 the COLA was 0.0%. And in January 2020, it was 1.6%. In January 201 it was 1.3%.
By January 2022, the COLA will increase Social Security benefits by 6%.
This does not mean you will necessarily have more money in your pocket. Inflation weakens the buying power of the dollar.
So, a 6% COLA increase in benefits only means that increase will help you keep pace with current inflation rates. Everything will cost up to 6% more than they did before the COLA increase.
If you don’t have extra income, your Social Security benefit could get you less buying power.
Average benefits may not be enough
The average Social Security benefit is $1,543, or about $18,500 annually.
When you consider the COLA rate for 2022, an average retiree may not be able to survive in a large American city on $18,500 annually.
If you are relying on Social Security alone for retirement, then you are essentially living without a financial safety net.
If you are hit by a financial or medical emergency, you could go bankrupt.