How retirees across income levels depend on Social Security

If Congress fails to act, more than 60 million Americans could see their Social Security income fall by nearly a quarter within several years.

That is when the program’s retirement trust fund is expected to be exhausted, leaving incoming revenue sufficient to cover only 78% of scheduled benefits and cutting each retiree’s check by 22%.

Created in 1935 and signed into law by President Franklin D. Roosevelt during the Great Depression, Social Security is not headed for total depletion. Lawmakers have long known they will need to close the shortfall through higher taxes, lower benefits, or some mix of the two, but progress has been slow on the politically sensitive issue.

Still, time is running short.

Many lawmakers chosen in the last election cycle will likely be responsible for crafting a solution, and they face hard questions: Who will pay for any changes designed to stabilize the program, and what would the effects be? Would retirement preparedness worsen for many people?

Delaying action has made the problem harder to solve. Even some Republicans, who often oppose tax increases, have recently suggested raising the payroll tax wage cap so higher earners would contribute more.

“Any serious Social Security reform package should be scored on what it does to household retirement outcomes, not only on what it does to trust-fund balances,” said Jack VanDerhei, director of retirement research at Morningstar’s Center for Retirement & Policy Studies.

The details of any fix are especially important because the program touches tens of millions of working Americans, future retirees and people already receiving benefits, many of whom depend on it heavily.

How much do they depend on it?

To explore that question, we examined four hypothetical households — two singles and two married couples — with different income levels and financial resources to show the role Social Security plays in their lives.

In each example, the people are 64 and plan to retire and claim Social Security at 67, the age when they qualify for a full retirement benefit. VanDerhei of Morningstar ran all of the analyses.

The lower-income retiree

Monthly Social Security benefit at age 67: $1,543

Social Security benefit if Congress doesn’t act: $1,204

Social Security often serves as a main income source for the lowest-income Americans, according to other analyses.

Here, a single man who earned an average of $34,000 a year over his working life is among the roughly half of U.S. households with no retirement-account savings to draw from.

The middle-income retiree

Monthly Social Security benefit at age 67: $2,548

Social Security benefit if Congress doesn’t act: $1,987

Total monthly income from Social Security plus savings: About $2,620

In this example, a single worker earned about $75,000 on average over her career. That produces a monthly Social Security benefit of $2,548, which makes up most of her monthly income because she has only $20,000 in retirement savings, generating about $70 a month, similar to households with comparable earnings.

About three-quarters of households in this group also own their homes, and the median household has $137,000 in home equity.

As pensions fade and rising costs for healthcare, housing and college are pushed more onto families, Social Security has acted as a stabilizing force during retirees’ most vulnerable years. If the stock market were to fall just before retirement and damage savings at the worst possible time, Social Security would not be affected.

Even households with strong incomes and savings must accumulate substantial assets to produce even a modest retirement income, and that income may need to last for decades.

A $1 million nest egg typically generates about $40,000 a year, adjusted for inflation in future years.

The middle-income couple

Monthly Social Security benefits at age 67: $5,096

Social Security benefits if Congress doesn’t act: $3,975

Total monthly income from Social Security plus savings: $5,668

Each spouse here earned an average of $75,000 over the course of a career, for a combined total of $150,000. Their $171,700 in retirement savings produces $572 a month. Most households like theirs also own homes, with a median $251,800 in home equity. A little more than a quarter also hold stocks, bonds or mutual funds outside retirement accounts.

The higher-earning couple

Monthly Social Security benefits at age 67: $6,681

Social Security benefits if Congress doesn’t act: $5,211

Total monthly income from Social Security plus savings: $8,131

This couple earned about $261,000 a year together. One spouse earned at least the maximum amount subject to Social Security payroll taxes each year, averaging about $186,000 over a career, while the other earned $75,000 on average.

Their $435,000 in retirement savings could generate $1,450 a month. Most similar households own homes, and the median household has $400,600 in home equity. About half hold stocks, bonds or mutual funds outside retirement accounts.

Many retirees say they feel reliant on Social Security.

But that reliance is more than a feeling. Among beneficiaries age 60 and older in the middle of a five-step income ladder, where median household income was projected at about $90,900, Social Security accounted for 38% of household income on average, according to the Social Security Administration’s MINT model, which uses administrative earnings and benefits records to make projections.

In the next-highest rung, with median household income of $152,300, Social Security made up a quarter of income on average. In the rung just below the middle, it accounted for 56%.

Other studies have found that roughly 42% of households rely on Social Security for at least half of their retirement income.

The program is more than an inflation-adjusted safety net against outliving your money in retirement. It also provides disability, survivor and family benefits. When so much of financial life depends on luck, timing and human vulnerability, this social contract has endured.

Assumptions and sources

1. Each example combines a Social Security benefit calculated for a hypothetical worker born in 1962 who claims at 67 with the retirement savings of real households near retirement with similar wages. The low- and middle-income workers’ earnings follow a career pattern based on actual workers’ pay, rising with national wages; the higher earner receives at least the maximum amount subject to Social Security tax each year. Career-average earnings are shown in 2026 wage levels. Benefits are in 2026 dollars adjusted for inflation.

2. The reduced payment assumes the retirement trust fund is depleted in the fourth quarter of 2032, as projected in the 2026 Social Security Trustees Report, after which about 78% of scheduled benefits would initially be payable. This is an illustrative proportional reduction, not a benefit estimate from the Social Security Administration.

3. Retirement savings figures are medians from the Federal Reserve’s 2022 Survey of Consumer Finances, adjusted for inflation, for comparable households headed by someone age 55 to 64 in 2022. They are not projections; balances could rise or fall with contributions, withdrawals and investment returns.

4. Retirement savings include individual retirement accounts such as Roth IRAs and employer plans such as 401(k)s and 403(b)s. Income from savings assumes a 4% annual withdrawal. It excludes pensions, earnings, home equity and other assets such as stocks, bonds, mutual funds and annuities held outside retirement accounts. All income figures are before taxes.

5. All data and analysis are from Jack VanDerhei, director of retirement research at Morningstar’s Center for Retirement & Policy Studies.