Karen Chadwick worked for decades as a massage therapist along with some stints as a secretary.
But in all those her years of work, she’s never had a pension plan and accumulated only modest savings. Now that she’s 73, those savings have evaporated and she lives mainly on her $738 monthly Social Security check, supplemented by two or three massages she provides each month.
“I used to do 15 massages a week," but her hands have stiffened with age, limiting the work she can take on, Chadwick said.
The Kalamazoo resident, who is divorced and has a grown son, makes her budget work by watching every penny. She feels lucky to live in a subsidized apartment complex for seniors. But her car is 24 years old, and when it gives out, she figures she’ll learn to live without it because she can’t afford a replacement.
“It will clip my wings, but I’ll have more money to work with,” Chadwick said about the prospect of being without a car. “My car insurance is $300 every six months, and that seems like a huge amount to squeak out each time."
“It sounds stupid, but I didn’t plan ahead for retirement" when she was in her 40s and 50s, Chadwick said. “I didn’t think about being an old woman. It just didn’t cross my mind. It was like going to the moon.”
Chadwick is far from alone in her circumstances.
- 21% of married couples and 45% of single people receiving Social Security retirement benefits rely on the program for at least 90% of their income. The average benefit per individual is currently $1,502 a month or about $18,024 in 2020. For married couples, it’s $2,531 a month or $30,372.
- 29% of households headed by someone age 55 and older have no pension plan or retirement savings, according to a 2016 report from the federal Government Accountability Office.
- 15% of Americans age 65 are older are still working, a percentage that is growing.
- In 2017, less than a third of Americans age 65 or older had pension income from an employer, and that percentage is dropping.
- Among Americans age 60 to 69, the average 401K balance was $195,000, and the median was $62,000 in 2019, according to Fidelity Investments, the largest holder of defined contribution plans. The average balance for those 70 and older was $182,100 and median was $51,900.
The big takeaway: As Baby Boomers start to retire in big numbers, reliance on Social Security has increased -- even as the federal program’s funding has become more tenuous.
8 strategies to help Michigan residents afford retirement
“We’re in a period of transition" in how Americans fund their retirement, said John Laitner, a University of Michigan economics professor who also heads U-M’s Retirement Research Center. “In this environment, Social Security is more important than ever."
The U.S. retirement system has long had three pillars: Social Security, employer-sponsored pensions and individual savings. In past generations, a typical senior citizen was getting a third of his or her income from each of those three sources.
But that system is undergoing a fundamental change, as employers move from defined-benefit pensions, which pay a guaranteed amount each month, to defined-contribution plans, such as 401K and 403(b) plans in which both employers and employees contribute money to a retirement savings account.
The shift to defined-contribution plans “has increased the risks and responsibilities for individuals in planning and managing their retirement,” the federal General Accountability Office said in a 2017 report. “In addition, economic and societal trends—such as increases in debt and health care costs—can impede individuals’ ability to save for retirement.”
(The interactive map above shows the percentage of Michigan households with Social Security income. You can click on a county to see the underlying data.)
“I hope people who have a defined-contribution plan available to them will take advantage of it," Laitner said. “I’m worried they’re not yet doing it fully enough to replace the old defined-benefit plans that industry used to provide.”
While traditional pensions provide a guaranteed income until death, defined-contribution plans carry the risk that people may outlive their retirement savings.
Chuck Henrich, a financial adviser in Portage, said that for a growing number of his clients, Social Security is their only guaranteed income stream.
Henrich, who runs Southwest Michigan Wealth Management in Portage, estimated only about 25% of his clients have a defined-benefit pension. The majority are reliant on 401K plans or individual retirement accounts to supplement Social Security.
In today’s world, "it’s all encumbent on employees to to take care of their own retirement,” he said.
That’s worked out in recent years because of the robust stock market, he said. But the U.S. economy is overdue for a market downturn, Henrich said.
“The average retirement plan dropped 40% to 50% when the dot.com bubble burst and again in 2008, 2009," he said. “If people are within five years of retirement, it becomes paramount that they not participate in the next downturn, or they may have to delay retirement for two or three years or more.”
And people who haven’t saved for retirement and lack a pension for retirement are even more vulnerable, he said.
“Those aren’t people who come to my office,” because they don’t have assets to manage, Henrich said.
