Should Millennials be Worried About Social Security

Unfortunately, I don’t have a quick answer to this. If I had to give one, it would be yes and no. Should millennials retiring in 25 to 30 years expect to receive social security? Yes. Is that where their questioning should stop? No. 

 To fully understand what Social Security MIGHT look like in 35 years, let’s first look at how it works. 

How Does Social Security Work 

Social Security Tax is a tax assessed on all working Americans. In fact, it can even be assessed on individuals who are not U.S. citizens in certain cases. The Social Security tax rate is 6.2% assessed on wages up to $132,900 in 2019. The employer then matches this amount. So, for every dollar you earn up to $132,900, 12.4 cents is contributed to Social Security. This source accounts for approximately 88% of fund earnings each year. Four percent more comes from taxes on the benefits received by retirees, and another eight percent or so from interest earned on the fund. The money earned each year is then paid out to those who are currently retired. The assumption is that there will be a working generation  paying into the system to support the currently retired/retiring generation. Therein lies the problem. 

The Problem With the Existing System 

Social Security was first enacted in 1940. Since then, people are living on average six years longer and retiring sooner. This means the system is a little outdated for currently existing demographics. The baby boomer generation is the largest generation on record, and they are the currently retired generation. With a smaller generation under them providing support, the cash surplus that was generated in the Social Security fund in the 80s and 90s is now dwindling. The fund has been cash flow negative since 2010 with no signs of changing that pattern. Current projections show the fund will be depleted by 2035.  

What Does This Mean 

This projection is what is getting everyone so worked up. It sounds dire, but it shouldn’t be the end of the program. One third of seniors report a dependence on social security. The average benefit in 2019 was $1,471. Historically, many Americans have not been great about saving for retirement. If Social Security went belly up, it would be disastrous. It is important to remember this, and understand changes are probably coming. These might include raising the benefit eligibility age, increasing the tax, increasing the cap at which social security wages are assessed, or reducing benefits. The last point is the one to focus on. As we explained, the vast majority of Social Security payments are funded by the payroll taxes collected on existing workers. This alone should be enough to pay retirees at least 75% of their earned benefits. That’s not too shabby. If changes are made, it could be more. 

Bottom Line 

The bottom line is, all signs point to the system continuing for the foreseeable future. Those retiring in 30+ years, however, should expect to receive far fewer benefits than those currently receiving social security if nothing is changed. Future tax law changes that would mean an obligation to pay more into the system until you do retire to make up for the funding gap are not off the table. As always, do NOT count entirely on social security. While it’s extremely unlikely you won’t receive it if you are eligible, it should be viewed as a support to your own retirement savings (even more so these days where benefits are expected to be lower). If you want help understanding how social security could work within your retirement plan and how much you might expect to receive, give our office a call. We’re happy to help.