Big changes are underway with Social Security, and they're not of the welcome variety.
According to the newest annual report from the Social Security Administration, the program is expected to spend more than it generates in revenue beginning this year. For added context, the last time Social Security spent more than it generated was all the way back in 1982, the year before the Reagan administration passed the last major overhaul of the program. Though this net cash outflow is only estimated at $1.7 billion in 2018, per the intermediate-cost model, it nonetheless signals a big change.
Where those concerns really pick up is in 2020 and beyond. Beginning in 2020, and with each subsequent year, Social Security's net cash outflow will grow substantially. By 2027, its net cash outflow will hit $169 billion, and by 2034, the nearly $2.9 trillion that's been built up over the past 35 years will be completely exhausted.
If you're part of Generation Z -- generally considered to be people born between the mid-1990s and mid-2000s -- Social Security may not even be on your long-term radar. It is, however, likely to be a very important source of income for your grandparents, and eventually your parents. A Gallup poll from April found that 90% of current retirees are reliant on their Social Security income in some capacity to make ends meet, with 84% of nonretirees expecting to be somewhat reliant on the program when they eventually retire. These figures strongly suggest that many future generations of Americans will need Social Security to help make ends meet when they retire.
So what can today's teens and young adults who comprise Generation Z expect from America's most important social program when they retire? Let's break out the crystal ball and take a look.
Social Security will be there for you
Undoubtedly, the biggest concern has to be whether or not Social Security will even be there for Generation Z when they retire. While nothing can ever be said with 100% certainty when it comes to Congress, I can say with 99.99% certainty that I fully expect Social Security to be able to make payments to eligible beneficiaries four to five decades from now.
The thesis here is simple: Even without its excess cash, the Social Security program is incapable of going bankrupt as long as the American public continues to work and Congress doesn't change the program's primary funding mechanisms. The 12.4% payroll tax on earned income provided roughly 87% of the $996.6 billion collected by the program in 2017. Meanwhile, the taxation of Social Security benefits added another $37.9 billion last year. As long as these funding mechanisms remain intact, payouts to eligible beneficiaries will continue.
Social Security dollars are unlikely to go as far as they once did
On the other hand, even with Social Security in no danger of going bankrupt, it's highly likely that what Generation Z will receive each month will be less than what their parents or grandparents received on an inflation-adjusted basis. There are two reasons this is probable.
First, as noted above, Social Security is expected to completely exhaust its asset reserves by 2034. Depleting this cash is an indication that the current payout schedule is unsustainable. The Trustees report has projected the need for an across-the-board cut in benefits of up to 21% if Congress hasn't found a way to lessen or eliminate the estimated $13.2 trillion cash shortfall between 2034 and 2092. Given lawmakers' history of waiting to the last second to resolve Social Security's problems, a cut in benefits is looking like a genuine possibility for future generations.
Second, the purchasing power of Social Security dollars has been on a precipitous decline since the year 2000. According to The Senior Citizens League, the purchasing power of Social Security income has declined by 34% over the past 18 years. The reason? Social Security's inflationary tether, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), does a poor job of measuring important expenditures for seniors. As a result, they aren't getting adequate cost-of-living adjustments from one year to the next, resulting in a loss of purchasing power. As long as the CPI-W remains the program's inflationary measure, this loss of purchasing power is expected to worsen.
The full retirement age is likely to have increased
Finally, there's a pretty good chance that Generation Z will have to wait longer to collect their full retirement benefit than their parents or grandparents did.
Since 1960, the average life expectancy in the U.S. has increased by about nine years. Meanwhile, the full retirement age -- the age where you become eligible to receive 100% of your retirement benefit, as determined by your birth year -- will have increased by just two years, to age 67, between 1983 and 2022. With the American public living longer, it's only logical to expect the full retirement age to increase over time.
What's worth pointing out here is that raising the full retirement age works as a means to reduce Social Security's lifetime benefits. Either an individual waits longer to receive their full benefit, thereby reducing the number of years they'll collect a monthly check, or they'll accept a steeper permanent reduction to their payout, lowering their lifetime benefit. This, along with a possible benefits cut and the loss of purchasing power, could notably reduce the impact of Social Security benefits by the time Generation Z begins to retire.
In other words, it's a mixed bag for today's teens and young adults, which is all the more reason they should do their best to lessen their future reliance on the program.
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