Should Millennials Plan on Social Security?

Social Security, started in the 1930s as a part of FDR’s New Deal, has been under fire since I can remember. All the while, the program has been helping fund the retirement of some 47 million Americans, with another 19 million on survivor or disability benefits. What started out as a way to ensure elderly Americans had some form of income has turned into a major piece of the US economy.

As we help our younger clients plan for retirement, we often hear, “Let’s not plan on Social Security, I don’t think it will be there by the time I retire.” While we understand where this attitude is coming from, we don’t think it reflects reality.

Here’s why:

• Social Security is funded by a separate payroll tax (FICA) that comes out of paychecks up until an individual reaches $160,200 in earned income (2023). That means, that for the first $160,200 each earner makes, 6.2% goes to Social Security, with another 6.2% coming from the employer.
• That’s a total of $19,864 that goes to Social Security for someone who earns $160,200.
• These amounts are then paid out directly to retirees, survivors, and disabled individuals.

As long as there are people working in the United States, there will be money going into, and then out of Social Security.

“But what about the trust fund?”

• As discussed above, Social Security is funded directly from payroll taxes. Up until very recently, the ratio of working to non-working Americans had been high enough that Social Security benefits were fully funded each year.
• However, as Baby Boomers retire and birthrates continue to decline, this is changing. If payroll taxes are not enough to current obligations, the difference is paid by the asset reserves in the Social Security trust fund. As more and more workers retire, the trust fund is expected to be depleted.

By the most recent estimates, the trust fund assets will be spent down by 2034. At that point, Social Security would officially be insolvent.

“That’s what I mean! Once Social Security is insolvent, I won’t get any benefits!”

But what does insolvency actually mean?

• Assuming no legislation is passed to shore up the program, all benefits will be cut to about 79% of what they are today.
• 79% is not 0%. Far from it, in fact, 79% is still solid amount of guaranteed income that the younger generation can plan on as a piece of their overall retirement picture.

“That’s it? That doesn’t sound as bad as what I’ve read in the news.”

No, it doesn’t. For younger workers who have plenty of time to factor such a possibility in their long-term planning, the potential reduction would not be life changing. A relatively modest increase to retirement savings would make up for the potential shortfall.

In reality, Congress will be forced to act, there will likely be changes to Social Security at some point. These changes will probably make sure that current benefits are not cut, and that Americans with no time to adjust will not have the rug pulled out from under them. For younger Americans, the fact remains that as long as we have workers and payroll taxes, Social Security will be there in one way or another.

Disclaimer: This analysis could certainly change pending action by Congress. We are in no way trying to predict the future, but we believe this analysis is reasonable based on the current landscape.