Social Security benefits narrow the wealth gap. But it’s not enough to keep low-wage earner out of poverty in retirement

Personal Finance

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Social Security benefits are helping to narrow the gap between the haves and have-nots who are approaching retirement. But they don’t go far enough.

That’s according to new research from The New School Schwartz Center for Economic Policy Analysis in New York.

The analysis took a look at one age group in particular — those 51 to 56 years old. Those workers are often on the brink of retirement, even if it’s not by choice, according to Teresa Ghilarducci, professor of economics at The New School.

Many people stop working around age 56 or 57, Ghilarducci said, especially those in blue collar jobs that are more physically strenuous.

At ages 51 to 56, median Social Security wealth amounts to $81,900, compared to $67,000 those workers have accumulated in their employer-sponsored retirement plans. (The median is found in the middle of a list of numbers.)

Low-wage workers — those with the lowest 20% of earnings — have no retirement savings at all. And high-wage workers — those with the top 20% of earnings — have two and a half times their earnings.

But once Social Security benefits are taken into account, the difference between low-wage and high-wage workers shrinks from two-and-a-half-times earnings to about half a year’s earnings.

In dollar terms, adding Social Security benefits brings low-wage earners’ median wealth from zero to $57,000.

Meanwhile, for high-earners, Social Security adds $176,000 to their median wealth, bringing their median $339,000 balance in their employer retirement plans to $515,000.

Of note, Social Security benefits are calculated based on a worker’s average indexed monthly earnings for their top 35 years of earnings. Low earners typically receive a higher income replacement rate.

But that is not enough to keep them out of poverty in retirement, the research found. That’s as 40% of middle-class workers ages 50 to 60 are expected live in poverty in retirement.

That strain is only expected to get worse. Full retirement age — or the point at which workers are eligible to receive 100% of the benefits they earned — is moving up to 67, from 65. That transition will result in a 13.3% across-the-board benefit cut, according to the research.

That makes it important to protect existing Social Security benefits, according to Ghilarducci.

“If you didn’t have Social Security, our poverty rates among the elderly would probably triple,” Ghilarducci said.

About 15 years remain until Social Security will not be able to pay full benefits. As of 2035, 80% of benefits will be payable, according to the most recent projections.

One way to help make up for that shortfall would be to lift the maximum earnings subject to Social Security taxes, Ghilarducci said. In 2020, workers pay Social Security taxes on up to $137,700 of their earnings.

But broader reform to increase Social Security benefits should also be considered, she said.

More from Personal Finance:
How 2020 candidates would change Social Security
Why retiring at 65 could become a thing of the past
Required minimum withdrawal changes may affect retirement

“We are finding that the only way that people will be able to retire without being in poverty is by expanding Social Security,” Ghilarducci said.

The need for more retirement income security has already become a more prominent topic in the 2020 presidential election, she said. Top Democratic candidates have revealed their plans for reshaping Social Security.

Workers who want to see changes to the system should pay attention to those plans and vote in November, Ghilarducci said.

And to increase their individual retirement security, they should also be mindful of their health and expenses, particularly in their 50s.

“It will be easier to cut back expenses in your 50s than it will be in your 60s,” Ghilarducci said.

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