It's probably something we don't like to talk about, but roughly half of all Americans don't expect to have enough money to retire comfortably, according to a Gallup survey conducted earlier this year. Though the percentage of existing retirees who stated that they have enough money to live comfortably has consistently hovered around 80% since 2002, the same has not been true for non-retired workers who clearly fear for their own economic future.
This fear is particularly pronounced for millennials, who are traditionally defined as currently being between ages 20 and 36. In "The Millennial Economy 2018" survey recently released by Ernst & Young, just a third of the 1,200 millennials surveyed expected their financial situations to be better than those of their parents. A common theme throughout this survey among millennials was the belief that they were living in a more stable economic environment than in the past, but that this stability wouldn't last.
Millennials' surprising top financial concern
Perhaps the biggest surprise of the entire questionnaire concerned the largest financial worries for millennials. Each of the 1,200 participants was asked the following question:
How much do each of the following worry you personally? Do they worry you a lot, some, or not very much or not at all.
- America's debt and deficit levels
- Effect of tax and regulatory policies on U.S. businesses
- Foreign competition for jobs
- Future job opportunities
- High healthcare bills
- Inability to pay back student loans
- Job jeopardization by automation
- Lack of Social Security at retirement
- Not enough money at retirement
In 2016, the last time this biennial survey was conducted, the top concern was "not enough money at retirement," which had 79% of millennials worried a lot or some. This was closely followed by the 78% who were worried a lot or some by America's debt and deficit levels, and future job opportunities.
Though somewhat similar near the top during the 2018 survey, there was one monumental change. The top financial worry among millennials is now the "lack of Social Security at retirement." Three-quarters of all millennials expressed a lot or some worry over Social Security's issues. This was 4 percentage points higher than America's debt and deficit levels, 5 percentage points higher than not having enough money at retirement, and 10 percentage points above high healthcare bills.
Millennials are right to be worried, but for the wrong reason
Millennials certainly have every right to be concerned about the nation's most important social program.
According to the newest annual report from the Social Security Board of Trustees, the program is set to hit an inflection point this year that'll see more money spent than brought in for the first time since 1982. Though we're only talking about a net cash outflow of $1.7 billion, which is peanuts compared to the nearly $2.9 trillion currently held in asset reserves, it's the underlying trend here that matters. This reversal of fortune clearly demonstrates that Social Security's payout schedule isn't sustainable.
The Trustees report projects that if nothing is done to increase revenue to the program and/or cut expenditures, these growing net cash outflows will completely exhaust Social Security's asset reserves by 2034. At such time, then-existing and future beneficiaries could be staring down a cut in benefits of up to 21%. That reduction could mean the difference between being able to meet your bills and coming up short as a retired worker.
But what millennials don't have to worry about is Social Security being there for them when they retire. As long as Congress doesn't change how the program is funded, there's no chance Social Security will be insolvent and unable to provide them a benefit during their golden years. The reason? The 12.4% payroll tax on earned income and, to a lesser extent, the taxation of Social Security benefits, provided 91.5% of the $996.6 billion for the program last year. These are recurring sources of revenue that aren't going away. Therefore, as long as Americans keep working, qualifying millennials who've reached the prerequisite 40 lifetime work credits will receive a retired worker benefit.
Minimizing exposure to Social Security is a smart move
Nevertheless, millennials should do everything they can to minimize their exposure to Social Security over the long run.
According to the Social Security Administration (SSA), the program is only designed to replace about 40% of the average retired worker's wages. Yet, data from the SSA show that 62% of current retirees are leaning on their monthly Social Security payout for at least half of their income. Further, 34% lean on Social Security for virtually all of their monthly income (90%-plus). This is simply too much reliance on a program that could face benefit cuts in less than two decades.
For millennials, preparing for retirement appears to be a mixed bag. Although it depends on the study in question, most surveys suggest that millennials are doing much better than boomers with regard to saving money. Unfortunately, they aren't doing such a great job once they squirrel that money away.
Data from the St. Louis Federal Reserve find that approximately 3 in 5 millennials don't have any stock market exposure. That might sound great from time to time when a correction hits, but it's actually dooming most millennials over the long term. That's because the stock market has historically returned 7% per year, inclusive of dividend reinvestment and when adjusted for inflation. You simply won't find a source of higher, more consistent returns. And without exposure to this wealth-creating machine, millennials will likely struggle to compound what they've saved.
Millennials thankfully still have decades to take advantage of the stock market's ability to compound many times over, but the clock is ticking.