As Millennials look ahead to retirement, questions loom regarding the future of Social Security. The system is undergoing changes, and it’s essential to anticipate how these transformations might impact future beneficiaries.
Below are seven expectations Millennials should brace themselves for concerning Social Security payments by their retirement era.
Delayed Retirement Age
The full retirement age (FRA) is gradually increasing. Millennials, born between 1981 and 1996, can expect their FRA to be higher than the current 67 years for those born in 1960 or later. This delay means working for a few more years to receive full benefits, impacting life and financial planning.
The Social Security trust fund is depleting and is expected to be exhausted by 2034, according to the latest reports. If this happens and no corrective actions are taken, benefits could be reduced to about 76% of the scheduled amount. Millennials should prepare for the possibility of smaller Social Security checks than current retirees receive.
To counteract the reduction in Social Security funds, the government might decide to increase the payroll taxes that fund these benefits. Millennials may need to contribute a larger portion of their income to Social Security taxes throughout their working years.
Changes in Cost-of-Living Adjustments (COLA)
The formula used to calculate the COLA for Social Security may change, possibly leading to smaller annual increases in benefits. This adjustment could mean that benefits may not keep pace with inflation, decreasing the purchasing power of Social Security payments over time.
The government might introduce or expand means-testing for Social Security benefits, reducing payments for higher-income retirees. Millennials with substantial income from other retirement savings could see a decrease in their Social Security benefits.
Potential for Private Accounts
There’s ongoing debate about allowing workers to invest a portion of their Social Security taxes in private accounts. While this could potentially increase retirement savings, it also introduces more risk and variability in benefits.
Importance of Diverse Retirement Savings
Given the uncertainties surrounding Social Security, Millennials should prioritize other retirement savings vehicles. Contributing to 401(k)s, IRAs, and other investment accounts can help ensure a secure retirement, irrespective of the changes to Social Security.
The future of Social Security is shrouded in uncertainty, especially for the Millennial generation. While it remains a vital component of retirement planning, the reliance on Social Security benefits may need to diminish. A proactive approach, incorporating various retirement savings strategies, will serve Millennials well as they plan for their future financial security.
Editor's note: This article was produced via automated technology and then fine-tuned and verified for accuracy by a member of GOBankingRates' editorial team.
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