For most current retired workers, Social Security is a vital source of monthly income. Some 61% of retired workers currently receiving Social Security benefits rely on those benefits to account for at least half of their monthly income, according to the Social Security Administration. Another way of looking at this data is that more than 3 in 5 seniors would be in major financial trouble without their monthly Social Security checks.
Unfortunately, Social Security's long-term future is somewhat in doubt.
Are boomers to blame for this mess?
According to the Social Security Board of Trustees 2016 report, the Trust is forecast to burn through its more than $2.8 trillion in excess cash by the year 2034. Assuming lawmakers on Capitol Hill are unable to come to an agreement as to how to fix Social Security, the program could require an across-the-board benefits cut of up to 21% in order to remain solvent through 2090. It's this imminent budgetary shortfall of more than $11 trillion that has current and future retirees so concerned about Social Security's outlook.
As a generation, baby boomers have dealt with their fair share of finger-pointing when it comes to Social Security's expected shortfall. Baby boomers are retiring at a pace of more than 10,000 per day, meaning their exodus from the workforce will ultimately be responsible for weighing down the worker-to-beneficiary ratio over the next two decades.
It was also noted in a 2016 survey from the Insured Retirement Institute (IRI) that 59% of boomers expect Social Security to be a "major" source of income during retirement, which was up 16% from its 2014 survey. This probably shouldn't come as much of a surprise considering that 45% of boomers responded to the IRI survey by noting that they had nothing in retirement savings. Some 30% have even postponed their retirement plans because they don't want to enter retirement with insufficient savings.
But are they really to blame for Social Security's downfall? Not exactly. The architects of Social Security back in the 1930s could never have predicted that we'd see such a surge in baby births between the mid-1940s and mid-1960s, nor could they have possibly imagined that life expectancies would grow by nine years over the last five decades.
Perhaps the only real blame rests with boomers' poor saving habits, which will likely have a majority leaning heavily on Social Security during their golden years.
Millennials are probably in worse shape than boomers
However, I have a reality check for millennials, who have been quick to point the blame for Social Security's shortfall at baby boomers: as a group, you may be in worse shape.
As recently noted by CNBC, the median savings rate for millennials is (drumroll...) 3%. Seriously... three percent! Most financial advisors suggest that workers sock away between 10% and 15% of their annual income for retirement, and a recent NerdWallet report opined that lower investment return rates of late could require millennials to save 22% of their annual income if they hope to replace 80% of their working wages once they retire.
Making matters worse, even when millennials do save, they're investing their money far too conservatively for their own good, often losing real money in the process (i.e., netting a rate of return that's lower than the national inflation rate). A Harris poll conducted last year found that nearly 80% of millennials weren't investing in the stock market, which has arguably been the greatest source of wealth creation over time, with 7% annual returns, including dividend reinvestment. A number of survey respondents suggested they weren't investing in stocks due to a lack of money, insufficient investing knowledge, student debt, or a distrust of Wall Street. No matter the reason, the conclusion is the same: millennials are looking just as ill-prepared for retirement, if not more so, than the baby boomer generation.
Here's the silver lining for millennials, boomers, and all future generations
There is, however, a silver lining here for millennials, as well as baby boomers and all future generations of retirees. Despite many future retirees believing that Social Security is spiraling toward bankruptcy, this long-prevailing thesis is 100% false.
Social Security is funded three ways. In 2015, 3.4% of the $920.2 billion in revenue was derived from the taxation of Social Security benefits. Another 10.1% came from interest earned on the aforementioned more than $2.8 trillion in excess cash currently being held in special issue bonds and certificates of indebtedness. The remaining 86.4% of revenue was generated from the payroll tax, which is a 12.4% tax on working wages earned between $0.01 and $127,200 (as of 2017). In other words, as long as Americans continue to work, payroll taxes will keep feeding revenue into Social Security, which in turn will be distributed to the program's beneficiaries.
To be clear, this doesn't mean benefits may not be cut in the future. The Trustees offer their best assessment each year, and it does change from time to time. However, they've been pretty clear for more than a decade that sizable across-the-board benefit cuts may be needed should Social Security essentially become a budget-neutral program.
What doesn't change is the underlying problem of millennials being poor savers. It's certainly possible that having a lack of work experience, and thus dealing with lower wages, is harming millennials' ability to save. As millennials gain more work experience, they could see their salaries grow and may be able to sock away more toward retirement. But as things stand now, millennials could wind up being even more reliant on Social Security income during retirement than baby boomers. With a possible benefit cut on the horizon, that's a terrifying thought.
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