To put it mildly, there's quite a bit of misinformation about Social Security on social media and in the news, and it's important for Americans to be able to separate fact from fiction when it comes to the nation's largest retirement plan. With that in mind, here are three things about Social Security that all millennials should understand while they're still decades away from retirement age.
Social Security has plenty of money
You may have heard on social media or in the news that Social Security is "broke." There are several variations of this myth going around, including one that claims Congress raided Social Security's reserves and all that is left is a bunch of IOUs.
To be fair, the latter is true -- in the sense that Social Security's money isn't just a bunch of cash kept in a warehouse. Like any responsible retirement planner would do, Social Security's money is invested. It is kept in interest-bearing Treasury securities to generate income to help fund the program. In fact, in a perfect world, Social Security would be self-sustaining between incoming payroll taxes and the interest earned on its reserves.
At the end of 2022, Social Security had $2.83 trillion in reserves. Because this money is all in Treasury securities, it earned $66.4 billion in interest income last year alone. So, when someone tells you Social Security is broke or bankrupt, don't believe them.
Social Security's sustainability problem isn't without precedent
With all of the above in mind, it is true that Social Security is spending more money than it takes in. With the ongoing retirement of the massive Baby Boomer generation, there simply aren't enough people paying into the system to cover all of the retirement benefits that are being paid out.
In 2022, Social Security reported a $22 billion deficit. As mentioned, with $2.83 trillion in reserves, it can certainly handle this outflow, but losses are expected to get worse as the years go on, not better. According to the latest projections, Social Security's reserves are expected to be depleted by 2034. If it runs out, incoming payroll taxes will only be enough to cover 80% of scheduled benefits.
However, this gives lawmakers more than a decade to come up with a solution. Of course, the sooner Congress acts, the easier it would be, but history tells us that something will be done.
A similar situation unfolded in the 1970s and 1980s, and Social Security was set to run out of money in July 1983. Just a few months before, the Social Security Amendments of 1983 were passed and made several changes to return the program to solvency for the next several decades.
Social Security isn't designed to be your only source of retirement income
As a final fact, it's important for millennials to realize that Social Security isn't intended to be your only source of retirement income. The average monthly benefit for a retired worker is $1,792 as of August 2023, which is about $21,500 per year and isn't likely enough to provide the lifestyle you want in retirement all by itself.
In fact, Social Security is only designed to replace about 40% of the average retiree's salary. Plus, the Social Security benefit formula is weighted in favor of lower-income workers, so the income replacement is likely to be significantly less than 40% for high earners.
Financial planners generally advise that you'll need about 80% of your pre-retirement income to sustain your lifestyle, and the rest will need to come from your retirement plan, IRA, or other assets. But it's important to realize that Social Security is still likely to play a big role in your retirement income, even if you aren't set to reach Social Security claiming age for decades.
