Personal Finance

If You’re Planning to Retire on Social Security, Think Again

Expertise: Personal Finance, Personal Development
32 Articles Written
social security

In 2016, the U.S. collected just under $4 trillion in tax revenue. Yes, trillion with a T. Roughly $2.7 trillion of that revenue – just over two-thirds of the total – went to paying our country's social insurances (Social Security, Medicaid and Medicare, unemployment compensation, veterans benefits, and the like). Another $604 billion, or 15.3% of total spending, went for national defense; net interest payments on government debt was about $240 billion, or 6.1%. Education aid and related social services were about $114 billion, or less than 3% of all federal spending. Everything else – crop subsidies, space travel, highway repairs, national parks, foreign aid, and much, much more – accounted for the remaining 6%.

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

Not only is the majority of our federal outlays spent on these social insurances, this figure is growing every year. When looking at the spending on these social services as a percentage of GDP, only 1% of GDP was spent on social insurances during the World War II era. In 2016, 15.5% of the U.S. GDP was spent on these programs.

By a landslide, the most costly of these social insurance programs is Social Security. It made up a whopping 24% of fiscal spending in 2016. Social security and these other social insurances continue to consume more and more of the fiscal spending each year, and the problem is about to get a whole lot worse.

The Baby Boomer Problem

Twelve thousand new baby boomers are ready to collect social insurances every single day. There is a massive wave of baby boomers knocking at the door, ready to collect their Social Security and the other social insurances that they have been promised.

Baby boomers, according to the S. Census Bureau, are the demographic group born during the post-World War II baby boom, approximately between the years 1946 and 1964. In 2017, this includes people between 53 and 71 years old. Over this period, more than 76 million babies were born in the United States. Factoring in immigration, the current estimate of the baby boomer demographic is close to 80 million people. A big wave of the population is focused in this one age group.

In 2017, the median age of a baby boomer is 62 years old. In the United States, 62 years old is the age individuals can first retire and begin to receive Social Security benefits. Many baby boomers have lived their whole adult lives aiming to retire between the ages of 62 and 66 with their Social Security benefits as their support system. In fact, the math tells us that over 12,000 boomers will be retiring every day for the next several years: ([80,000,000 boomers/18-year age span]/365 days per year = 12,176 retired boomers per day.) Of course, some individuals included in that figure will not retire, and some will die. However, the point is not to be exact, but rather to show that there will to be a massive wave of retirees in the United States in the next 1–5 years.

Unfortunately, of those tens of thousands of retires per day, only a small percentage are actually financially ready to retire. Research by the Insured Retirement Institute depicts the likely financial strain heading for many retiring baby boomers. According to the study, 24% of baby boomers have no retirement savings—the lowest number since the study began in 2011. Only 55% of Baby Boomers have some retirement savings, and of those, 42% have less than $100,000. Thus, approximately half of retirees will be living off of their Social Security benefits.

Related: How Much Do I need to Retire?

We Can’t Afford the Promises We Made

like an unstoppable glacier, social insurances continue to carve a larger and larger chunk out of the fiscal spending budget. The issue is already a big problem. It’s only quickly getting worse. The reality is we can not afford to pay for the promises we have made. Fair or not, we overpromised and will surely under deliver. The question is, who gets screwed? Can you imagine a politician coming to a podium, tapping the microphone and saying, “We are sorry. We overpromised and we no longer will be paying Social Security.”? Not going to happen. Not only would this be political suicide, it would financially decimate entire demographics. Maybe that is a little extreme. But no matter how you try to correct the problem, someone has to admit mistakes. Someone will lose big, and that person will likely be pissed. Rightfully so.

social security

So, What to Do?

With the right plan, the social insurance burden can slowly be stripped from its recipients with some fancy math and a sleight of hand.

What if no politician had to commit political suicide by bearing the bad news, and no social insurance recipient had to know they were the ones being screwed? Well, that’s exactly what is happening. Occasionally, government officials can be pretty thrifty and postpone issues without having to confront them today. With the right plan, the social-insurance fiscal burden can slowly be stripped from its recipients with some fancy math and a bit of sleight of hand. On a basic level, I explain how it’s done below.

