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

What the government report says

Every year the Social Security Board of Trustees releases an update on the financial status of the Social Security trust funds.

It’s widely known from previous reports that the fund’s reserves (the excess contributions collected and invested over the last few decades) are drying up, but this year’s report says that when they do, the Social Security Administration (SSA) will only be able to pay 80% of its promised benefits if Congress doesn’t act. That 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, recommended lawmakers “address the projected trust fund shortfall in a timely way” to ensure changes could be made gradually.

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Should you be scared?

If benefits are reduced 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 recent analysis from HealthView Services, a Massachusetts data provider that serves the health care and financial services industries. Assuming they live to 87 years old, that means $365,000 less over the course of their retirement.

A millennial making between $100,000 and $150,000 would lose out on between $21,000 and $25,000 — adding up to $560,000 and $675,000 over a lifetime.

“Millennials already have low expectations for the role Social Security will play in their retirement plans," CEO Ron Mastrogiovanni said. "These benefits will clearly be less valuable to them than past generations.”

Yet benefits aren’t expected to end altogether. If policymakers take no action, Social Security could still pay 80% of benefits using its tax income.

“Those who claim that Social Security won’t be around at all when today’s young adults retire and that young workers will receive no benefits either misunderstand or misrepresent the trustees’ projections,” writes Kathleen Romig, director of Social Security and disability policy at the Center on Budget and Policy Priorities.

Increasing Social Security’s tax revenues, she says, should address the shortfall and restore solvency as the population ages.

“Social Security’s fundamental challenge is demographic, traceable to a rising number of beneficiaries rather than to escalating costs per beneficiary,” Romig says.

In 2008, it was estimated that for every beneficiary, there were 3.2 to 3.4 covered workers. That number fell to 2.8 workers for every beneficiary in 2021, the trustees report shows. And the ratio could fall to 2.3 by 2033 when baby boomers will have largely retired.

Filling the gap in retirement

Social Security helps replace earnings during retirement, but it’s not meant to cover all your expenses. For the average worker, Social Security replaces about 40% of annual savings before retirement, according to the SSA — though 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 per year.

Financial advisers generally recommend 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’ll have less to work with. Those who claim their benefits at the age of 62 can expect their income replacement rate to be between 19% and 55%, AARP says. And that’s if the cash surplus doesn’t run out in 2035.

Still, the loss of future Social Security benefits can be offset with a “consistent and modest annual increase” 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 until their full retirement age to offset the reduction. Assuming the worker has a 50% employer matching plan, that amounts to an extra $33 per week from now until retirement.

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