Millennials who often gripe they won’t see a dime in Social Security may be right all along. Counting on entitlement benefits when they retire may be a fool’s game.
Unless there are reforms to the Social Security program before the surplus is depleted in 2034, millennials should expect roughly a 20% reduction in Social Security benefits when it’s time to turn on their monthly checks, according to a new report conducted by Healthview Services, a provider of retirement data to the financial services industry. That largely aligns with the annual report from the trustees of the program released earlier this month.
For 35-year-old millennials (the midpoint age of this generation), the loss of lifetime benefits for earnings between $50,000 and $150,000 today would be $365,000 to $675,000, according to the paper’s findings using that 20% reduction as a guide.
Those are big numbers, but take a breath. Social Security is not disappearing. It’s expected to continue to be a source of income in retirement for most retirees. The reality is that millennials will probably collect less in Social Security than their parents and grandparents.
How millennials can make-up the difference starting now
It’s not a total wipe out, and the gap can be plugged with a dollop more stashed away in retirement accounts. A 35-year-old earning $100,000 a year today would need to pony up an additional, inflation-adjusted $33 a week over the course of their career to make up for a 20% lifetime reduction in Social Security benefits, according to the report.
The estimate takes into its analysis a 50% employer match, 6% annual returns during their working years, and 5% annual returns during their retirement years, which begin at age 67 and last for a lifetime that ends at age 87. Under the same parameters, someone earning $50,000 a year would need to set aside an extra $21 a week.
“Although it’s unclear when or how reforms to Social Security will take place, millennials can and should factor the various scenarios into their retirement planning assumptions,” Catherine Collinson, CEO and president of Transamerica Institute and Transamerica Center for Retirement Studies, told Yahoo Money.
“Over the years, my team’s research has found that many millennials are saving for retirement, but they are not fully engaging in retirement planning, so this is a compelling reason to get started maxing out contributions to tax-advantaged retirement accounts such as 401(k) or similar plans or IRAs,” Collinson added. “They should also open, if feasible, Health Savings Accounts which offer tax-advantages for saving for health care-related expenses for short-term and long-term retirement needs.”
Fear of Social Security vanishing strikes workers of all ages
The steady drum of reports about the possible demise of Social Security stirs up angst for workers of all ages. Roughly a third of employed workers (36%) cite the retirement fear that Social Security will be reduced or cease to exist in the future, according to a survey released this week by Transamerica Center for Retirement Studies. Seventy percent of workers agree with the statement: “I am concerned that when I am ready to retire, Social Security will not be there for me.”
The fear is not unfounded. An aging population is the catalyst for the shrinking fund. The workforce is no longer growing. There are fewer young workers contributing to the program and a burgeoning number of baby boomer retirees are living longer and receiving benefits.
Do the math.
“Retiree benefits are paid by the payroll taxes of current workers, and there are only a few workers per retiree these days, compared with much larger ratios in the past,” Philip Moeller, a Medicare and Social Security expert and principal author of the “Get What’s Yours” series of books about Social Security, Medicare, and health care, told Yahoo Money.
As recently as 2008, it was around 3.3-to-1, but by 2035, it is projected to be 2.3-to-1, Ron Mastrogiovanni, CEO of HealthView Services, told Yahoo Money.
“While most millennials are not counting on Social Security to the extent of previous generations, it will play an important role in their retirement income planning,” he said.
A myriad of potential changes for millennials
There are some solutions being floated.
“To extend solvency, the government could raise the cap for contributions to exceed $147,000,” he said. The Social Security tax limit is the maximum amount of earnings subject to Social Security tax. The Social Security taxable maximum is $147,000 in 2022. Workers pay a 6.2% Social Security tax on their earnings until they reach that amount of earnings for the year.
Other possibilities: Delay full retirement age to 69 to collect 100% of the benefit for those who aren’t close to retirement, up from the current 67 for those born in 1960 and after. The minimum age to claim benefits could be bumped up to 65 from 62. The payroll tax itself could be increased, or implement a combination of these, Mastrogiovanni said.
But to be honest, an increase in the full retirement age, which is probably the simplest adjustment Congress can make, is at its heart, a cut in the benefit for millennials.
That example of a 35-year-old making $100,000, and living to a projected age 87 would receive $2.8 million in lifetime benefits by claiming at a full retirement age of 67, and $2.6 million by claiming at a full retirement age of 69, a difference of $211,913, according to HealthView Services.
“Workers of all ages need to believe that Social Security will be there for them, so Congress needs to get its act together quickly to put the program on solid financial ground,” Moeller said. “There's no way to escape this ‘retirement math,’ even with much higher payroll taxes on high-earning workers. Private savings will thus play a larger role in retirement planning, and socking away money at younger ages is essential.”
Kerry is a Senior Columnist and Senior Reporter at Yahoo Money. Follow her on Twitter @kerryhannon