A recent report on Social Security, which forecasts that the combined retirement and disability trust fund reserves will be depleted in 2035, but will still have money to pay reduced benefits, leaves unanswered the critical question of how much benefits — or benefit cuts — Americans can expect.
The longer Congress puts off shoring up the shortfall, boomers and Gen Xers will avoid tax hikes or benefit cuts. Meanwhile, the generation likely to feel the biggest financial burden of fixing Social Security will be millennials.
“Further delay has real costs: The burden of tax increases or benefit cuts fully shifts to millennials and subsequent generations,” according to Alicia H. Munnell, director of the Center for Retirement Research at Boston College and author of a new report analyzing the program’s funding.
‘A great source of concern’
That would be a significant blow to millennials — those born between 1981 and 1996, ranging in age from 28 to 43 this year — who are well behind in saving for retirement compared to the rate of earlier generations due to student debt, Munnell said.
“Millennials’ lack of wealth in their 30s relative to earlier cohorts should be a source of great concern, given that they will live longer than previous cohorts and will receive less support from Social Security,” Munnell told Yahoo Finance.
More than 7 in 10 millennials are already concerned that Social Security could run out during their lifetime, according to Bank of America’s Workplace Benefits Report.
Waiting to fix Social Security “undermines Americans’ confidence in the backbone of our retirement system and causes some to claim their benefits early, hoping that those on the rolls may be spared future cuts,” Munnell said.
Half of Americans turning 65 this year are already retired and claiming Social Security and about a third are doing so because of “fear of missing out” on receiving their share of benefits.
Read more: How to find out your 2024 Social Security COLA increase
Avoiding ‘draconian benefit cuts’
The 2024 Social Security and Medicare trustees report projects insolvency one year later than last year’s estimate. That’s due to low unemployment, which has meant that more workers are adding to the program, the trustees said. There will still be funds to pay benefits — though only 83% of what’s been promised to current and future beneficiaries. In other words, without a fix, beneficiaries could see a 17% cut in benefits.
“Fixing Social Security is not a big deal,” Munnell said. “The shortfall equals only 1 percent of GDP, and the changes required are well within the bounds of fluctuations of other programs.”
Making changes sooner rather than later would “keep more options open, distribute the burden more equitably across cohorts, and avoid draconian benefit cuts,” she added.
For instance, if the change had been made in the early 1990s, baby boomers would have shared more of the burden, she said.
“At this point, the youngest boomer is age 60, so the boomer cohort will not be affected by any increase in the payroll tax, and they are almost certainly protected from any benefits cuts,” Munnell wrote.
Read more: What is the retirement age for Social Security, 401(k), and IRA withdrawals?
Millennials and generations after will ‘pay the full cost of fixing Social Security’
If Congress fails to act until 2035, the youngest member of Generation X will be 55 and will most likely be grandfathered from benefit reductions, according to Munnell’s analysis.
“The result of the good fortune accorded to boomers and Gen Xers is that millennials and subsequent generations will have to pay the full cost of fixing Social Security,” Munnell wrote. This would require a tax increase of more than 4% or a 25% reduction in all benefits.
The somewhat good news, depending on your perspective, is that millennials already don’t expect Social Security to be around for them, Lorna Sabbia, head of workplace benefits at Bank of America, told Yahoo Finance.
They are thinking holistically, she said, and “leveraging all of the savings tools available to them, including 401(k)s and health savings accounts.”
They’re wise to do so. Even without cuts to Social Security, saving for potentially longer life spans in a world without traditional pensions should be on everyone’s radar.
“Americans need to realize how little of their current income would be replaced by Social Security even if there isn’t a reduction,” Mary Johnson, a Social Security and Medicare policy analyst, sad. “That sum comes to roughly 40% for average earners, less for higher earners. That’s the reason to save.
“Could you live on only 40% of your current income?”
Kerry Hannon is a Senior Columnist at Yahoo Finance. She is a career and retirement strategist, and the author of 14 books, including “In Control at 50+: How to Succeed in The New World of Work” and “Never Too Old To Get Rich.” Follow her on X @kerryhannon.
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