Retirement may seem like a lifetime away for millennials — the youngest of whom is just 26 — but those who bank on Social Security to help them skate through their post-work years are likely to face an unfortunate reality.
Do not miss it
Some millennials are already anticipating the worst of the federal retirement benefits their parents and grandparents had to help them live relatively comfortably after age 65.
They have good reasons to be concerned. The Social Security Administration’s latest report shows that the program will only be able to pay a portion of benefits to retirees after 2035 if policymakers don’t change the system.
That means young people need to look for other ways to supplement their income after retirement – if they haven’t already.
What the government report says
Each year, the Social Security Board of Trustees releases an update on the financial status of Social Security trust funds.
It’s common knowledge from past reports that the fund’s reserves (the excess contributions collected and invested over the decades) are drying up, but this year’s report says that when they do, the Social Security Administration (SSA) will only be in will be able to pay 80% of the promised benefits if Congress does nothing. That could mean higher taxes or lower benefits.
“It is important to strengthen social security for future generations,” acting Social Security Commissioner Kilolo Kijakazi said in a statement when the report was released.
Kijakazi, on behalf of the trustees, advised lawmakers to “address the expected shortage of trust funds in a timely manner” to ensure that changes can be implemented gradually.
Should you be afraid?
If benefits are cut 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 a recent analysis by HealthView Services, a Massachusetts data provider that healthcare and financial services. Assuming they live to be 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 between $21,000 and $25,000 — adding up to $560,000 and $675,000 over a lifetime.
“Millennials already have low expectations of the role Social Security will play in their retirement plans,” said CEO Ron Mastrogiovanni. “These benefits will clearly be less valuable to them than previous generations.”
Still, the benefits aren’t expected to end altogether. If policymakers don’t take action, Social Security can still pay 80% of benefits using its tax revenues.
“Those who argue that Social Security won’t be there at all when today’s young adults retire and that young workers won’t receive benefits are either misunderstanding or misrepresenting the trustees’ projections,” writes Kathleen Romig. , Director of Social Security and Disability Policy at the Center for Budget and Policy Priorities.
Increasing Social Security tax revenues, she says, should address the deficit and restore solvency as the population ages.
“The fundamental challenge of Social Security is demographic, attributable to an increasing number of beneficiaries rather than increasing costs per beneficiary,” says Romig.
In 2008 there were an estimated 3.2 to 3.4 insured employees for each beneficiary. That number dropped to 2.8 employees for each beneficiary by 2021, the trustees’ report shows. And the ratio could drop to 2.3 by 2033, when the baby boomers will largely be retired.
Filling the gap in retirement
Social Security helps replace income in retirement, but it’s not designed to cover all of your expenses. For the average worker, Social Security replaces about 40% of annual savings before retirement, according to the SSA — although that figure varies based on income.
The average Social Security retirement benefit in August 2022 was $1,627 per month. That’s less than $20,000 a year.
According to AARP, financial advisors generally recommend that employees replace between 70% and 85% of their income to maintain their lifestyle during retirement.
If you start collecting your Social Security benefits early, you have less to work with. Those who claim their benefits at age 62 can expect their income replacement rate to be between 19% and 55%, AARP says. And that is if the cash surplus does not run out in 2035.
Still, the loss of future Social Security benefits could be offset by a “consistent and modest annual increase” in savings, according to the HealthView Services report.
The 35-year-old who earns an annual salary of $100,000 would have to add $2,543 to their annual savings from now until their full retirement age to make up for the reduction. Assuming the employee has a 50% employer contract, that adds up to an additional $33 per week from now until retirement.
Millennials should take some comfort knowing they have time to deal with potentially lower SSA benefits — whether that means increasing their savings, delaying their claim age, or hiring a financial advisor.
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This article provides information only and should not be construed as advice. It comes without any kind of warranty.