Social Security may only pay 80% of its dues by 2035 – here’s how that affects your retirement

Social Security may only pay 80% of its dues by 2035 – here’s how that affects your retirement

Social Security may only pay 80% of its dues by 2035 - here's how that affects your retirement

Social Security may only pay 80% of its dues by 2035 – here’s how that affects your retirement

Retirement may seem like a disaster — the youngest is just 26 — but those banking on Social Security to help them out are likely to skate by. to do throughout their post-working years.

Don’t lose

Some millennials are already expecting the worst of the federal retirement benefits their parents and grandparents had to help them live in relative comfort after age 65.

They have good reason to worry. The Social Security Administration’s latest report reveals that the program will only be able to pay some of the benefits to retirees after 2035 unless policymakers make changes to the system.

That means young people should be looking for other ways to supplement their post-retirement income — if they haven’t already.

What the government report says

Each year the Social Security Board of Trustees issues an update on the financial status of the Social Security trust funds.

It is widely known from previous reports that the fund’s reserves (the excess contributions collected and invested in recent years) are drying up, but this year’s report says that when they do, the Social Security Administration will not (SSA) can only pay. 80% of their promised benefits if Congress does not act. This could mean higher taxes or lower benefits.

“It is important to strengthen Social Security for future generations,” Kilolo Kijakazi, Acting Commissioner of Social Security, said in a statement when the report was released.

Kijakazi, on behalf of the trustees, advised lawmakers to “address the shortfall in the projected trust fund in a timely manner” to ensure that changes could be made gradually.

Should you be afraid?

If benefits are cut by 20%, the average 35-year-old millennial currently earning $50,000 will lose an estimated $13,500 in annual Social Security income in the first year of retirement, according to a recent analysis by HealthView Services, a data provider serving Massachusetts. the healthcare and financial services industries. Assuming they live to age 87, that means $365,000 less in retirement.

A millennial making between $100,000 and $150,000 would make between $21,000 and $25,000 – adding up to between $560,000 and $675,000 over a lifetime.

“Millennials already have low expectations of the role Social Security will play in their retirement plans,” said CEO Ron Mastrogiovanni.

However the benefits are not expected to stop altogether. If policymakers take no action, Social Security could still pay 80% of benefits using its tax revenue.

“Those who claim that Social Security will never be around when today’s young adults retire and young workers receive no benefits either misunderstand or misrepresent the trustees’ projections, ” writes Kathleen Romig, director of Social Welfare and disability policy at the office. Center on Budget and Policy Priorities.

An increase in Social Security tax revenue, she says, should address the deficit and restore solvency as the population ages.

“Social Security’s fundamental challenge is demographic, traceable to increasing numbers of beneficiaries rather than increasing costs per beneficiary,” says Romig.

In 2008, it was estimated that between 3.2 and 3.4 workers were covered for each beneficiary. That number fell to 2.8 workers for every beneficiary in 2021, the trustees’ report shows. And the ratio could drop to 2.3 by 2033 when baby boomers are largely retired.

Bridging the retirement gap

Social Security helps replace earnings during retirement, but it’s not meant to cover all of your expenses. For the average worker, Social Security replaces about 40% of annual savings before retirement, according to the SSA—although that figure varies depending on income.

The average Social Security retirement benefit in August 2022 was $1,627 per month. That’s less than $20,000 a year.

Financial advisors generally recommend that workers aim to replace between 70% and 85% of their earnings to maintain their lifestyle in retirement, according to AARP.

If you start collecting your Social Security benefits early, you will have less work to do with it. Those who claim their benefits at age 62 can expect their income replacement rate to be between 19% and 55%, says AARP. And that is if the money surplus doesn’t run in 2035.

Still, the loss of future Social Security benefits can be offset by “consistent and modest annual increases” in savings, according to the HealthView Services report.

The 35-year-old earning an annual salary of $100,000 would need to add $2,543 to their annual savings from now to their full retirement age to offset the reduction. Assuming the worker has a 50% employer matching plan, that’s $33 more per week from now until retirement.

Millennials should take some comfort in knowing they have time to face potentially lower SSA benefits—whether that means increasing their savings, delaying their claim age or hire a financial advisor.

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

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