Why Your Social Security Alone Isn’t Going To Cut It For Retirement

Getting the Most from the U.S. Retirement System

Ever seen a patchwork crazy quilt? The U.S. retirement system is a lot like that: many different pieces put together to form a unique, if sometimes – incohesive, whole. These days few companies are offering traditional, fixed-benefit pensions. And the Social Security program, never intended to serve as an individual’s only source of retirement income, faces some problems.

So everyone should be building their own nest egg that will last throughout their so-called “golden years.”

How does the U.S. retirement system compare with those in other countries?

I’m sorry to say the U.S. lags behind most developed countries in terms of what it provides for those who have left the workforce after many years on the job. Iceland has the best system, according to Mercer CFA Institute Global Pension Index of 2021. Norway, the Netherlands, Switzerland, Denmark, Australia, Ireland and New Zealand also take good care of their retired workers.

The U.S.? Not so much. The Natixis Investment Managers Annual Global Retirement Index put the U.S. in 18th place among developed countries, down from 17th over the previous year.

What is the basic structure of the U.S. Retirement System?

Our fragmented system has three basic components: Workplace options (formerly commonly provided by companies as defined benefit plans), Social Security and personal savings.

As America’s population ages, more and more people will depend on retirement income to get by. In 1950, about 14% of the population was over age 65. By 2050, that is projected to exceed 40%. Today, about 56 million Americans are over 65; that number is expected to increase to more than 78 million by 2035.

What’s wrong with workplace options?

For one thing, they shift the responsibility–and risk–to individuals. These options (including 401(k)s and Roth IRAs) aren’t accessible to everyone; the Center for Retirement Initiatives estimated some 57 million Americans fell into the retirement savings “gap” in 2020.

Workers who do have access to a workplace plan are not required to join it. There is insufficient knowledge about or participation in these plans, meaning many workers are not taking advantage of them to build their retirement nest eggs. It’s also difficult for low-income families to give up some of their earnings to put into a retirement savings plan and inflation and costs such as health care can eat into whatever someone has put aside for retirement.

What are some of the issues with Social Security?

About one-fourth of seniors rely on this public benefit for most, if not all, of their income, according to the Social Security Administration. The average monthly benefit in 2022 was around $1,600–not much to live on! Benefits may fall in the future if the program doesn’t have enough money to pay the full benefit amounts. Other federal government retirement related programs, such as the Pension Benefit Guaranty Corp., which backs up struggling private pension plans, is facing potential insolvency as early as 2025. Larger pension funds, such as the ones that cover public employees, are underperforming and longer life spans increase the likelihood that many Americans will “outlive” their retirement savings and benefits.

What keeps people from saving more?

Individual savings – the third and increasingly important component of the retirement system – can be constrained by inflation, low wages, out-of-pocket health care costs and other issues. Longer life spans means the money we do have must be stretched further or we risk outliving our savings. More than half the independent (or gig) workers are worried they won’t be able to save enough for retirement, according to a recent Pew Charitable Trusts survey of 1,000 people.

What steps are being taken to help people save more?

Employers can start automatically enrolling workers into 401(k) plans, thanks to the Pension Protection Act of 2006. The employee contribution amounts also can be automatically increased annually. AARP found that Americans are 15 times more likely to save for retirement when they can do so via payroll deduction at work. Eleven states and two cities – New York and Seattle–have adopted programs that require companies to offer retirement programs to employees, according to the Center for Retirement Initiatives.

What can I do to help myself now?

Max out your retirement account, at least to the amount of any company match. Next year, you’ll be able to put an extra $1,000 into your 401(k) plan. Make your retirement fund contribution automatic so you’re not tempted to skip a month.

Try to save at least 15% of your pre-tax income for retirement, including any workplace plans and contributions from employers. Don’t forget to check out a Roth IRA. Comb your budget for possible savings that could go toward your retirement fund; check out our retirement worksheet for help. And talk to your financial advisor to make sure your accounts and asset allocations align with your goals.