The Magic Trick

The dollar value certain recipients of social-insurance programs (including Social Security) receive is mathematically derived and adjusted based on standard quality of life. If the price of everything goes up an average of 2% in a year, social-insurance recipients are promised a 2% increase on their income from the government. These adjustments are called cost of living adjustments or (COLAs). This is determined by the consumer price index (CPI). The higher the CPI, the more money the government needs to spend on these income payments in order to keep pace with the cost of living. However, this same government is about $20 trillion in debt. The lower the CPI, the less money the government needs to spend on cost of living adjustments.

The government has a few tools in its belt to manipulate the CPI. First, the raw data used to calculate the CPI is not available to the public. Second, in the last 35 years, the government has changed how it calculates inflation 20 times or more. The Feds call them "methodological improvements" to the CPI that allegedly provide more accurate reflections of consumer prices and inflation. Maybe, But it also sounds like a great opportunity to make the math tip in favor of the government.

An example of these “methodological improvements” includes the addition of substitution and hedonic changes to the fixed basket of goods and services.

Related: Why My Retirement Strategy is Cash-Flowing Rentals


One way to describe how substitution within the CPI calculation is used is “steak to hamburger.” The Bureau of Labor Statistics (BLS) essentially says that if it’s been tracking the price per pound of a T-bone steak for years, but then one year the price of steak shoots up, it will make a substitution for steak with hamburger. It argues that this is a reflection of how the consumer will react to the increased price of steak. But would anyone really agree that the quality of hamburger and steak are equal? What happens when hamburger gets too expensive? Do we substitute with hot dogs?


Hedonic changes is another tool the government added to its tool belt when calculating the CPI. Hedonic changes can now be made to the inflation calculation if the price of something went up but the newer version was a better, more-useful version of the product. College textbooks is one example. As the prices of college textbooks have skyrocketed over the years, the BLS makes adjustments to those increased prices for “improvements” in quality. The BLS says now that textbooks have been printed in color and have more images, it needs to make an adjustment to the price of the books to accurately reflect the increased quality. I have searched for examples of the BLS adjusting for a decrease in quality, but can’t seem to find any. Maybe the BLS believes an IKEA table made of pressed cardboard is of comparable quality of a real hardwood. Who knows.


The Trouble with Tracking Inflation

Inflation isn’t a uniform figure. The effects of inflation on each individual are different depending on what each person buys. For example, a major criticism of the COLAs for Social Security is that it does not accurately reflect the spending habits of seniors who are the majority recipients of these COLA’s. Seniors argue that in comparison to the country as a whole, they spend significantly more on healthcare. With healthcare prices rising quickly, you can see how this could skew seniors’ actual inflation rate from that of the country’s average.

The government has tried to address these issues with several versions on the CPI, and with several methodologies on calculating it. But each time an improvement is made, there seems to be a small tip in the favor of the government: A new rule, a new trick, a new tool. Through these subtle slight-of-hand mathematical changes, what we are left with is the ability for policymakers to skirt blame and also do what’s necessary by pulling back on the social-insurance costs, which are out of control.

Whether those mathematical changes adjust inflation one-tenth of a percent or 3% off of the accurate inflation metric, this is undoubtedly a way for the government to pay less to Social Security beneficiaries as well as other social programs with COLA’s indexed of the CPI.

I did not write this article to explain this issue in major detail. Rather I hope to create a spark in you, the reader, to research this topic further. Being aware of this will allow individuals make better assessments of how they need to handle their own financials and adjust dependency on these types of programs, now and into the future.

What do you think about fading social benefits? Let me know in the comments below!

