The Average American Retiree’s Dependence on Social Security and Pensions, in One Chart

Brian Stoffel
Jun 13, 2016 at 7:03AM - The Motley Fool

Whether we like it or not, the next election cycle is about to ramp up considerably. As we debate who the best candidate for president is, Social Security will be a hot-button issue that's likely to surface.

Here at The Motley Fool, you'll see a number of our columnists exploring how each candidate would like to change the system, and what that could mean for the average American retiree. While our opinions of what to do with Social Security will run the gamut, it's important that we get what few facts we have straight.

Fact No. 1: American retirees count on Social Security and pensions for most of their income

America's retirees rely on Social Security and public or private pensions for the vast majority of their income. The Bureau of Labor Statistics (BLS) just released figures in April for income sources of households over the age of 65.

The groups are separated by the amount of income the household has, in thousands of dollars. The results speak for themselves.

Data source: Bureau of Labor Statistics. Chart by author.

One might look at this and think: "It's no surprise that those getting by on less $40,000 rely so heavily on these programs. But that's only a small percentage of all retirees." But that's simply not the fact: 63% of households over the age of 65 have income below this threshold, and 31% survive on less than $20,000 per year.

The Center on Budget and Policy Priorities (CBPP) estimated in 2013 that while 9.1% of those aged 65 and older were living in poverty at the time, the number would quintuple to 44.4% were it not for Social Security. I would caution that this is more opinion than fact -- as it ignores second- and third-order effects of getting rid of Social Security. In other words, we don't know how we would adjust -- as a society -- if the program disappeared overnight. That being said, the estimates at least help prove how important the program is.

Fact No. 2: The Social Security Trust Fund is predicted to run out of money in 2035

The fact here is that the Old-Age and Survivors Insurance (OASI) Trust Fund is trending toward insolvency, and that Social Security's Board of Trustees has already warned that it will run out of money. Whether that will actually happen is a matter of opinion.

Either way, the situation does not appear to be as dire as you might have heard. Even if the Trust Fund runs completely dry, retirees are predicted to still receive 77% of what they would have received under Social Security's current design.

The problem, of course, is that a 23% cut in benefits can be a huge deal when it is your primary source of income. There are lots of potential solutions for this problem -- but that's a topic for future articles.

Fact No. 3: Pensions will be less common for tomorrow's retirees than they are for today's senior citizens

Unfortunately, the BLS didn't parse out how much income came from Social Security, and how much came from pensions. Regardless of their level of importance, however, it's clear that pensions have fallen out of favor. Data from Employee Benefits Research Institute (EBRI) show that:

• In 1980, 84% of full-time employees at medium and large private establishments had a pension. By 2015, it had fallen to 25%.
• In 1992, 22% of full-time employees at small private establishments had a pension. By 2015, it had fallen to 7%.

Employees of state and local governments, however, still enjoy high rates of pension-plan participation. Even in this realm, however, there have been declines: 93% of full-timers had a pension in 1987, but in 2015 it was down to 82%.

Defined contribution plans -- i.e., 401(k), 403(b), etc. -- have largely taken the place of the pension. That makes learning how to invest for yourself all the more important. It's why we here at The Motley Fool do what we do: help the world invest -- better.

With your retirement far more dependent upon your investing acumen now than it has been in the past, it's time you grab the bull by the horns and set yourself up for a financially healthy retirement.