Social Security has faced financial threats for years, with the latest projections suggesting that the demographic onslaught of Baby Boomers will completely exhaust the Social Security Trust Fund by the mid-2030s. For those in Generation X, who are currently in their mid-30s to early 50s, the prospect of Social Security's crisis sounds like a case of seriously bad timing -- and a potential recipe for retirement disaster. Social Security won't disappear even if the trust fund runs out of money, but members of Generation X nevertheless should watch their back to make sure that political moves don't take advantage of their smaller numbers to implement benefit-busting measures in the future.
Why Generation X is worried
The immediate problem that Social Security faces is that demographic trends have a shrinking workforce supporting a growing base of retired benefit recipients. Historically, there were between three and four workers for every retiree on Social Security throughout most of the 1960s through the 2000s. Yet in 2010, that ratio broke below the 3 mark, and demographers now expect the ratio to fall to 2.1 within the next dozen years. 2029 will represent the end of the Baby Boom generation hitting age 65, and that will be when Generation X starts to reach that traditional retirement age in their mid-60s.
Fewer workers mean less payroll tax revenue to fund benefits, and that in turn will require Social Security to use its accumulated trust fund assets to meet the shortfalls. That's expected to happen in 2034, and when it does, Social Security benefits will be reduced by between 20% and 25%.
How "solutions" could hit Generation X harder
Politicians have sought fixes for the Social Security financial crisis for some time, but they haven't come up with any consensus for how to address the issue. Last year, many lawmakers believed that increasing Social Security benefits was the highest priority, with the idea of raising tax revenue through higher wage base limits and other measures. Now, though, the Republican victories in Washington have benefit-cutting measures back in the spotlight. Such measures are largely aimed at Generation X and younger Americans.
For instance, the Social Security Reform Act proposal from Rep. Sam Johnson (R-Tex.) would raise the maximum Social Security full retirement age from 67 to 69. The 67-year-old provision hasn't even fully taken effect yet, with only those born in 1960 or later having that full retirement age currently. Under the proposal, full retirement age for those turning 62 would rise by three months per year starting in 2023, and after the eight-year phase-in, it would be Generation X members born in 1968 and later facing the immediate impact of the higher retirement age.
The impact of the rising age would be substantial. For those planning to claim Social Security at 62 and who've earned full-retirement-age benefits of $1,500 per month, a full retirement age of 67 means that you'd receive early benefits of $1,050 per month. The 30% discount is the price you pay for claiming five years early. Yet if the full retirement age rises to 69, the discount grows to 40%, leaving the same person with just $900 in monthly benefits.
No surprise for Gen X
For what it's worth, few Generation X members are truly surprised by the way Social Security's situation is playing out. Even nearly 20 years ago, only two-fifths of Generation X members believed that Social Security would be able to provide benefits by the time they retired. At the time, according to one poll from The Wall Street Journal,many believed that taking advantage of the booming stock market was a better way to save for retirement, and a majority believed that getting out of the Social Security system entirely was the best move.
Even as they've grown, Generation X has remained more pessimistic about Social Security than other demographics. Even millennials have slightly more faith in Social Security's survival than Gen X, according to the latest Transamerica Center for Retirement Studies survey , although more than 80% of both cohorts have concerns that Social Security won't really be there for them when they're ready to retire.
Given the volatile political climate in Washington, it's extremely difficult to predict what changes to Social Security could happen between now and the time that Generation X starts retiring in earnest in the late 2020s and early 2030s. It's too early for Generation X to kiss Social Security goodbye, but many members of the generation appear resigned to what seems like an imminent breakup at some point between now and retirement.