The Social Security program is in trouble, but that hasn't stopped millions of retired seniors and soon-to-be-retired baby boomers from counting on it to provide a majority of their income during retirement. Based on December 2015 data from the Social Security Administration, 48% of couples and 71% of unmarried persons receiving a Social Security benefit count on the program to provide at least half of their monthly income.
The concerns with Social Security can be traced to two primary issues. First, the outflow of baby boomers from the workforce and into retirement means a rapid expansion of the eligible beneficiary base. When Social Security was conceived more than 80 years ago, a demographic shift of this nature simply wasn't factored into the equation.
The other issue is Americans' longer life expectancies. Though living longer means more time with family and friends, it also means a longer period during which to draw benefits from the Old-Age, Survivors, and Disability Insurance Trust, the fund from which Social Security benefits are paid. This was also not factored into Social Security's original design.
Based on the program's current trajectory, the Social Security Board of Trustees believes the program's $2.8 trillion in surplus cash -- which is predominantly invested in special bonds -- could be exhausted by 2034. At that point, benefits could be reduced by up to 21%. In other words, Congress has some decisions to make, and fast, to fix Social Security.
Millennials weigh in on Social Security
But it's not just seniors and baby boomers, or even Gen Xers, who are worried about Social Security. Millennials, who have three-plus decades to go until they start hitting their full retirement age (age 67), have chimed in with their opinions of Social Security.
According to a 2014 survey from Pew Research Center, 51% of all millennials fell for the greatest Social Security myth of all time -- namely, that Social Security is on the path to bankruptcy. The good news for millennials -- and all Americans, for that matter -- is that Social Security isn't going bankrupt. But clearly changes to the program are needed to ensure its solvency for generations to come.
Where millennials probably are right is in regard to their pessimism surrounding eventual payouts. The same Pew survey in 2014 found that 39% of millennials believe they'll receive a reduced benefit once they retire, with just 6% expecting their benefit to be on par with the benefit enjoyed by current retirees. In other words, 94% of millennials don't believe Social Security will be paying out benefits commensurate to those of today's seniors once they retire -- and to this extent, millennials are probably spot-on.
Why Social Security cuts are probably inevitable
One of the biggest debates concerning Social Security is how to fix the budgetary shortfall set to hit by 2034. While there are numerous potential solutions, lawmakers on Capitol Hill have not agreed to any single course of action.
Congress essentially has three ways to fix Social Security:
- Raise revenue
- Cut benefits
- Enact some combination of the two
Generally speaking, most Americans don't like the idea of cutting benefits. Even 61% of millennials, a group who won't even receive Social Security for decades to come, believe that cutting benefits is an unacceptable solution to fixing the current budgetary shortfall.
In 2014, The Washington Post conducted an informal online survey that presented 12 solutions, six of which were benefit cuts and six of which entailed revenue increases. Readers were allowed to vote for as many solutions as they'd be willing to support. Simply doing nothing and passing this problem off to the next generation received the fewest votes, while reducing benefits for everyone right now was the fourth-least popular solution.
By comparison, removing or raising the payroll tax cap for high-income earners was the top vote-getter at 69%. Since taxing the rich at a higher rate would affect only about 1 in 10 people, most Americans support the idea. Raising the retirement age (44% support), adjusting how the Social Security Administration accounts for inflation (33%), and adjusting benefits on a sliding scale (32%) -- i.e., freezing the purchasing power/benefits of high-income earners while allowing the benefits of lower-income and middle-class workers to grow -- were the next most popular options.
Now here's the problem: The solutions that tend to be more favored by Americans won't close the budgetary shortfall by themselves, according to the Center for Retirement Research at Boston College. Raising taxes on the rich would cut the budget shortfall by just 30%. Additional solutions, such as raising the retirement age and adjusting how the program calculates inflation, reduce the shortfall by only 20% each. Combining all three of the most popular solutions wouldn't even get the program three-quarters of the way to a fix!
What this likely means is that benefit cuts, or some combination of tax increases and benefit cuts, will be needed to sustain the program through 2090. Based on The Washington Post's survey, the "most popular" true fix would be to increase taxes on all workers across the board, which was favored by 30% of online readers. Other than cutting benefits on everyone, or passing the problem off to the next generation, there are few full-fledged fixes.
Millennials need to be prepared
It's unclear what path Congress will choose to head down at the moment, which, for millennials, means they'll need alternative sources of income once they hit retirement. This means they should take advantage of any 401(k) matches they may be offered and use tax-advantaged retirement tools to grow their nest eggs as much as possible.
One of the smartest moves millennials can make is to open and contribute to a Roth IRA. Although a 401(k) and a traditional IRA defer paying taxes on your nest egg until you retire, a Roth IRA allows your money to grow completely free of taxation for the life of the account. Furthermore, Roth IRAs have no required minimum distributions, no age restrictions on contributions, and the added flexibility of letting you withdraw your principal for any reason, at any time, should you run into a cash crunch. Contributing to a Roth IRA is probably one of the smartest moves millennials can make, and it could help millennials from being overly reliant on Social Security income once they do retire.