Social Security may only pay 80% of what it owes until 2035 — see how this affects your retirement

Social Security may only pay 80% of what it owes until 2035 — see how this affects your retirement

Social Security may only pay 80% of what it owes until 2035 — see how this affects your retirement

Social Security may only pay 80% of what it owes until 2035 — see how this affects your retirement

Retirement may seem like a lifetime away for millennials — the youngest of whom are just 26 — but those who are banking on Social Security to see them through their post-work years are likely to face an unfortunate reality.

Dont miss

Some millennials are already expecting the worst of the federal pension benefits their parents and grandparents had to help them live in relative comfort past age 65.

They have good reason to be concerned. The Social Security Administration’s most recent report reveals that the program will only be able to pay a portion of benefits to retirees after 2035 if policymakers do not make changes to the system.

That means young people will have to look for other ways to supplement their income after retirement — if they haven’t already.

What does the government report say?

Each year the Social Security Administration publishes an update on the financial condition of the Social Security trust funds.

It’s widely known from previous reports that the fund’s reserves (the excess contributions collected and invested over the past few decades) are being depleted, but this year’s report says that when that happens, the Social Security Administration (SSA) will only be able to pay 80%. of promised benefits if Congress does not act. This could mean higher taxes or lower benefits.

“It is important to strengthen Social Security for future generations,” Kilolo Kijakazi, deputy commissioner of Social Security, said in a statement when the report was released.

Kijakazi, on behalf of the trustees, recommended that lawmakers “address the projected trust fund shortfall early” to ensure that changes could be made gradually.

Should you be afraid?

If benefits were cut by 20%, the average 35-year-old millennial currently earning $50,000 would lose about $13,500 in annual Social Security income in the first year of retirement, according to a recent analysis by HealthView Services, a data provider of Massachusetts serving the healthcare and financial services industries. Assuming they live to age 87, that means $365,000 less during their retirement.

A millennial making between $100,000 and $150,000 would lose between $21,000 and $25,000 — adding up to $560,000 to $675,000 over a lifetime.

“Millennials already have low expectations of the role Social Security will play in their retirement plans,” said CEO Ron Mastrogiovanni. “These benefits will be clearly less valuable to them than previous generations.”

However, the benefits are not expected to end completely. If policymakers don’t act, Social Security could pay 80% of benefits using its tax revenue.

“Those who claim that Social Security will not exist at all when today’s young adults retire and that young workers will receive no benefits either misunderstand or misrepresent the trustees’ projections,” writes Kathleen Romig, director of Social Security and Disability Policy at Center on Budget and Policy Priorities.

Increasing Social Security tax revenue, he says, should address the deficit and restore solvency as the population ages.

“Social Security’s fundamental challenge is demographic, which can be traced to a growing number of beneficiaries rather than escalating costs per beneficiary,” says Romig.

In 2008, it was estimated that for every beneficiary there were 3.2 to 3.4 covered workers. That number dropped to 2.8 workers for each beneficiary in 2021, the trustees’ report shows. And the ratio could drop to 2.3 by 2033 when baby boomers will have largely retired.

Filling the pension gap

Social Security helps replace earnings during retirement, but it’s not meant to cover all of your expenses. For the average worker, Social Security replaces about 40% of annual pre-retirement savings, according to the SSA — although that percentage varies by income.

The average Social Security retirement benefit in August 2022 was $1,627 per month. That’s less than $20,000 a year.

Financial advisors generally recommend that workers aim to replace between 70% and 85% of their earnings to maintain their lifestyle in retirement, according to AARP.

If you start collecting your Social Security benefits early, you will have less time to work. Those who claim their benefits at age 62 can expect their income replacement rate to be between 19% and 55%, AARP says. And that’s if the cash surplus doesn’t run out in 2035.

However, the loss of future Social Security benefits can be offset by a “consistent and modest annual increase” in savings, according to the HealthView Services report.

The 35-year-old earning an annual salary of $100,000 would need to add $2,543 to his annual savings between now and his full retirement age to offset the decrease. Assuming the employee has a 50% employer matching plan, that amounts to an additional $33 per week from now until retirement.

Millennials should be relieved to know they have time to deal with potentially lower SSA benefits—whether that means increasing their savings, delaying their claiming age, or hiring a financial advisor.

What to read next

This article provides information only and should not be construed as advice. Provided without warranty of any kind.

Leave a Reply

Your email address will not be published.