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Millennials Can Count on Social Security After All

April 2, 2018
Investing, Personal Finance, Retirement Planning, Social Security
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Are you convinced the Social Security system is on life support, not long for this world? You’re not alone.

Eighty percent of millennial workers say they’re worried Social Security won’t be there for them, according to a 2017 study by the Transamerica Center for Retirement Studies, which counts millennials as those born from 1979 to 2000.

You can relax: There is “zero doubt that Social Security will be there for millennials,” says Dean Baker, a senior economist at the Center for Economic and Policy Research.

Even if nothing is done to shore up the system, Baker says people retiring in 30 to 40 years can count on about 10% more money, in inflation-adjusted dollars, from Social Security than what today’s beneficiaries get.

That’s even though the system is projected to be able to pay only 75% of benefits starting in 2035 when the Social Security trust fund will deplete its reserves, according to estimates by the Social Security Administration.

Growing faster than inflation

How can that be? It’s because future benefits increase at a rate that outpaces inflation.

“Even if benefits are not paid in full, the average retiree in 30 years will be able to buy about 10% more with their Social Security check than a retiree today,” Baker says.

Andrew G. Biggs, a resident scholar at the American Enterprise Institute, agrees. “Even if Social Security benefits were cut by 25% when the trust fund runs out, the real value of those benefits would still be higher than what’s received by today’s retirees,” he says.

If you’re still worried about that depleted trust fund, consider this: Payroll taxes pay for most of retirees’ paychecks.

“People confuse the exhaustion of the trust fund with the end of the program,” says Alicia Munnell, director of Boston College’s Center for Retirement Research. “Even once the trust fund is gone, payroll taxes themselves, already in place, can pay 75% of benefits.”

Note, too, that it’s widely believed that Congress won’t allow benefit decreases, given their political unpopularity.  “I would be shocked if there were a major cut in benefits,” Baker says.

But there’s a catch

There is one major caveat, however: The percentage of your pre-retirement income that Social Security benefits will replace decades from now likely will be lower than what retirees today currently enjoy.

The so-called replacement rate for an average-earning 65-year-old retiring in 2035 is expected to drop to 36%, from 39% in 2015 and 43% in 1995, according to one measure of such rates, based on data compiled by the Center for Retirement Research.

That’s assuming there are no cuts to benefits. If there are, the replacement rate would drop more.

“What you care about in retirement isn’t just the absolute level of your retirement income,” Biggs says. “You care about how your retirement income compares to your pre-retirement earnings.”

The drop in replacement rate is due to a variety of factors, including an increase in the retirement age, instituted in 1983, which effectively is a benefit cut. People born in 1937 could claim full benefits at 65, but the age to receive full benefits has slowly risen. It’s 67 for anyone born in 1960 or later.

Keep saving for retirement

No matter what happens, remember that Social Security isn’t meant to be your sole source of retirement savings. Set a goal to save 15% of your income. If you’re wondering if you’re on track, plug your numbers into a retirement calculator.

If you find you’re not saving enough, then consider increasing your 401(k) contributions or opening an IRA. Both accounts can trim your tax bill, too.

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