Here’s What Social Security Will Look Like by the Time Millennials Retire

Millennials — people born between 1981 and 1996 — face unique concerns when it comes to saving for retirement. Previous generations could rely on company pension plans, which are declining in number, and Social Security, which is experiencing deficits that threaten its future existence.

Whether you’re a member of the millennial generation or the parent of someone born during this period, you likely have questions about the challenges facing Social Security and how they might affect retirement planning.

Click through to see some of the most frequently asked questions about the future of Social Security, and why some people might have to tap into their retirement savings early.

Assuming millennials retire when they reach full retirement age at 67, the oldest millennials will start retiring in about 30 years, and the youngest millennials, who are now 22, will start retiring in about 45 years. What Social Security will look like for them is a critical question as they plan for retirement.

Millennials are about to be the largest generation in America, according to the U.S. Census Bureau. Estimating retirement income and savings amounts now are essential steps for millennials to take, whether or not the Social Security program changes dramatically over the next several decades.

Social Security is primarily the Old-Age, Survivors and Disability Insurance federal program, which keeps over 15 million of all Americans over the age of 65 above the poverty line.

The program is funded through payroll taxes that are put in the fund, which is managed by the government. It is the largest federal spending program, and it is expected in 2018 that 63 million Americans will receive roughly $1 trillion in benefits, according to the Social Security Administration.

“Social Security will change because it is unsustainable at its current rate,” said Jamie Hopkins, an associate professor at The American College of Financial Services’ Retirement Income Program.

According to a summary of the 2017 Social Security annual report, Social Security’s rate of expenditures has exceeded its income since 2010 — and the government has difficulty paying benefits with no surplus.

Experts projected that the cash-flow deficit would average about $76 billion between 2015 and 2018 and will continue to climb as the number of beneficiaries — mostly baby boomers — continues to grow at a faster rate than the number of workers.

“Social Security will still exist because it is needed and we made a decision as a country to take care of our elderly,” said Hopkins. Roughly one-third of elderly Americans rely on Social Security for basic necessities, and Hopkins believes that a complete dissolution of the system would throw the country into chaos.

Considering the reserve depletion projections, however, changes to benefits are likely forthcoming. According to the Social Security 2015 report summary, “Lawmakers should address the financial challenges facing Social Security and Medicare as soon as possible. Taking action sooner rather than later will permit consideration of a broader range of solutions and provide more time to phase in changes so that the public has adequate time to prepare.”

“There might even be a testing portion of Social Security that would reduce or completely eliminate benefits for those individuals with large amounts of retirement income or wealth,” said Hopkins. It’s hard to say what Social Security will look like in 40 years, but a complete overhaul of the program is inevitable, according to Hopkins.

Half of all millennials surveyed by the Pew Research Center in 2014 believe that Social Security will go bankrupt before they retire. With government data on tax income pointing to a continuation of about three-quarters of scheduled benefits through 2089, however, millennials will likely receive some Social Security — just not as much as Americans receive now.

Understand: The True Costs of Retiring on Social Security

Let’s assume that the government will pay three-quarters of scheduled benefits through the end of 2089, as per the current projection. Using the current average retiree’s Social Security monthly payment of $1,377, and assuming a 2 percent annual inflation rate, a retiree’s benefit will be $2,544 in 31 years. If the government will only pay a maximum of three-quarters of that amount, the total Social Security monthly payment will be $1,908.

How much you should save for retirement per year depends on your age and how long you plan on working. “You will need roughly 70 percent of your current income in retirement to maintain the same standard of living,” said Hopkins.

According to the Social Security Administration, Social Security is expected to replace about 40 percent of a person’s salary at its current payout rate, but that falls to 30 percent if benefits are cut. That means millennials will need to make up 40 percent of their salaries from savings and investments. For someone earning $80,000 a year, that means $32,000 in annual retirement income.

“Contrary to popular belief, millennials are good savers,” said Peter Drake, a now-retired Fidelity retirement expert. In fact, according to a survey from T. Rowe Price, millennials save 8 percent of their paycheck, which is close to the 9 percent that baby boomers save — and since baby boomers are closer to retirement, they’re expected to save more.

Since millennials don’t know how much government support they will have during retirement, they need to start saving now.

Here are a few good retirement savings tips:

• Aim to pay off all high-cost debt first to avoid expensive interest payments.
• Get a 401k match from your employer if it is offered.
• Save your raises and bonuses and continue living on your lower income.
• Put money into an IRA automatically.
• Aim to allocate 15 percent of your paycheck into retirement savings.

If this all seems insurmountable, just remember that setting aside even a small amount of each paycheck will pay off later. For example, $25 a week invested at 5 percent interest for 40 years can grow to more than $156,000. And when it comes to capitalizing on the power of compound interest, the sooner you start saving, the better.

Click through to read more about millennial money traps and how to avoid them.

More on Social Security

• Answers to Your Top 6 Social Security Questions
• Do These 13 Things to Boost Your Retirement Savings Now
• Best Places to Live on Only a Social Security Check