Social Security is More Valuable Than Ever to Your Retirement. Here’s Why

Social Security is More Valuable Than Ever to Your Retirement. Here’s Why
Your Social Security check goes a lot further overseas.|©iStock/AJ_Watt

Recent reports show that the top 10% of earners account for half of all consumer spending in the U.S., with their share rising steadily since 1990. Meanwhile, most people’s incomes (the other 90%) have barely stayed ahead of growing costs, making it harder to save and resulting in a growing reliance on Social Security for retirement.

Here’s the good news: Social Security will be an increasingly valuable component for most retirement plans, and I am going to make a case for why your benefit is probably your best bet for underwriting a strong financial plan for when you retire, especially if you are considering living overseas.

“Wait!” I hear you cry. “Isn’t Social Security going broke? And even if it isn’t, it’s not all that much money, certainly not enough to provide a comfortable life in retirement, is it?”

While Social Security isn’t going broke, the Trust Fund is going to run out sometime within the next ten years. Despite this concern about Social Security’s future, history shows us that the Trust Fund faced and survived a similar looming deficit back in 1983. Through a variety of rule changes, that shortfall was averted for what will have been 50 years by the time we face a second projected funding gap in the early 2030s. Reforms comparable to those of 1983 are expected again before the Trust Fund runs out. On the administrative side, the Social Security Administration (SSA) is also improving efficiency through technology, which should reduce errors and improve service over time—notwithstanding the rocky roll-out of this effort by DOGE personnel earlier this year.

Still, these issues have received considerable attention this year in the press. Some evidence indicates that worries over Social Security’s stability have led many to claim benefits early, often to their long-term disadvantage. Usually, waiting to claim can substantially increase lifetime benefits, so it’s important to make informed decisions without fear-driven urgency.

To summarize, as they did back in 1983, Congress will fix the coming shortfall by tweaking the current rules, and ongoing disruptive changes at SSA promise a more efficient and effective agency. That’s why you should be confident that the program will be there in full for you, because when you are confident in relying on the program, you are less likely to make a poor Social Security claiming decision. Instead, you can investigate the program carefully and calmly to determine the claiming strategy that will work best for you over your lifetime.

And there’s even better news. Well, it isn’t “new” news, but most people aren’t aware of the fact that baseline Social Security benefits rise beyond just inflation, due to indexing the benefit formula to the National Average Wage Index. High earners (remember that top 10% of earners we spoke about earlier?) drive this average up, resulting in substantially greater purchasing power for new beneficiaries compared to prior generations.

I want to drive home how significant this is by drilling down a bit on the keyword here, which is “average.” What does “average” mean in this context? (Sorry if this reads a bit “math-y.”) There’s an old yarn about 100 young programmers gathered in a conference room. They all earn $70,000 to $90,000. The median income is $80,000 (half earn a bit less than that amount and half earn a bit more), and the average income is the same: $80,000. Now Bill Gates walks into the room: the median income is still about $80,000 (half earn more, half earn less), but the average income has now gone way, way up!

The top 10% of earners in our society have seen their incomes surge in the last 30 to 40 years, while the income of the other 90% has grown only modestly. Still, for calculating our baseline Social Security benefits, the top 10% are like Bill Gates coming into the room: they drive up the National Average Wage Index significantly. Because it’s an “average,” the top 10% of income earners pull that average way up relative to the typical earnings of the lower 90%. The result is that the purchasing power of Social Security benefits today is more than double that of our grandparents (assuming they had earnings comparable to ours in inflation-adjusted dollars).

For the first time this year, there are new beneficiaries who receive over $5,000 per month. Yes, these were workers who claimed at age 70 and earned at the top end of the annual earnings limit (above that amount in salary, and the worker no longer pays Social Security payroll tax). However, someone earning half what these high earners made would receive roughly two-thirds or so of that benefit amount because of the progressive structure of the Social Security system. A mid-income earner might be looking at $3,500 per month—$7,000 per month for a working couple.

Because Social Security benefits receive favorable tax treatment, for singles or couples with little other income, these levels of benefits would be 100% tax-free. This is after-tax income that can provide a high living standard in numerous locations outside the U.S.

For a concrete example, my wife and I currently spend just over $3,200 per month living very well in the historic center of Querétaro, Mexico. This includes rent in a 240-year-old city home (with rooftop views to die for), food and incidentals, entertainment, local transportation, and local medical care. That’s less than one of our Social Security checks. We don’t live here to save money; we live here because it’s a wonderful old colonial city with more history and culture than any other in the country (except Mexico City) and a splendid climate (overall a much better city than nearby San Miguel de Allende—don’t tell anyone). And we live quite comfortably, even luxuriously.

In summary, you can leverage the value of your benefits into a relatively luxurious lifestyle by choosing to live in any of dozens of locations outside the U.S. where costs are much lower. Social Security remains a strong pillar for retirement planning, offering increasing real value and adaptability for current and future retirees.

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