According to a 2020 poll published by the Longevity Project and Morning Consult, only 13% of Millennials expect to rely upon Social Security as a primary source of income during retirement.
Where did such a bleak outlook come from? Well, Millennials aren’t just being cynical; the Social Security Administration has been telling us for years that:
“the Old-Age and Survivors Insurance (OASI) Trust Fund, which pays retirement and survivors benefits, will be able to pay scheduled benefits on a timely basis until 2034.”
There are important caveats to that figure, however, and even some good news on the Social Security front for Millennials.
There’s a popular misconception that Social Security is like a giant shared pool of money that the working generation contributes to so they can all share it when they retire. In reality, it’s even simpler than that.
Instead, Social Security is a direct transfer of wealth from the working generation to current retirees and disabled folks. It’s not an investment account. The money you pay into Social Security with each paycheck doesn’t sit around earning interest and come back to you when you retire; the money you pay in immediately flows out to pay benefits to your grandmother, your friend who’s on disability, and millions of others like them.
According to the Social Security Administration, 49 million people received Social Security benefits in June of 2020 while around 150 million workers were paying into it.
Where did Social Security come from?
The Social Security Administration has a surprisingly cool page dedicated to the history of Social Security. Basically, for millennia mankind has tinkered with the idea of an economic safety net for anyone who can’t work, and in most cases, it’s worked pretty well.
The earliest documented form of Social Security was by the ancient Greeks, who stockpiled long-lasting olive oil to prevent economic ruin or starvation. Throughout the Middle Ages, you could rely upon your guild or union to support you through “retirement,” and England formally codified the idea of Social Security in the 17th century.
The American Social Security system was a direct response to the destitution of the Great Depression. FDR signed Social Security into law in 1935, and after years of misguided lump sum payments (that didn’t go particularly well), the government transitioned to a monthly payment system.
The first-ever United States Social Security check was issued in 1940 to a secretary in Vermont named Ida May Fuller. She received $22.54.
Who qualifies for Social Security?
Another common misconception is that Social Security is basically just a government allowance for retirees. That’s true, but not the whole truth. A full 20% of Social Security recipients aren’t retired.
Social Security benefits all of the following groups:
- The disabled.
- A spouse or child of someone getting benefits.
- A divorced spouse of someone getting or eligible for Social Security.
- A spouse or child of a worker who died.
- A divorced spouse of a worker who died.
- A dependent parent of a worker who died.
And so on.
How much does Social Security pay?
Everyone collects a different amount of Social Security. The amount of money you receive from Social Security depends on your average indexed monthly earnings (AIME) during your 35 highest-earning income years. Once you retire, Social Security will pay you between a quarter and a half of your AIME (accounting for inflation). Lower earners will earn a greater percentage of their former monthly paycheck.
In 2021, the maximum monthly payout for someone on Social Security is $3,895. But because Social Security will only pay out a maximum of half your previous monthly paycheck, some people only receive a few hundred dollars from Social Security each month.
Here’s how Social Security works.
Each year you work, you earn one Social Security “credit” for every ~$1,500 of income you earn, up to a max of four per year. Once you earn 40 credits (basically 10 years of work), you’ll qualify.
When you approach retirement, there are three windows in which you can begin collecting Social Security.
- Ages 62-66 aka “early retirement”. You can begin collecting Social Security benefits as early as age 62, but the SSA will dock 0.5% of your benefits for each month before “full retirement” you begin collecting.
- Age 67 aka “full retirement”. Everyone born after 1960 has a “full retirement” age of 67, meaning this is when you’ll begin to receive 100% of your benefits.
- Ages 68-70 aka “delayed retirement”. The SSA will give you an 8% bonus for every year past 67 you delay receiving benefits.
Do you have to stop working to collect Social Security?
No. Once you hit 62, you can begin collecting Social Security even if you’re still collecting a paycheck. However, the SSA will withhold some of your benefits and pay them out later.
In some cases, working while you collect Social Security can even increase your monthly payments before and after your full retirement age (67). This could happen if your paychecks in your 60s increase your AIME and thus your overall benefits.
Social Security has worked fine for a pretty long time, as there have usually been far more workers than there have been retirees. However, demographic shifts, including a falling birth rate and longer life expectancies, mean that the ratio of workers to retirees has gone down.
