Alexander Shcherbak

Report: Cutting Social Security Could Cost Seniors $240,000

If cuts to Social Security come to pass, such as through the elimination of the payroll tax, it could cost seniors hundreds of thousands of dollars.

Derek Silva


Derek Silva

Derek Silva

Senior Editor & Personal Finance Expert

Derek is a former senior editor and personal finance expert at Policygenius, where he specialized in financial data, taxes, estate planning, and investing. Previously, he was a staff writer at SmartAsset.

Published|7 min read

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Key takeaways

  • Social Security income makes up about 40% of the average household’s total retirement income

  • The average household could not afford retirement without Social Security or even with reduced Social Security benefits

  • The Social Security Administration predicts its reserve funds will run out in 2034 and benefits will be reduced to 76% of their current value

  • Both full and partial reductions of Social Security payments would cost seniors tens or hundreds of thousands of dollars

Social Security is a federal program that pays retired workers a monthly benefit. Benefits may also go to people with disabilities, widows, or the children of Social Security recipients, though 76% of all payments go to retired workers. Social Security benefit payments are funded through the payroll taxes that employers withhold from their workers’ paychecks.

Based on the latest Census Bureau data, almost one third of U.S. households received Social Security benefits in 2019. The exact percentage varied by state, however; West Virginia had the highest percentage of Social Security recipients, with about 42% of households receiving benefits.

In most states, the income from Social Security — $1,656 per household, on average — makes up at least 40% of all retirement income. Losing Social Security either in full or in part would make it significantly more difficult for seniors to pay for daily living expenses in retirement. Based on our previous research into the cost of retirement in each state, the average retirement wouldn’t be affordable in any state if Social Security were defunded.

Unfortunately, the Social Security Administration (SSA) in a 2020 report said that it expects its reserve funds to run out in 2034. At that point, Social Security payroll taxes will be the sole source of money for benefit payments and benefits will be reduced to 76% of their full value.

That means that if we did nothing at all, nearly every senior would still lose out on thousands of dollars of income that they need to survive in retirement. But if the payroll tax were eliminated, as the Trump administration proposed in August in response to the COVID-19 pandemic, it could further jeopardize the already uncertain future of Social Security.

In this report, we look at which states rely the most on Social Security, and how much it would cost seniors in these states if Social Security were lost. We conclude that if nothing is done to save and bolster Social Security, then seniors around the country will find it difficult if not impossible to pay for their expenses in retirement.

How Social Security works

Social Security is a federal program that provides income to retirees, people with disabilities, and the families of those individuals. As a refresher, here’s a brief look at how Social Security is funded and who can receive benefits.

How is Social Security funded?

Social Security is funded through a payroll tax that just about all workers in the U.S. must pay, including resident aliens, most nonresident aliens, and undocumented workers. Some police officers, teachers, judges, and other government employees do not have to pay Social Security tax because they pay into separate pension funds.

In most cases, 6.2% of your income comes out of your paycheck and goes into the Social Security Trust Fund, which is administered by the Social Security Administration (SSA). Employers contribute an equal amount so that the final contribution for each worker is equal to 12.4% of that person’s pay. If you’re self employed, you have to pay the full 12.4% yourself, but there’s also a tax deduction that refunds you for the 6.2% that’s normally paid by an employer. (Learn more about self-employment taxes.)

Who can receive Social Security benefits

Residents and citizens are eligible to receive retirement benefits once they have worked and paid Social Security taxes for at least 10 years. Once they reach age 62, they can begin receiving benefits if they retire. However, full benefits are only available if they wait until their full retirement age, which the SSA calculates based on birth year. Over time, the full retirement age has been increasing, and is currently 67 for people born in 1960 or later. The value of benefits increases for someone who waits until after their full retirement age to claim benefits.

Learn more about how to apply for Social Security benefits.

How long will Social Security funding last?

The 2020 report from the Social Security Administration states that it only expects to be able to make full Social Security payments until 2034. After 2034, the SSA will only be able to pay 76% of full benefits. Of course, this assumes there is no decrease in the collection of Social Security payroll tax. Any interruption to the collection of payroll taxes could mean benefits are reduced further. In one scenario, in which payroll taxes are cut starting in 2021, the SSA estimated that the trust fund’s reserves would run out in the middle of 2023, about 11 years sooner than anticipated.

While President Trump and Republican leaders have vowed that they will not make any cuts to Social Security, the Trump administration has proposed a couple of changes that could impact Social Security funding. For example, President Trump enacted a payroll tax deferral in August 2020 and he has said that he would like to make that deferral a permanent payroll tax tax cut in 2021.

How many people receive Social Security income?

In 2019, nearly 39 million U.S. households — 31.7% of all households — received some amount of Social Security income. In most states, somewhere between 30.1% and 35.3% of households had at least some Social Security income in 2019. Washington, D.C., has the lowest percentage of Social Security recipients, with only 19.0% of households receiving benefits, while 41.8% of West Virginia households had Social Security income — the highest among the states.

How much Social Security income do people receive?

Among households receiving Social Security income in 2019, the average annual income from Social Security was $19,872 nationally, for a monthly average of $1,656 in Social Security income. However, there is more variability in Social Security income between states. In households in Alaska, Louisiana, and Washington, D.C., Social Security recipients receive an average of $1,427 to $1,471 monthly, while households in Connecticut, Delaware, and New Jersey receive an average monthly payment of $1,790 to $1,842.

Where people rely on Social Security the most for retirement income

Social Security provides vital income for many individuals and families because they do not have much (or any) other retirement income. According to Census Bureau data, only 57.3% of households have money in retirement accounts, including 401(k) plans and IRAs. Even for people who do have retirement income outside of their Social Security benefits, the benefits generally make up more than 40% of their total retirement income each year.

Nationally, 41.2% of a household’s retirement income is their Social Security payments; in 10 states, Social Security benefits make up at least 45% of retirement income. Indiana retirees rely the most on Social Security benefits, where these payments make up nearly half (49.7%) of all retirement income.

Where people can afford retirement without Social Security

To better understand where people would be hurt the most if Social Security benefits were lost or reduced, we compared the average retirement income in each state to the average cost of a 20-year retirement in each state (based on a previous Policygenius study). Ultimately, the average household wouldn’t be able to afford retirement without Social Security. The average household also wouldn’t be able to cover their retirement expenses if Social Security benefits were reduced.

To determine the impact on retirees, we subtracted the total amount of average Social Security benefits from the total cost of retirement. On average, retirees would face a shortfall of $240,000 over 20 years. But the differences between states were stark: at the highest end, in Hawaii, New Hampshire, New York, and Vermont, seniors would face a shortfall of over half a million dollars over the course of their retirement.

We also checked what would happen to retirement income if Social Security paid out at just 76% of its current rate, which is the SSA’s estimate of payment amounts if Social Security doesn’t receive additional funding by 2034. With a 76% reduction, only households in Alaska could afford the average retirement, though Delaware households would only be short by $325. (For the sake of an easier comparison, we used a scenario where benefits were reduced to 76% now and remained at that level for the duration of someone’s retirement.) On average, seniors would be short nearly $100,000 over 20 years if Social Security were cut by 24%.

Many seniors already face a shortfall of retirement income and per our data, even with full Social Security benefits, seniors can afford retirement in just 22 states. But that’s an argument for expanding Social Security, not cutting it.

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