For the Future of Social Security, Just Look Back

$22.54.

That’s how much 65-year-old Ida May Fuller, a resident of Ludlow, Vermont, received on January 31, 1940.

The check number? 00-000-01.

The very first Social Security check.

(That’s about $412 dollars in 2019 money.)

Little did Ms. Fuller know she had just become the very first retiree to benefit from a program that now pays monthly benefits to 67 million Americans. Years later, recalling that first check, she said: “When I received it, I didn’t even think to look at the number.”^[i]

And even though it’s been almost 80 years since that first Social Security payment hit Ms. Fuller’s mailbox, and almost 84 years since Social Security was created, the program’s history is still as relevant as ever.

Here are 3 ways the past is affecting you – and your retirement – today.

1. Life expectancy was much lower

On August 14, 1935, President Franklin D. Roosevelt signed the Social Security Act into law. With the Great Depression still crippling the nation, Social Security’s goal was to help prevent elderly Americans from slipping into poverty.

When the program officially began making payments in 1940, a worker could receive full Social Security benefits at age 65.

But here’s something to consider: In 1935, the average life expectancy was much lower than it is today: 64 years for a woman, 60 years for a man.^[i]

The government calculated that most recipients would die before they became eligible to collect any money, or that they’d only collect benefits for a few years, helping to strike a nice balance in the system between payers and payees.

Fast forward to 2019.

While the age workers can claim Social Security has remained about the same (Full Retirement Age is now either 66 or 67), life expectancies have drastically increased: if a woman reaches age 65, she’s likely to live until almost 87; and a man, 84.^[ii]

Bottom line, retirees are now receiving benefits for a longer period of time. Couple that with the fact the ratio of workers-to-beneficiaries is smaller than it was in the early days of Social Security (37:1 vs. less than 3:1),^[iii] and you can see why there’s a strain on the program.

Why does this all matter to you? According to the latest Social Security Trustees’ report, if no changes are made to Social Security by 2035 – only 16 years from now – recipients will get slightly less than 80% of their promised benefit.

When you’re retired in 16 years, can your retirement plan withstand the shock of a reduction in your Social Security benefit? You need to plan for a worst-case scenario.

2. Intended to replace only part of your income 

Did you know that Social Security benefits were never designed to replace your full paycheck?

Instead, it replaces only about 40% of your pre-retirement income.

Some pre-retirees might be in for shock.

According to USAToday, 44% of Baby Boomers who are retired or who will retire within the next decade expect Social Security to be their main retirement income. These same people also anticipate an average monthly check of $1,805 – but the average for a current retiree is closer to $1,400.

That’s less than $17,000 a year.

So, let’s be clear: If your goal is to retire better, Social Security should just be one part of your retirement plan. You should strive to create multiple streams of income, be it through a pension, 401(k), IRA, or other outside investments.

Take some advice from Ms. Fuller: “You can’t live on [Social Security] of course if you’ve got other expenses to pay, but it’s a help.”^[i] 

3. It was – and still is – an insurance program 

It may seem like Social Security is a pension system or a retirement savings program. But in all actuality, it’s something else.

At its core, Social Security was created as a pay-as-you-go insurance program. As previously mentioned, its initial goal was to protect older Americans from a specific financial risk: living too long and falling into poverty.

And as the program has evolved over the years, Social Security now protects against other financial risks as well, including:

• The death of a main income provider
• Loss of income due to disability
• The death of a child’s income-earning parent or guardian

However, at times, we have heard folks who come into our offices say, “I want to get out everything I’ve put into Social Security.” But would you burn down your house to get back all the homeowner’s insurance premiums you’ve paid over the years?

That would be ridiculous.

Just as you pay insurance premiums on your car or your house, think of FICA taxes as your Social Security premium: You pay into the program to protect yourself from outliving your money (because that’s your biggest financial risk once you retire).

At the end of the day, not many people will be as fortunate as Ida May Fuller. She lived to the ripe old age of 100 and collected $22,889 in benefits.

During her career, she paid a total of $24.75 in Social Security payroll taxes.^[i]

 

[i] https://www.history.com/news/first-social-security-check

[ii] https://www.ssa.gov/planners/retire/background.html

[iii] https://web.stanford.edu/class/e297c/poverty_prejudice/soc_sec/hsocialsec.htm