It’s a problem that is expected to get worse. 17% of the current population is over 65; the share will increase to 23% by 2080.
Congress actually took steps, back in 1983, to prepare for the tidal wave of retiring Baby Boomers. They increased the payroll tax, and as a result, Social Security took in far more in revenue than it paid out for the following 20 to 30 years. The excess was invested into non-tradeable Treasury bonds. As of this summer, those reserves are currently worth about $2.9 trillion.
Is Social Security really disappearing in 2034?
When payroll tax revenues cease to be enough to cover benefits (because of those pesky demographic shifts), the difference is then taken out of that $2.9 trillion cushion of cash. That cushion, however, is expected to be depleted by 2033 or 2034 (estimates differ), which, if you’ll recall, is roughly how long Social Security is expected to be able to pay full benefits.
What happens after that? No one’s certain, but it’s also not as bad as it sounds. Social Security benefits won’t just “evaporate” by the time we retire.
At worst, they might get reduced a bit. You and I may receive 75% of what our parents’ generation receives for Social Security, adjusted for inflation.
But what’s much more likely is that the SSA continues to make adjustments to tax laws to refill their cash reserves in preparation for retiring Millennials. For example, the maximum annual earnings subject to the Social Security tax has risen $15,000 in just three years, from $128,400 in 2018 to $142,800 in 2021.
In a practical sense, there’s an easy way to project how much you’ll get in payments at the full retirement age, which is currently 67 for people born after 1960: register for The Social Security Administration’s Retirement Estimator (it takes about five minutes). As long as you’ve collected 40 “work credits” thus qualifying for benefits at retirement, the site can estimate your benefits. Even if you haven’t, it’s a good idea to register anyway.
Make sure you have a current credit card number handy (it’s for identity confirmation purposes only—the service is free) and prepare to answer some basic financial questions about who issues your high-ticket debt such as a mortgage or auto loan. Once you complete the groundwork and sign in, the site gives you an immediate snapshot of your estimated benefits.
I found out that at age 67, I’ll collect $2,333 a month at my current earnings rate. And if I wait until age 70, that figure grows to almost $2,800. Now, who knows how far that will go decades from now, but it sounds like a healthy starting point. At least in theory.
If you’re wondering how much Social Security will add to your paycheck come retirement, keep these three things to keep in mind:
Count on a higher retirement age
Keep in mind that the current full retirement age is 67. It could go down or more likely go up by the time we retire. For that reason, it may be best to use the Social Security website to calculate your benefit come age 70. There’s no confirmation of this happening, but a high probability remains that the retirement age will creep up to that level in the decades ahead.
Remember inflationary intangibles
It’s impossible to say how well Social Security payouts will keep pace with future inflation. Currently, Social Security is pegged to the Cost of Living Adjustment (COLA), and Congress enacted a law in 1973 requiring that Social Security keep up with rising prices.
Social Security is (likely) here to stay
Though retirement ages could rise and benefits be cut in some unforeseen way, Social Security remains an overwhelmingly popular program, as does its close cousin Medicare. Lawmakers on both sides have every incentive to save Social Security if it gets in trouble, and won’t touch the core of it if the coffers remain strong.
Social Security is not a replacement for saving
There’s an old saying that you should always “hope for the best, and plan for the worst.”
Let’s all hope that Social Security gets stronger and stronger over the next few decades, even to the point that you and I can retire off of Social Security alone in our early 60s.
Let’s hope for that.
Let’s plan for Social Security to completely evaporate by the time we retire.
To be clear, neither scenario is likely. Social Security will most likely still be around in 40 years in some form or another. Your monthly check may be for $700 or $3,700 in today’s dollars, or anywhere in between.
But planning for the worst, in this case, and in most of your financial forecasting, will leave you better prepared for the future.
The future of Social Security isn’t as bleak as our generation thinks. The Social Security Administration has already begun adjusting tax laws to refill reserves in advance of retiring Millennials. We’ll get something from Social Security; it probably won’t be enough to live off of, but it’ll be more than most are expecting.
That being said, you’re better off planning for retirement as if Social Security won’t exist. Treat it as bonus, supplemental income to your savings, investments, and retirement accounts.
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