A recent Nationwide survey revealed that barely more than half—54 percent—of a sample group of Americans knew what percentage of their pre-retirement income would be paid out by Social Security. If the sample translates to the rest of the United States, this means that more than 130 million U.S. adults are unaware of how much they expect to earn from Social Security.
This is a problem because bad information can significantly affect someone’s retirement. If a would-be retiree assumes that the money that he or she receives from Social Security can cover expenses, it could de-incentivize that retiree from making savings independent of Social Security and leave them without enough to retire when it comes time to claim Social Security. On the flip side, someone could underestimate Social Security’s payout and save more cash than needed for retirement. Between the two problems, this is unquestionably the better one to have.
The answer is that Social Security is intended to replace about 40 percent of a person’s pre-retirement income. In reality, one’s Social Security payout is closely linked to one’s earnings during their career, but this is not always reflected perfectly. The National Academy of Social Insurance calculated that the average replacement rate for high-income Americans, defined as those with incomes of $86,011 or more, only earned about 33 percent of their pre-retirement income from Social Security. As of 2021, the Social Security Administration has a wage cap of $142,800; any earnings above this limit will not count towards one’s payments. This means that someone who makes $200,000 per year and someone who makes $10 million per year will in theory receive the same Social Security check—if they are the same age when they claim it.
On the other end of the spectrum, lower earners making $24,191 or less saw a significantly higher replacement rate of 53 percent. For most middle-income Americans, though, the rule of thumb has remained consistent at 40 percent.
Is that enough? For most Americans, probably not. Financial planners have usually recommended replacing about 70 percent of one’s pre-retirement earnings to enjoy a comfortable retirement. In most cases, the remaining 30 percent should be made up either by savings from one’s career, such as 401(k) plans and Roth IRAs, or by other retirement benefits, such as pensions provided by one’s employer. One way or another, unless a person expects their retirement to be exceptionally frugal, it is a good idea to put away some money first.
Trevor Filseth is a current and foreign affairs writer for the National Interest.