Still, he sees a number of senior citizens who lack the resources for early retirement and have to stay in the workforce longer than they would like -- or who retire and end up taking a part-time job to pay the bills.
Social Security still allows people to draw reduced retirement benefits at age 62, but full retirement age is now 66 for those born from 1943 to 1954 and gradually increases to 67 for those born in 1960 or later. The highest benefits are for those who wait until age 70 to start their Social Security payments.
The difference is significant: Benefits increase by about 8% a year for every year of delay. Someone who qualifies for $12,000 a year in Social Security at age 62 would get $15,600 by waiting until his or her full retirement age and $19,675 by waiting until age 70.
A common misconception about Social Security is that Americans would be better off if they could invest their Social Security contributions on their own, Laitner said.
In some scenarios, that’s true. But, Laitner said, when one considers all the protections that provides, Social Security “looks better and better.”
For instance, Social Security provides survivor benefits to spouses and dependent children when workers die before retirement age and also serves as disability insurance.
Another attractive feature of Social Security compared to private pensions: A stay-at-home wife or spouse with low earnings can get benefits on his or her partner’s work record without reducing the higher earner’s Social Security payments.
In addition, Social Security provides a guaranteed income for life with cost-of-living increases. “A lot of private annuities don’t have inflation protection,” Laitner said.
“Social Security it isn’t the same thing as a stock market investment," he said. “It shouldn’t be compared with that. ... The nature of it is insurance."
Moreover, while private investments can do better than Social Security when the market is going up, “the market doesn’t always do that,” Laitner said. “People who were retiring in 2010 saw the markets go down 50%, and if they had to retire then, they were in trouble.
“So the thing about Social Security is that it’s a lot more stable and a lot less risky than private investments,” he said. “It’s a sure thing.”
It’s a sure thing for now. But the program’s finances are increasingly problematic. A big reason: Social Security always has been a pay-as-you-go program, in which contributions from current workers are paying the benefits for current retirees. And with Baby Boomers swelling the number of retirees, there are now only 2.8 workers per Social Security beneficiary compared to 3.3 as recently as 2007.
The Social Security Administration estimates Social Security benefits will start to exceed the program’s costs in 2020, and the program will deplete its $2.9 trillion reserve fund in 2035.
So what happens then?
“The system won’t be able to pay the current benefits, unless changes are made,” Laitner said.
Among the potential reforms: Increasing the Social Security tax for employers and employees; raising the retirement age; slowing initial benefit growth, especially for top earners; modifying the cost-of-living increases, and/or raising the ceiling on Social Security contributions. (On the latter, earnings above $137,700 a year are currently not subject to Security Security tax.)
“Social Security is more important than ever for people, so Congress is going to have to get on this and make whatever adjustments are necessary,” Laitner said. “And the earlier they make that change, the easier it will be to accommodate it.”
That said, Laitner said it seems highly likely that even if and when changes are introduced, current beneficiaries will be grandfathered under the old rules.
That means current retirees “are probably going to get the amounts that are statutory now,” he said. “But we need to take care of the solvency issue.”
Christopher O’Leary agrees that lawmakers need to figure out how to put Social Security on sound financial footing, and the sooner the better.
But he also said there’s little chance that the Social Security program will go away in the foreseeable future -- it’s just too important.
“People think Social Security won’t be there when they need it, but that’s not true,” O’Leary said. “Social Security affects everybody and it cannot be neglected.”
Among those counting on Social Security is Lesley Reed, a 73-year-old retiree who lives in Portage.
Reed, who is divorced and has two grown daughters, spent more than 30 years as an office worker, most of it with a small family-owned company that didn’t have a pension plan.
She now lives an less than $2,000 a month, with almost 75% of that coming from Social Security and the rest from a 401K account.
It works for now, Reed said. But she worries could outlive her modest nest egg.
“I don’t think about it constantly, but I often do when I’m falling asleep,” she said about her finances. “My hair is thinning like crazy," and thinks financial stress is a reason.
“I could get wiped out if I get cancer or something," she said. “I hope nothing happens.”
Reed has been actively hunting for a part-time office job for months to help her finances, but it’s been to no avail so far. “I think it’s my age,” she sighed.
But Reed takes comfort in her Social Security check, saying it’s vital to her finances -- a sentiment echoed by Chadwick.
“If it wasn’t for Social Security, I’d be homeless,” Chadwick said. “Homeless, or living in somebody’s basement.”