Retirement may seem like a lifetime away to millennials — the youngest of whom are just 26 — but those banking on Social Security to help them skate through their post-working years are likely to face an unfortunate reality.
Some millennials are already expecting the worst out of the federal retirement benefits their parents and grandparents had to help them live in relative comfort after the age of 65.
And for Americans who are already in retirement, there are worries that even with the biggest cost-of-living adjustment (COLA) in decades, benefits may not be able to keep up with worsening inflation.
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Both older and younger generations have good reason to worry. The Social Security Administration’s most recent report reveals that the program will only be able to pay a portion of benefits to retirees after 2035 if policymakers don’t make changes to the system.
That means young people should be looking for other ways to supplement their post-retirement income — if they haven’t already.
The current state of Social Security
Social Security benefits will be receiving their biggest boost in four decades starting in 2023, following this year’s sustained inflation.
The Social Security Administration announced last week that next year’s cost-of-living adjustment (COLA) is 8.7%.
“This may be the first and possibly the last time that beneficiaries today receive a COLA this high,” Mary Johnson, Social Security and Medicare policy analyst at advocacy group The Senior Citizens League (TSCL), said in a recent press release.
Johnson warns that a recession next year could have severe consequences for your Social Security benefits.
The majority of funding for the benefits comes from payroll taxes, but high unemployment during an economic downturn could “cause a significant worsening in the finances of the Social Security Trust Fund.”
The Bank of America forecasts the U.S. economy could lose about 175,000 jobs a month in the first quarter of 2023.
“In addition, an abrupt turn to deflation could mean that there may be no COLA payable in 2024,” Johnson says.
Johnson notes that next year’s higher payout could potentially hasten the fund’s insolvency date — an issue that is not being helped by the large drop in birth rates over the last few decades. Less people means less tax revenue to fund Social Security.
“The last time inflation was this high was in 1981,” Johnson adds. “The Social Security Trust Fund was close to insolvency and Congress enacted a series of bills that cut Social Security benefits and raised taxes.”
What the government report says
Every year the Social Security Board of Trustees releases an update on the financial status of the Social Security trust funds.
It’s widely known from previous reports that the fund’s reserves (the excess contributions collected and invested over the last few decades) are drying up, but this year’s report says that when they do, the Social Security Administration (SSA) will only be able to pay 80% of its promised benefits if Congress doesn’t act. That could mean higher taxes or lower benefits.
“It is important to strengthen Social Security for future generations,” Kilolo Kijakazi, acting commissioner of Social Security, said in a statement when the report was released.
Kijakazi, on behalf of the trustees, recommended lawmakers “address the projected trust fund shortfall in a timely way” to ensure changes could be made gradually.
Should you be scared?
If benefits are reduced by 20%, the average 35-year-old millennial currently earning $50,000 will lose an estimated $13,500 in annual Social Security income in the first year of retirement, according to recent analysis from HealthView Services, a Massachusetts data provider that serves the health care and financial services industries. Assuming they live to 87 years old, that means $365,000 less over the course of their retirement.
A millennial making between $100,000 and $150,000 would lose out on between $21,000 and $25,000 — adding up to $560,000 and $675,000 over a lifetime.
“Millennials already have low expectations for the role Social Security will play in their retirement plans," CEO Ron Mastrogiovanni said. "These benefits will clearly be less valuable to them than past generations.”
Yet benefits aren’t expected to end altogether. If policymakers take no action, Social Security could still pay 80% of benefits using its tax income.
“Those who claim that Social Security won’t be around at all when today’s young adults retire and that young workers will receive no benefits either misunderstand or misrepresent the trustees’ projections,” writes Kathleen Romig, director of Social Security and disability policy at the Center on Budget and Policy Priorities.
Increasing Social Security’s tax revenues, she says, should address the shortfall and restore solvency as the population ages.
“Social Security’s fundamental challenge is demographic, traceable to a rising number of beneficiaries rather than to escalating costs per beneficiary,” Romig says.
In 2008, it was estimated that for every beneficiary, there were 3.2 to 3.4 covered workers. That number fell to 2.8 workers for every beneficiary in 2021, the trustees report shows. And the ratio could fall to 2.3 by 2033 when baby boomers will have largely retired.
Filling the gap in retirement
Social Security helps replace earnings during retirement, but it’s not meant to cover all your expenses. For the average worker, Social Security replaces about 40% of annual savings before retirement, according to the SSA — though that figure varies depending on income.
The average Social Security retirement benefit in August 2022 was $1,627 per month. That’s less than $20,000 per year.
Financial advisers generally recommend workers aim to replace between 70% and 85% of their earnings to maintain their lifestyle in retirement, according to AARP.
If you start collecting your Social Security benefits early, you’ll have less to work with. Those who claim their benefits at the age of 62 can expect their income replacement rate to be between 19% and 55%, AARP says. And that’s if the cash surplus doesn’t run out in 2035.
Still, the loss of future Social Security benefits can be offset with a “consistent and modest annual increase” in savings, according to the HealthView Services report.
The 35-year-old earning an annual salary of $100,000 would need to add $2,543 to their annual savings from now until their full retirement age to offset the reduction. Assuming the worker has a 50% employer matching plan, that amounts to an extra $33 per week from now until retirement.
Millennials should take some comfort knowing they have time to address potentially lower SSA benefits — whether that means increasing their savings, delaying their claiming age or hiring a financial adviser.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.