What Will Social Security Look Like for Millennials?

Social Security is this country's most important social program, although that's arguable given the importance of Medicare. Each and every month, at least as of February 2018 based on data from the Social Security Administration, over 62.1 million people receive a benefit. Most of these folks -- 42.71 million people to be precise -- are retired workers, of which 62% lean on the program to generate at least half of their monthly income. Without this guaranteed monthly payout for eligible retired workers, the elderly poverty rate could be much higher than it is now.

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Yet Social Security has problems -- problems that some folks believe could be its undoing.

According to last year's report from the Social Security Board of Trustees, the program is facing a monstrous $12.5 trillion funding shortfall between 2034 and 2091, based on the current payout schedule and inclusive of annual cost-of-living adjustments. By 2022, Social Security is forecast to begin paying out more in benefits than it's generating in revenue, and by 2034, its $3 trillion in asset reserves could be completely exhausted. The result, per the Trustees, is the possible need for an across-the-board cut of up to 23% in current and future benefits.

Millennials And Social Security: What Does The Future Hold?

Millennials -- traditionally defined as folks born between 1981 and 1996, per Pew Research Center -- believe things are even worse for Social Security. A 2014 poll from the aforementioned Pew Research Center found that 51% of millennials surveyed didn't expect to receive a dime from the program once they retire. That's both a sad and scary prospect for workers who'll likely have paid into the retirement program for decades.

What does the future of Social Security hold for millennials? While nothing is written in stone, let's take a look.

Qualifying Millennials Should Receive A Guaranteed Monthly Benefit

By the time millennials begin leaving the workforce 35 years from now, my strong belief is that Social Security still will be around to pay qualifying retired workers a benefit. By "qualified," I mean a worker who's earned the 40 lifetime work credits needed to qualify for retirement benefits from Social Security.

Though a majority of millennials in Pew's 2014 survey suggested the program was headed toward insolvency, this actually isn't the case. In fact, assuming Congress keeps the program as is, Social Security is incapable of going bankrupt based on its current revenue-generating structure.

Social Security currently generates revenue three ways: a 12.4% payroll tax on earned income, interest income on its asset reserves, and the taxation of benefits. The latter two combined for less than 13% of the $957.5 billion generated by Social Security in 2016. Meanwhile, the 12.4% payroll tax on earned income between $0.01 and $128,400 (as of 2018) generated more than 87% of total revenue back in 2016.

This payroll tax will continue to supply Social Security with a consistent stream of revenue over time as long as Americans keep working. Therefore, there will always be funds for Social Security to distribute to eligible retired workers, practically guaranteeing a payout when they choose to file for benefits.

Benefits Could Be Reduced, And Probably Will Lose Purchasing Power Over Time

However, it should be noted that a guaranteed monthly benefit isn't the same thing as a sustainable monthly payout. You see, Congress and the American public have known for a while that Social Security is facing a funding shortfall in the decades that lie ahead.

This shortfall stems from a confluence of factors and includes the ongoing retirement of baby boomers weighing on the worker-to-beneficiary ratio, increased longevity, growing income inequality, and Congress' inability to agree on anything. The longer lawmakers wait to fix this shortfall, based on the current payout schedule, the wider the long-term (75-year) actuarial deficit grows.

According to the Trustees and as noted above, if Congress fails to generate additional revenue for the program, an across-the-board cut for current and future retirees of 23% may be needed beginning in 2034. Given Congress's penchant for kicking the can, a reduction in benefits is possible for millennials.

Also likely, regardless of whether benefits are reduced or not in the future, is the expectation that Social Security dollars will continue losing purchasing power. The Senior Citizens League notes that the purchasing power of Social Security dollars dropped by 30% since 2000 as a result of the Consumer Price Index for Urban Wage Earners and Clerical Workers not adequately representing the medical care and housing inflation that elderly Americans are facing. It seems plausible, then, that this inflationary tether could continue to underrepresent the true inflation that seniors are facing moving forward, resulting in a loss of purchasing power.

The "X-factor" We Can't Account For

Though I feel pretty confident that millennials will receive a Social Security benefit, and that this benefit is likely to lose purchasing power over time, what remains unknown about all of this is what Congress will do. If lawmakers leave Social Security's funding mechanism as is, the predictions above are probably going to be close to accurate. If not, all bets are off.

For example, a GOP lobbyist last year had tossed around the idea that Social Security's payroll tax be abandoned in favor of a value-added tax on consumption. Doing so would have put more money in workers' pockets, but would have tied funding for Social Security to consumption, which is a very dangerous proposition given that recessions are inevitable. Though this idea never got anywhere on Capitol Hill, it points to a pathway that could be taken that would remove the "guaranteed" label I've attached to Social Security payments for qualifying retired workers.

Things could also change if both parties could agree on a way to either raise new revenue, reduce long-term expenditures, or employ some combination of the two strategies. Raising new revenue via taxation, for instance, might mean zero need for any benefit cuts in the future.

In sum, I fully expect Social Security to be around when millennials retire, but I wouldn't count on it playing as big a financial role as it did for their parents or grandparents.

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