How a Social Security Benefit Cut Could Affect Millennials

What You Need to Know

If the Social Security trust fund runs dry as projected, a client who is currently 35 could lose about 20% of total lifetime Social Security benefits.
Millennials may need to cut their post-retirement spending targets or increase savings and investments.

If Congress fails to fix the Social Security trust fund solvency problem, that could cost a typical millennial retirement planning client roughly the amount of cash now needed to pay for a house.

Analysts at HealthView Services predict that, if the program trust fund runs dry in 2035, as the trustees predict, a client who is 35 years old today could face the loss of about 20% of total lifetime Social Security benefits.

For a 35-year-old who currently earns $100,000 per year and begins claiming Social Security benefits at age 67, that would translate into a loss of $563,203 in lifetime benefits, from the total of $2.8 million now promised.

The client would need to use annuities, ordinary retirement savings arrangements or other means to provide $26,819 in additional income per year. The cost of doing that by making one big lump-sum payment to a retirement savings arrangement would be $54,154.

The HealthView analysts have put those projections in a paper designed to show off the company’s health cost planning system.

What It Means

Past history suggests that Congress is unlikely to let Social Security’s trust fund empty out. Lawmakers have regularly passed legislation to keep Social Security and Medicare going, and Social Security is already getting enough payroll taxes to pay about 80% of promised benefits without use of money from the trust fund.

But, even if policymakers restore long-term Social Security trust fund solvency, any income or payroll tax increases, benefit cuts, program design changes or other measures used to stabilize the trust fund could have an impact on higher-income millennials that would be comparable to a trust fund failure.

That suggests that millennials who have not yet factored Social Security problems into retirement planning may need to cut their post-retirement spending targets by 20%, increase contributions to retirement savings and investment arrangements, or come up with some combination of spending target cuts and contribution increases.

Methods

The Pew Research Center defines a member of the millennial generation as someone born between 1981 and 1996 — or someone who is turning between 26 and 41 this year.

The HealthView analysts simplified their projections by using a 35-year-old as a proxy for all millennials.

The analysts assumed that the 35-year-old was single; would have a full retirement age of 67; would begin claiming Social Security benefits at age 67; would live to age 87; and would collect the same benefits now projected by Social Security, with a 20% cut.

The analysts’ projections include the effects of projected cost-of-living adjustments.

More Numbers

For the millennial client with a $50,000 annual income, a 20% lifetime benefits cut would mean a loss of $364,775 in future value, from the current projected benefit total of $1.8 million.

That middle-income client might need to replace $17,370 in average annual retirement income, and might be able to fill the gap by adding $35,074 to a retirement savings arrangement today.

The millennial client with the $150,000 annual income might face a loss of $677,199 in future benefit value on a $3.4 million projected benefit total.

The client might need to replace $32,248 in average annual retirement income, and likely could do so by making a $65,114 additional contribution to a retirement savings arrangement today.

The analysts say the lump-sum contribution fix estimates are based on the assumption that savers will get a 6% annual rate of return on investment during working years and a 5% annual return after retiring.

Limitations

The HealthView analysis includes many implicit assumptions, made both by the Social Security program trustees and the HealthView analysts, about what the world will be like between now and 2083, when the youngest millennials have reached age 87.

Economic growth could be stronger than expected, for example, and make it easy for Social Security managers to use payroll tax revenue to pay the benefits promised.

The analysis also leaves out any discussion of the retirement savings and income needs of millennials who live longer than expected.