Ask some seniors receiving Social Security benefits today, and a majority are likely to tell you that meeting their monthly financial obligations would be difficult, if not impossible, without Social Security income. Each month, approximately 61.5 million people receive a Social Security check, 42 million of which are retired workers. For more than three out of five of these retired workers, Social Security income accounts for at least half of what they'll bring home each month. The program is simply that important for today's seniors.
But what might Social Security look like once millennials (ranging in age from 18 to 35) and Generation Z (under age 18) hit retirement age? Let's look at 10 things the younger generation needs to know about this all-important program.
1. It's not going bankrupt
Let's begin with the most important piece of information: Social Security isn't going bankrupt, despite the popular belief among millennials that it'll soon be insolvent. Yes, Social Security is projected by the Social Security Board of Trustees to burn through its nearly $3 trillion in asset reserves by the year 2034, but the program will still be generating revenue through its payroll tax on working Americans. This payroll tax accounted for 87.3% of all revenue the program generated in 2016.
In other words, as long as people keep working, and Social Security's 12.4% payroll tax is collected, a benefit payment will be made to beneficiaries when they retire.
2. Benefit cuts are a real possibility
However, it's important for those of the younger generation to understand that even with the guarantee of a future monthly payout, it's possible that their future benefit may be cut. The Board of Trustees has intimated that a 23% across-the-board cut to current and future beneficiaries may be needed by 2034 to sustain payouts through 2091. A growing number of eligible retirees and lengthening life expectancies have weighed on Social Security, meaning that without additional revenue it's growing more likely that benefit cuts of some sort may be needed to ensure the financial health of the program for future generations.
3. So are higher payroll taxes
In addition to potential benefit cuts, it's also very possible that payroll tax increases could be passed along to millennials and Generation Z at some point to generate more revenue for the program. The 12.4% payroll tax currently applies to earned income between $0.01 and $127,200. However, most workers pay only half of this amount, 6.2%, with their employer covering the other half. It's possible that Congress will pass legislation in the future to gradually increase the payroll tax to bring in more revenue for Social Security.
4. Social Security's purchasing power will probably keep falling
Millennials and Generation Z should understand that regardless of whether benefits are cut or not in the future, the purchasing power of Social Security dollars is probably going to decline over time.
In plainer English, Social Security's annual raises, which are tethered to the movement of the Consumer Price Index for Urban Wage Earners and Clerical Workers, isn't keeping pace with the actual inflation seniors are dealing with. Medical-care inflation has topped Social Security's annual cost-of-living adjustment (COLA) in 33 of the past 35 years, and housing inflation has recently been rising much faster than Social Security's COLA. The younger generation should be resigned to the idea that their Social Security income may not buy them as much in 30 or 40 years as it does for their parents or grandparents today.
5. You're not entitled to Social Security benefits
Although Social Security provides what can arguably be described as guaranteed monthly income, it isn't an entitlement program. To qualify for Social Security, you'll have to earn 40 lifetime work credits, of which a maximum of four can be earned annually. Each work credit in 2017 translates into $1,300 in earned income. In short, if you work part-time for about 10 years, you'll at least qualify for Social Security income when you retire.
Then again, you'll also want to earn as much as you can for at least 35 years to maximize what the program will pay you once you hit the claiming age of 62 or older. Also, as you'll find out in a moment, there are a few exceptions to the 40 lifetime work-credit rule.
6. It covers more than just retirees
Though 68% of Social Security's recipients are retired workers, the program also covers some 10.5 million disabled folks and 6 million survivors of deceased workers. Roughly 96% of workers aged 20 to 49 are currently covered by survivors insurance protection, while Social Security protects around 90% of workers aged 21 to 64 are protected in the event of a long-term disability.
The disabled are an exception to the rule and may be able to qualify for Social Security income without having reached 40 lifetime work credits. Meanwhile, spouses and children of deceased workers may also qualify for a monthly payment, possibly even without having worked a day in their lives.
7. It's designed to replace only about 40% of your working wages
Millennials and teens today should also realize that Social Security isn't designed to be some luxurious income you live off during retirement. It's only expected to replace about 40% of your working wages, according to the Social Security Administration. This means Social Security should be nothing more than a Plan B in your retirement strategy, and that saving and investing should remain your primary goal during your working years.
8. You'll probably be somewhat reliant on Social Security in retirement
If history suggests anything, it's that younger adults probably ignore the advice of the Social Security Administration and lean far too heavily on Social Security income once they retire. As of July 2017, according to the St. Louis Federal Reserve, the U.S. personal saving rate was just 3.5%. That's nowhere near the recommended 10% to 15% of earned income that financial advisors recommend workers save for the future. Unless millennials and Generation Z all happen to stumble on exceptional investment opportunities, it's going to be really difficult to reach a comfortable nest egg while saving and investing just 3.5% of earned income.
9. Your full retirement age is 67
Perhaps the most important date for millennials and retirees is their 67th birthday. When they turn 67, they'll have reached their full retirement age, according to the Social Security Administration. Your full retirement age is the point at which you're deemed eligible to receive 100% of your Social Security benefit, which once again is calculated by averaging out your 35 highest-earning years.
Anyone born in or after 1960 has a full retirement age (FRA) of 67. If you claim benefits at any point before your FRA (age 62 to age 66 years and 11 months), you'll accept a permanent reduction in your monthly benefit. Similarly, if you were to wait for any age between 67 years and 1 month and age 70, your monthly payout will grow even more.
10. You'll probably owe federal tax on a portion of your benefits
Last, but not least, prepare to hand over a portion of your Social Security benefits to Uncle Sam. According to The Senior Citizens League, 56% of senior households receiving Social Security benefits owed at least some federal tax on those benefits as of 2015.
Why, you ask? Congress hasn't adjusted the income-tax thresholds for Social Security beneficiaries since 1983. Individuals earning more than $25,000 annually, and couples tipping the scales at more than $32,000 a year, will have at least a portion of their Social Security benefits exposed to federal taxation. It is possible that Congress adjusts these thresholds for inflation at some point in the future, but the program is also very much in need of extra revenue, providing little reason for Congress to consider making this adjustment anytime soon.
Long story short: Social Security will be there for millennials and Generation Z when they retire, but don't expect it to look anything like the Social Security program their parents or grandparents have been privy to.
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