Social Security is, for millions of retired Americans, a financial lifeline that they simply couldn't do without. A 2017 Gallup poll found that a majority of seniors relies on their monthly benefits check to account for a "major" part of their income, suggesting that without this income, our nation's retired workers would be in some deep financial trouble.
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But this financial lifeline has issues, and today's working generation of millennials is well aware of it. According to last year's Social Security Board of Trustees report, the program is projected to exhaust its $2.85 trillion in asset reserves by the year 2034. In the eyes of millennials, this means Social Security is less than two decades from going belly-up. In fact, a 2014 survey from Pew Research Center noted that 51% of millennials believe that Social Security won't be there for them when they retire. That's a scary thought for workers who've paid into a program for years or decades and expect it to be there when they retire.
Thankfully, this belief is inaccurate, as you'll see below. But it's also not as if Social Security's situation is hunky-dory. Here's what millennials should really expect from Social Security over their next couple of decades of work, and once they retire and claim benefits.
1. Social Security won't go bankrupt, and it will be there when you retire
The first thing millennials absolutely need to understand is that Social Security will be a functioning program by the time they retire. As long as they have enough lifetime work credits to qualify, they'll receive benefits based on their work and earnings history. In other words, half of millennials are wrong about Social Security going bankrupt.
Though Social Security has issues, it's primarily funded by the payroll tax, which is a 12.4% tax on earned income between $0.01 and $127,200 (as of 2017), with income above and beyond $127,200 free and clear of the payroll tax. Most workers only pay half this amount (6.2%), while their employer covers the other half. In 2015, payroll tax comprised 86.4% of the $920.2 billion in revenue generated for Social Security, meaning that as long as people are working, there will be money flowing into the program for disbursement. That's why Social Security can never go bankrupt -- and why millennials will receive a benefits check once they retire.
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2. Social Security won't come anywhere close to covering your full retirement income needs
Social Security was never designed to account for a majority of your income once you retire. The rough guideline from the Social Security Administration is that your benefits check should replace about 40% of your working wages, though this figure is higher for lower-income workers and lower for more well-to-do retired workers.
This point is especially important considering that some of the costs seniors face during retirement are rising at a considerably quicker pace than what they receive as a "raise" via Social Security's annual cost-of-living adjustment (COLA). Over the previous 35 years (not counting 2017), Social Security's COLA has been lower than the medical care inflation rate in 33 years. Essentially, it means the purchasing power of your Social Security benefits is being eroded almost every year.
Millennials will need to save, invest, be smart about tax-planning, and ensure that Social Security isn't their "Plan A" when they retire.
3. Your benefit may be cut prior to retirement
Thirdly, based on the 2016 Trustees report, millennials should expect to see a possible across-the-board cut in benefits within the next two decades, assuming Congress is unable to implement changes that strengthen Social Security.
According to the Trustees report, benefit cuts of up to 21% may be needed to extend the solvency of the program through the year 2090. This would mean that millennials' claiming decisions will be all the more important. No current or future retirees want to face the prospect of a 21% haircut to their monthly check, but waiting longer to claim benefits will help. For every year you wait to enroll for benefits, beginning at age 62 and stopping at age 70, your eventual payout grows by 8%. This would mean that millennials who wait until ages 66 to 70 to claim benefits will probably be in better financial shape than those who claim early, if there's a cut in Social Security payouts.
4. Payroll tax is liable to go up at some point
Lastly, millennials should expect that the payroll tax will rise at some point during their working careers.
As noted above, Social Security is facing a steep budgetary shortfall, and while cutting benefits could resolve the issue, extra revenue will be needed at some point to shore up the program against future cuts, or at least to help buoy seniors who are facing significantly higher medical-care and housing costs. The most logical way for Social Security to raise more capital would be either to raise the payroll tax rate across the board for all workers or to remove some of the exclusions the wealthy currently enjoy by reinstituting the payroll tax on earned income above and beyond $127,200.
In sum, millennials should expect to receive Social Security income when they retire, but it probably won't be anywhere near the levels their parents or grandparents received.
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