Since I was a teenager, my father has told me to save for retirement and assume that Social Security won't be around when I hit my 60's. All things being equal, this wasn't terrible advice: It motivated me to focus on saving and investing, and it has helped put my family in a stable financial position.
It turns out that this mantra isn't unique to my family. A recent survey by T. Rowe Price had a surprising finding. Respondents were asked if they agreed with the following statement: "I'm more likely to win the lottery than receive any money from Social Security."
- 64% of Millennials agreed with this statement
- 49% of Generation X members agreed with the statement
This is just plain wrong -- and by a large margin. Here's why.
While respondents might have been a little hyperbolic, let's dissect their response. Let's take, say, the country's largest lottery: Powerball. According to the lottery's website, to odds of winning the grand prize are one in 175 million. In other words, if we are to believe T. Rowe's respondents, only about two individual Americans out of roughly 320 million should expect to receive even $0.01 of Social Security money.
Hopefully, I don't have to point out how out of touch this is.
We are bombarded on a regular basis with messages about a shortfall in Social Security, and its looming ramifications. While its true that the Social Security Old Age and Survivors Insurance, or OASI, Trust Fund is expected to run out of money in 2033, that doesn't mean the program will disappear.
That's because, for decades now, there has been more money going into the trust fund -- in the form of payroll taxes -- than coming out of the fund -- in the form of OASI payments. When the fund runs out in 2033, assuming the program functions the way it does now, it won't disappear -- it will simply use the payroll tax revenues to immediately reimburse retirees.
The situation is akin to someone who exhausts their savings account, and must now live paycheck to paycheck to cover their costs. The difference is that there's no risk of losing the "monthly income." As long as Congress keeps Social Security payroll taxes in place, people will be paying into the fund.
It'll be a big deal, even if cuts are in place
However, because the number of retirees is expected to grow faster than the number of working Americans, experts predict that OASI benefits would have to be reduced by 23% once the trust fund is depleted.
It helps to put this in perspective. Let's say you were born in 1980, and will average an inflation-adjusted salary of $50,000 per year during your working career. Using the Social Security Administration's Quick Calculator, we can see that if you retire at the age of 63, you'll get a monthly check of $1,333 in today's dollars.
That's equivalent to $16,000 -- a substantial chunk of change when you consider that most aren't expecting anything from Social Security. Even if benefits are reduced by 23%, you're still looking at $12,320 in automatic income. And if you retire later than 63, you're looking at even more money.
How much are we talking?
Assuming that Congress does nothing to remedy the Trust Fund shortfall, and reducing your benefits accordingly, here's how much the average Millennial can expect to get annually from Social Security in today's dollars, depending on their average salary and the year they retire.
Is this enough for most American retirees to live on? Probably not. But is it a significant chunk of change nonetheless? Absolutely.
In the end, the upshot of these wildly inaccurate views is that most Millennials and Gen Xers should be going above and beyond to make sure they can fund their own retirement -- Social Security or not.
The drawback is that while candidate after candidate will have their own ideas about how to change the legacy program, our nation's voters are largely illiterate when it comes to how Social Security will affect their own lives.
Education is good. Saving is good. Combine the two and you set yourself up as best you can to live a comfortable retirement.