Millennials are ready for a big social security planning surprise


What do you want to know

  • Congress will likely act to bolster the trust fund, but the cost will fall heavily on millennials.
  • A 20% drop in lifetime benefits is a good planning scenario to start with.
  • Closing that savings gap is more achievable than your millennial customers think.

Few millennials expect Social Security to play a big role in their retirement.

The Social Security Administration’s latest report, released in June, shows that if no changes are made to the program, it will only be able to pay 80% of benefits for all recipients starting in 2035.

If substantial actions are postponed for several years, the changes necessary to maintain the solvency of Social Security would be “concentrated over fewer years and fewer generations”. Since it is unlikely that there will be a need to cut benefits for current retirees, Millennials could, in the worst case, face larger benefit cuts.

Millennials, who will turn 65 almost a decade later, in 2045, have good reason to be concerned.

But like the figures in our white paper “Social Security Benefits: What Should Millennials Expect?show, although they and their advisors should expect to receive lower benefits than previous generations, Social Security is likely to play a bigger role in their retirement than most anticipate.

Social Security Solvency Solutions

Given the popularity of the program, there is every reason to believe that Congress will act to either raise taxes or make changes that will reduce benefit payments, or a combination of both.

Although politically challenging, the Social Security Administration’s report notes that a payroll tax increase of about 4% (2% for employees and employers) would solve its funding shortfall.

Raising the Social Security payroll cap by $147,000 — a potentially easier pill to swallow — would also boost program revenue.

Raising the Full Retirement Age (FRA) from 67 to 69 and/or delaying early claims from 62 to 65 would allow Social Security to improve solvency – and potentially pay 100% of benefits monthly promised to millennials.

Putting these changes into context, delaying the FRA to just age 69 would reduce total lifetime benefits by $210,000 for a 35-year-old millennial earning $100,000 today and living to life expectancy. mean.

With about 70% of Americans claiming Social Security before their FRA, changing the claim age to 65 from 62 would further reduce benefits for millennials.

What does that mean

The key question for advisors and their millennial clients is what they should expect to receive from Social Security in retirement.

And the follow-up question is: how much extra money would a millennial need to save to close this potential income gap?

Given the range of potential scenarios, we think Social Security’s current expectation that it will be able to pay 80% of benefits in 2035 is a reasonable starting point for planning purposes.

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