Jered Sturm is the co-founder of SNS Capital Group LLC. Starting in the industry 15 years ago as a maintenance technician for residential rental properties, Jered built on that experience to start ...
Read more
    Christopher Smith Investor from brentwood, california
    Replied over 2 years ago
    Yes, its called the Theory of Gradual Erosion and its happening in many circles, not just Government sponsored largess. The private (and public) sector shift from primarily defined benefit to primarily defined contribution pension plans, and the further gradual dilution of even those original contribution vehicles. Ah alas, the chickens must come home to roost one way or another. I guess the new golden rule will be “plan accordingly”.
    Douglas Larson Rental Property Investor from Salt Lake City, UT
    Replied over 2 years ago
    I loved your detail and analogies! As a gen-X-er, I have heard all my life that “social insecurity” was inevitable, simply because of the boomer demographic. I actively chose real estate investing to offset the probability that no money will be left in the kitty when I am old enough to collect. Another example of over-promise and under-deliver is the corporate and municipality pension plans that are also coming up short. The giant Ponzi schemes may not fail all at once, but as you clearly describe, the actual benefits will continue to shrink. All of that said, government-sponsored insurances were never designed to fund a luxury, perpetual vacation in the last 15-25 years of life. After the Great Depression, government-sponsored programs were instituted as a safety net for the elderly and the poor. Still, millions of people in the US were promised more than they will receive, after a lifetime of work. If they have not created other streams of income, their future does not look very bright.
    Erik Whiting Real Estate Investor from Springfield, MO
    Replied over 2 years ago
    Well-written, well-researched! I think the only (possible) addition I have is that according to what I’ve seen Medicare will bankrupt sooner and harder than Social Security. If the numbers I saw are accurate (and who knows with the Interwebz?), the present day dollar value of the unfunded Medicare mandates are 2.5-3 x those of Social Security. Govt can “play” with Social Security numbers, CPI, etc all they want, but doctors and hospitals will only accept so much cram down before they move into private practice, move away from specialties that cater to lower-paying services, and/or accept fewer Medicare patients. That tend is already happening. I guess those who rely solely on social programs will be forced to accept care from the Docs who got “C-/D+” averages in med school, whereas those who pay out of pocket will receive the summa cum laude graduates. I’ve been trying to warn the folks I know and care for about the changes that are coming to SSI, but they seem content to ignore it and say, “The Govt will ‘do something’.” Yes, they will. They’ll rob you blind while arguing they are ‘doing their best’ to ‘fulfill the promises we made our seniors.’ (cough, cough, Baloney Slices). But ultimately, I can’t blame Govt. They proposed the insane ideas that led to where we are today, and We the People accepted their word. Mistake # 1 – Trust, but Verify!
    Karen Rittenhouse Flipper/Rehabber from Greensboro, NC
    Replied over 2 years ago
    Fabulous, Jered. And not only are the baby boomers retiring which means taking more out of social security, but they’re no longer working which means there are fewer employees paying into social security. A double math problem. AND, there are fewer numbers in the “next” generation meaning no way to catch up with the increased demands. At some point, the safety net breaks. I jumped into real estate investing in 2005 because I wanted to secure my retirement as it was obvious that social security and medicare can’t possibly meet the demands of the aging public. I’m so glad I started when I did because I truly won’t need the government. If anyone reading this is waiting to start their investing career, don’t wait!!!
    John Murray from Portland, Oregon
    Replied over 2 years ago
    The cold hard facts about America, it is expensive to live and die here. The name of the game is reach age 65 with supplemental money to see the individual through to the grave. About 2 million should do it for a married couple and 1.5 million for a single adult. For the millennials multiply by 2 and for Gen X multiply by 1.5. We are Americans, our ancestors came with little or nothing. We are not like the rest of the world, we are Americans. Cowboy and Cowgirl up, seize opportunity and prosper. The government does not tell you how to prosper and that is true freedom, that what we Americans have.
    Nathan G. Real Estate Broker from Cody, WY
    Replied over 2 years ago
    Excellent analysis. A quick study of history proves one thing: only the slothful can rely on government to meet their needs. We should all focus on building our own security; if government”provides” anything, it will be a bonus. I’m saddened by the number of people nearing retirement that are relying 100% on social security and Medicare to care for them. Of course, I’m also saddened by the number of people that retire at 65 and live on social security even though they are in great health and fully capable of being productive members of society.
    Hunter Fitch from Mesa, Arizona
