In Your 40s? Here's What to Expect From Social Security When You Retire

When you retire, there's a really good possibility that you'll rely on Social Security benefit, to some degree, to help make ends meet.

According to a Gallup survey conducted in April, approximately five out of six nonretirees implied that Social Security would represent either a major (30%) or minor (54%) source of income during retirement. This combined 84% ties a 15-year high for reliance, based on nonretirees' responses.

The changing dynamics of Social Security

Yet, being reliant on Social Security is a somewhat dangerous proposition for those looking to retire in more than a decade's time. The latest Board of Trustees report, released in early June, shows that the program will have $1.7 billion more in expenses this year than it'll generate in revenue. That's the first time this has happened in 36 years. And while $1.7 billion isn't a particular large figure in relation to the trust's $2.9 trillion in asset reserves, this changing dynamic is clearly cause for concern.

Of course, what Social Security will look like during your retirement will ultimately depend on when you reach the eligible claiming age of 62. Let's take a look at what folks in their 40s (i.e., people born between 1969 and 1978) can expect from America's most important social program.

Good news: It's not going anywhere

If you are a working Americans in your 40s, there's one thing you should know above all else: Social Security will be there for you when you retire. Even though the Board of Trustees has projected that the program's net cash outflow will accelerate each year after 2019, and will result in the complete exhaustion of $2.9 trillion in asset reserves by 2034, Social Security is in absolutely no danger of going bankrupt.

The secret to its success lies in the fact that two of its three sources of income are recurring. Whereas the interest income earned on its asset reserves would disappear if its excess cash were to be exhausted, the 12.4% payroll tax on earned income of up to $128,400, and the taxation of Social Security benefits, ensure that income will still flow into the program for disbursement. Or, to put this into plainer English: As long as the American public keeps working, and Congress doesn't adjust how the program is funded, the payroll tax and the taxation of benefits will ensure Social Security has no chance of going bankrupt.

Bad news: Your payout might be reduced

However, although Social Security will march on, there are consequences to the program having a persistent, and growing, net cash outflow. One of them is the expectation for a cut in benefits, assuming Congress doesn't find a way to raise additional revenue.

If the Trustees' projection is correct, and the program depletes its asset reserves by 2034, then it's been estimated that a 21% benefit cut will be needed to sustain payouts through the year 2092. The magnitude of this reduction is such that no further cuts should be needed over the long term, which is defined by the report as the next 75 years. Slashing benefits by up to 21% won't go unnoticed, and it's a clear warning to people in their 40s to reduce their expected reliance on Social Security, if possible.

More bad news: The purchasing power of Social Security dollars will further dwindle

Not that any of you in your 40s need anymore rain on your parade, but the purchasing power of Social Security dollars is liable to decline substantially between now and when you begin claiming benefits.

According to an analysis from The Senior Citizens League, the purchasing power of a Social Security dollar has dropped 34% since the year 2000. What $100 in Social Security income used to buy in goods and services in 2000 now buys $66 worth of the same goods and services.

The issue here is that Social Security's measure of inflation, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), does a pretty poor job of factoring in the expenditures that matter most to seniors. As the name implies, this is an inflationary tether that tracks the spending habits of working-age urban and clerical employees, who have markedly different spending habits from seniors. Ultimately, it means medical care and housing expenses are underweighted in the CPI-W, while less-important costs for seniors (like apparel, education, and transportation) get more weight.

Unless lawmakers move away from the CPI-W, which has been Social Security's only cost-of-living adjustment calculator since 1975, this loss of purchasing power should persist.

You'll have to wait a bit longer to collect your full payout

An important fact that those of you in your 40s should know is that you'll have to wait a bit longer than your parents to claim your full benefit.

In 1983, Congress passed the last major reforms to Social Security. Among the laundry list of changes made by the Reagan administration was to gradually raise the full retirement age from 65 to 67 over a four-decade span. Your full retirement age is the age at which you become eligible to collect 100% of your retirement benefit, as determined by your birth year. For people born in 1960 or later, their full retirement age is 67. Meanwhile, the parents of folks in their 40s likely had a full retirement age of 66, or perhaps even under 66.

Waiting longer to receive your full payout means that your lifetime benefits will be reduced. You'll either wait longer to collect your full payout, shortening the amount of time you'll receive a monthly check, or you'll claim prior to your full retirement age, thereby accepting a steeper permanent reduction in your monthly payout.

It's something to keep in mind when deciding on the best claiming age for you.

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