Millennials will probably collect less in Social Security than older generations, but a little extra savings over the course of their careers can help close the projected gap, according to a new report.
A 35-year-old earning $100,000 a year today would need to save an additional, inflation-adjusted $33 a week over the course of their career to make up for a 20% lifetime reduction in Social Security benefits, according to the report by HealthView Services, which provides retirement health-care cost data and tools to financial advisers. The calculation assumes a 50% employer match, 6% annual returns during their working years, and 5% annual returns during their retirement years, which begin at age 67. Under the same assumptions, someone earning $50,000 a year would need to save an extra $21 a week.
The analysis comes on the heels of the Social Security Board of Trustees’ annual report, which recently announced the program’s old-age trust fund will become depleted in 2034. At that time, Social Security will be able to pay only 77% of promised benefits through payroll taxes. Demographics are driving the program into a deficit, as there are fewer workers contributing into the program and more retirees receiving benefits, a trend that is projected to continue. Yet it’s unlikely that current or soon-to-be recipients would see any benefit cuts, since that would be a politically unpopular move.
It’s more likely that the brunt of future benefit cuts will fall on those millennial-aged and below, who have more time to plan around possible reductions. “If you start at 35 and put a few more bucks into your 401(k), it will make a big difference,” said Ron Mastrogiovanni, CEO of HealthView Services.
Congress could take action to shore up the program’s finances, either by raising taxes, reducing benefits, or some combination of both. One of the most politically palatable measures, experts say, would involve raising the full retirement age, the age at which you can collect 100% of the benefits you’ve earned. Full retirement age is currently 67 for those born in 1960 and after, and one possibility would involve raising it to 69 for those who aren’t close to retirement. The last time that Congress increased the full retirement age, in 1983, the changes first went into effect for people who retired in 2000, and they involved very gradually raising the full retirement age from 65 to 67.
An increase in the full retirement age is effectively a reduction in benefits. That hypothetical 35-year-old making $100,000, and living to a projected age 87 would receive $2.8 million in lifetime benefits by claiming at a full retirement age of 67, and $2.6 million by claiming at a full retirement age of 69, a difference of $211,913, according to HealthView Services. (This is gross income; for planning purposes, remember that Medicare Part B premiums are deducted from Social Security checks, and some benefits may be subject to taxes.)
For their part, many millennials aren’t counting on Social Security anyway. A poll last year from the Nationwide Retirement Institute found that 47% of millennials at least somewhat agreed with the statement, “I will not get a dime of the Social Security benefits I have earned.”
Dasarte Yarnway, founder of Berknell Financial Group in San Francisco and co-founder of the Onyx Advisor Network, said many millennials are planning for financial independence over the traditional retirement after working for a company their entire career. Financial independence brings the flexibility for travel, entrepreneurship, or other priorities. His firm runs financial models with Social Security and without, he said, to make sure “whether it’s here or not, you’ve done the heavy lifting…so you’ll be OK in either scenario.”
Write to Elizabeth O’Brien at [email protected]