The Social Security Reality Baby Boomers Were Never Fully Told

Social Security benefits are a crucial income source for many Baby Boomers, especially as Fidelity reports that the average 401(k) balance for this generation comes in at just $249,300, while the average IRA balance totals around $257,002.

Unfortunately, although many Boomers will rely on Social Security to help them cover essential costs, many members of this age group simply don’t know the truth about this benefit program or what it can do for them. In fact, there are a number of Social Security realities that Boomers are in the dark about — and this lack of knowledge could come back to haunt them.

Here are a few key things that Boomers weren’t told about Social Security, along with some details about why this lack of information could end up leaving far too many Boomers facing financial insecurity as they move into their later years.

You don’t have a personal Social Security account

Most people know that they pay Social Security taxes out of their paychecks and that they get benefits in return. However, the fact that Social Security is considered an “earned” benefit funded by Social Security tax has created considerable confusion around what is actually happening to the money that workers are paying in.

In fact, the Cato Institute reports that almost one in four Americans believes they have a personal Social Security account, while 55% of Americans have no idea how Social Security is funded. This lack of understanding is a problem, given that Social Security’s trust fund is facing impending shortfalls that could hit many Boomers during their retirement years.

The reality is that the government can change the rules for how much money retirees get at any time, and they’ve done it before by moving the full retirement age later.  Proposals were on the table as recently as the Obama Administration that would have resulted in retirees getting smaller Cost of Living Adjustments, which would be a de facto benefits cut. Worse, an automatic 17% benefits cut could happen in 2035 if no changes are made.

Now, it’s true that Social Security is a very popular program, and lawmakers are likely to try to preserve benefits. But, unlike funds you put into your 401(k) or IRA, which truly are yours, your contributions to  Social Security are not set aside for you, and your continued ability to collect your expected benefits relies on lawmakers keeping their promises.  This is one of many reasons why you need to make sure you have money in savings to help support you.

Social Security benefits cannot be your only income source

According to Pew Research, over 38 million people rely on Social Security to provide at least half of their total income, and for around 26.5 million people, benefits make up 3/4 of their income. Unfortunately, for those who rely too much on Social Security, retirement can be full of financial worries.

Far too many Boomers count on these benefits to support them because no one told them that Social Security is supposed to be part of a “three-legged stool” that includes a pension and savings on top of benefits.  Given that you are supposed to have plenty of other money, Social Security was only designed to replace 40% of pre-retirement income.

Coping with a 60% cut to your earnings is not possible without major, drastic lifestyle changes that many people are simply not going to want to make.

This is why it is so critical for seniors to learn the truth about what benefits can do for them.  Boomers can and should count on getting some Social Security money, but they should also do what they can to make sure they have savings that will provide enough income to replace another 40% or so of pre-retirement earnings.

Social Security COLAs don’t work as well as they should

The last frightening fact about Social Security that many retirees don’t realize has to do with the inflation protections built into the benefits program.

Retirees are promised a Cost of Living Adjustment (COLA) when they sign up for Social Security, and, in most years, they do see an increase to help benefits keep pace with inflation. The problem, however, is that this benefit increase is rarely large enough to actually prevent them from losing ground because the formula used to calculate it underestimates how much of their income is spent in areas with higher-than-normal inflation, like housing and healthcare.

The Senior Citizens League has warned that  Social Security has lost 20% of its buying power since 2010 because of problems with the COLA formula. Far too many Boomers don’t realize that the value of benefits is slowly eroding over time, so they don’t plan for that.

All of this adds up to a recipe for disaster for older Americans who don’t realize what these harsh truths about Social Security mean for them, since these issues aren’t widely known. Baby Boomers must learn about the limitations of  Social Security and ensure they have enough savings to help them enjoy financial security in their later years, even when benefits turn out to be not nearly as generous as expected.