Social Security has been around for 89 years today. Let’s think about how hard, if not impossible, it would be for most Americans to get something similar.
Social Security has been giving retirees a kind of annuity since August 14, 1935. Their guaranteed payouts are based on inflation. A retiree could not buy something on the open market that would be equal to what Social Security gives them. Annuities that take inflation into account used to be sold by insurance companies, but they no longer do.
In another way, though, most Americans would have a hard time, if not be unable to replace Social Security on their own. It would take a lot more money than most people have saved for retirement.
To show this point, I think it would be helpful to figure out how much the only approach I know of that guarantees an inflation adjustment costs. These are TIPS ladders. Allan Roth, founder of the investment advisory company Wealth Logic, taught me about them first. For this plan to work, different U.S. Treasury Inflation-Protected Securities with terms spanning over 30 years will have to be bought. This “ladder” of TIPS can support a fixed payout that takes inflation into account, like Social Security, because the interest they pay is higher than inflation.
The average monthly Social Security income for retired workers right now is $1,918.28, according to data from Social Security. This amount will go up every year to keep up with inflation. TIPSLadder.com says that a TIPS ladder that gave the same amount of money over 30 years, adjusted for inflation, would cost $523,270 up front.
It’s not even close to this big number when it comes to how much it would cost to replace Social Security payments. Social Security gives you a steady income no matter how long you or your spouse live, but the TIPS ladder plan stops making money after 30 years. Roth wrote in an email that the TIPS ladder, on the other hand, gives heirs payments if the retiree dies before the 30 years are up, while Social Security does not.
The median 401(k) account at Vanguard was worth just $35,286 at the end of 2023.
In any case, it’s safe to say that not many retirees have enough money to even come close to replacing their average Social Security payout. The most recent version of How America Saves, Vanguard’s yearly report on retirement savings trends, says that at the end of 2023, the average 401(k) account at Vanguard was only worth $35,286.
All of this talk is not meant to deny that Social Security has trouble paying its bills. Over the next ten years, tough choices will have to be made to keep the Social Security Trust Fund from running out in 2033. If that happens, retirees will only get about 79% of the payments they would normally get.
The similar TIPS ladder, on the other hand, would cost more than $400,000, making it hard for most seniors to pay for even Social Security at 79% of full strength.