    Replied over 2 years ago
    Think about how much money we could save if we just killed off all the boomers? Teehee, obviously kidding. On a serious note, if you are depending SS for all, or the vast majority, of your retirement then you are failing at the game of life.
    Replied over 2 years ago
    Unfortunately the entitlement mentality is common to all generations and is only made worse by feckless politicians who have totally abdicated their duty to lead responsibly. Of course the blame is not all theirs by any means, we as their constituents promise to punish them severely if they even hint at lowering payments to reflect some semblance of fiscal reality, and they all want to be reelected so of course they don’t. Then when the situation becomes clearly untenable the blame game begins in earnest, one generation blaming another, one party blaming the other, as so it goes on and on and on. If you understand this human nature dynamic, you know better than to place undue reliance on these programs.
    Carole G. Investor from Durango, Colorado
    Replied over 2 years ago
    I don’t think claiming my social security benefits that my employer and I paid into for years is entitlement. Those who get disability benefits and are perfectly able to work (I see them all the time applying to live in my apartments)- those are the ones who are taking the free ride.
    Colin Reid Investor from Tampa, FL
    Replied over 2 years ago
    This is why I don’t count SS in my financial planning. If I get it, it’ll be gravy, but I don’t expect to get it. I plan to be financially independent in about 20 years, at the latest (I’m 32 now), and no part of that includes possible pensions, or SS. I’ll be financially independent on my own, and those other streams will be extra to enjoy lavishly, and/or pass on to my son.
    Susan Maneck Investor from Jackson, Mississippi
    Replied over 2 years ago
    Social Security was never intended to provide the bulk of our retirement income, except in the cases of those who will be as poor in retirement as they were in their working life. It is still the best annuity out there if you do the math. I intend to delay collecting my Social Security until I am 70 even though I intend to retire early in order to maximize my benefits. In the meantime I will live off of my rental income. Here is what I find to be ironic; The people who complain the most about how much of our revenue goes into Social Security are also the people who complain the poor don’t pay enough taxes. Yet, the poor pay a much higher portion of their income for Social Security than do the wealthy. Why? Because FICA taxes are only paid on the first 125K of earned income and not paid at all on passive income, whereas the poor pay FICA on all their income. If we think getting rid of programs like Social Security and Medicare would reduce our National Debt, we are sadly mistaken. The Social Security Trust *owns* most of our debt! That’s right, the money we pay in FICA taxes are loaned to the government with interest. So unless we just want the government to expropriate our hard earned money, we’d better tell them ‘hands off’ as far as ending these programs. Still, it is true that if current trends keep up the Trust will run out of money within the next thirty years. This is because the Baby Boom generation retired without producing enough children to replace us. This leads to lowering of the labor participation rate despite low unemployment. That in turn means less money going into Social Security. Also, the current administrations crack down on illegal immigration, if successful, will cost the Social Security Trust 15 billion a year. That is the amount that illegals put into the system but can’t take out (since they are using fake SSNs.) There are two easy fixes to our Social Security system: 1. Raise the cap so that all earned income is subject to FICA taxes. That would keep it solvent for the next fifty years. 2. Encourage immigration to raise the labor participation rate. Ultimately we will have to do this our birth rates continue to decline. Fortunately there is no shortage of people who want to come here to work. Unfortunately the racism of our political climate mitigates against this.
    Gene Cook Residential Real Estate Broker from Penn Valley, California
    Replied over 2 years ago
    Susan, Can’t disagree with much of what you say but the part about disproportionate payment into Social Security is just wrong. The 125k cap on ss tax is also matched by a cap on benefits and those in the higher range of lifetime earnings get a significantly lower percentage return of benefit that those at the lower level of income. That is p as it should be since ss was designed as a minimal survival insurance , but don’t think that the “rich ” are getting more and paying less.
    Gene Cook Residential Real Estate Broker from Penn Valley, California
    Replied over 2 years ago
    Susan, Can’t disagree with much of what you say but the part about disproportionate payment into Social Security is just wrong. The 125k cap on ss tax is also matched by a cap on benefits and those in the higher range of lifetime earnings get a significantly lower percentage return of benefit that those at the lower level of income. That is p as it should be since ss was designed as a minimal survival insurance , but don’t think that the “rich ” are getting more and paying less.