Like every generation for over 80 years, today’s young adults are funding Social Security through their payroll taxes. But will America’s retirement safety net still be around when it’s time for Gen Z to collect benefits?
No one can say for sure what any government program will look like 40 years out, but one thing is certain — if Congress doesn’t act, Social Security will not exist in its current form when today’s 25-year-olds turn 65 in 2063.
The FICA taxes that your employer withholds from your check don’t go into an account that will come back to you as Social Security payments. They pay for current retirees’ benefits in conjunction with trust funds — and those trust funds are projected to run out in 10 years.
When that happens, Social Security won’t become insolvent, but it will have to rely only on incoming tax revenue — which won’t be enough — long before Gen Z is scheduled to collect.
“If Congress does nothing to reform the system by 2033, Social Security would only be able to pay 77% of promised benefits through 2090,” said Lindsey Crossmier, a financial writer with RetireGuide. “Gen Z should start preparing to offset lower Social Security benefits as soon as possible.”
The youngest adults are on pace to carry more student debt into old age than any previous generation — and that trend could have a big impact on their ability to retire. “Social Security benefits could be reduced by $2,500 or more for future Gen Z beneficiaries,” Crossmier said. “This is due to delinquent student loans.”
If you default on a federally backed student loan, the government can withhold part of your Social Security benefits. According to a recent study from the Center for Retirement Research at Boston College, the average delinquent retiree loses 4%-6% of their household income to Social Security benefits garnishments, which is how Crossmier came up with $2,500 lost per year.
Student debt rates among retired persons are currently low, but delinquencies are rising rapidly — and baby boomers are much less likely to have borrowed for college than today’s young adults. According to the Education Data Initiatives, Gen Z is on track to become the most educated generation — and the one that borrows the most to achieve that education. The Boston College report also found that delinquency rates among younger borrowers increased steadily between 2012 and 2020 as student loans surpassed all other types of consumer debt.
Another thing that could impact today’s 20-somethings is their propensity for contract work and freelancing. “The growing gig economy and an uptick in self-employment could impede their accumulation of Social Security credits,” said Brad Banias, a former Department of Justice attorney and the founding partner of Banias Law and Pro Se Pro, which advocates for beneficiaries in delay suits against the government.
But even if young gig workers accumulate all the work credits required to collect Social Security, they’ll pay double to earn them. That’s because a 12.4% payroll tax funds Social Security, with employers and their workers splitting the bill at 6.2% each. If you work for yourself, however, you get stuck with the whole 12.4% bill. It’s known as the self-employment tax, and young workers are much more likely to pay it. According to Statista, 43% of Gen Zers work as freelancers — only millennials claim a greater share of independent contractors at 46%.
If Gen Zers pay double payroll taxes for their entire careers, their nest eggs will likely be smaller, forcing them to claim benefits early and settle for smaller checks.
Despite all the crises the program has faced, Congress has always modified the law to continue full payments since the inception of Social Security in 1935 — and considering it’s one of the most popular initiatives in America, the will to save the program will likely endure.
Congress could shore up the program by raising the retirement age — it has in the past. “Currently, Social Security replaces about 40% of pre-retirement income for most people,” said Kendall Meade, a certified financial planner at SoFi. “It is estimated that by pushing the age back to 70, the average impact would be a 20% reduction in benefits. This would mean that Gen Zers may only be able to count on Social Security to replace approximately 32% of their income in retirement.”
But Congress could also reduce or means test benefits. “Either of these options could mean a reduction in the amount of Social Security income coming to you in retirement,” Meade said.
The best thing Gen Z can do is prepare now to be as self-reliant as possible in their golden years. “Start saving and investing ASAP,” Meade said. “By beginning as soon as possible, you are able to contribute more to your retirement savings and are also able to grow it more through the power of compounding.”
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