(The opinions expressed here are those of the author, a columnist for Reuters.)
Reforming Social Security may sound like an issue of interest mainly to older Americans. But any changes the U.S. Congress might make to address the looming shortfalls of the program will actually have a far larger impact on Gen Xers, millennials and the younger generations that follow.
Younger workers will need Social Security even more than the millions of baby boomers now claiming their benefits. That means they should be paying close attention to the political debate about Social Security that began heating up this year in the wake of President Joe Biden’s State of the Union address last month.
Certainly, some changes will be needed. Unless Congress acts by 2035, the mismatch between revenue coming in from the Federal Insurance Contributions Act (FICA) and benefits paid out will require an estimated across-the-board benefit cut of 20% to 25%.
The cuts would be especially painful for today’s younger workers and people of color. Forty-nine percent of “early millennials” - born between 1980 and 1989 - would lack the income they need to meet basic living expenses, according to projections by the Urban Institute. For Black and Hispanic adults in that age group, the figure jumps to 53% and 62%, respectively, the think tank found.
Smaller Social Security checks already are baked in to the cake for Gen Xers and millennials as a result of the reforms enacted by Congress in 1983. That legislation put in motion a gradual increase in the Full Retirement Age (FRA), or the age when you qualify to receive 100% of your benefit. Before 1983, the FRA was 65, but for everyone born in 1960 and later, it is 67. Every 12-month increase in the FRA roughly equates to a 6.5% cut in benefits.
But other factors also are putting younger workers at a disadvantage. “Millennials and subsequent generations already are facing pretty uncertain retirement prospects,” said Richard Johnson, senior fellow and director of the Urban Institute’s Program on Retirement Policy. “They haven’t experienced the same earnings growth that previous generations did, and that has a big impact on how they will do in retirement and how much money they’ll receive from Social Security.”
A report that Johnson co-authored also underscores the erosion of traditional defined benefit pensions, and the impact of the 2008-2009 global financial crisis, which wiped out trillions of dollars of household wealth and caused long bouts of unemployment. That crisis hit younger workers especially hard, and the effects are long-lasting.
The report projects that 38% of early millennials will have inadequate income to meet their basic living needs at age 70, compared with 39% of late Gen Xers (born between 1973 and 1979) and 28% of late boomers (born from 1955 to 1964). The picture looks worse still for early millennials of color: 53% of Hispanic adults and 42% of Black adults will struggle to meet expenses. And those projections assume that Congress figures out a way to avert the 2035 benefit cuts.
The dark forecast could brighten somewhat depending on certain positive trends, Johnson notes, including the continued growth of dual-income households and the tendency to work longer.
AVERTING THE PROBLEM
The 2035 problem can be averted by injecting new revenue into Social Security, cutting benefits or through some combination of the two.
Progressives favor raising taxes on the wealthy and expanding benefits. They have proposed adding a new tier of payroll taxes for people with high incomes as a way to extend the program’s solvency. Then, they would add an across-the-board boost in benefits, along with some targeted benefit increases. Those might include improved benefits for widows and widowers, and caregiver credits that increase benefits for people who take time out of the workforce to care for dependent family members.
Conservatives want to shrink benefits, but bump them a bit for the lowest-income seniors. They have called for gradually raising the FRA to 70, and for changes to the benefit formula that would sharply cut benefits for middle and higher earners. That would shift Social Security from a program of earned benefits to something more akin to need-based welfare. Their aim is to avoid tax increases, and some see Social Security as unnecessary for middle-income and higher earners.
“Their proposal decimates middle-class benefits, turning them into subsistence-level benefits unrelated to prior earnings or contributions to Social Security,” said Nancy Altman, co-director of Social Security Works, a progressive advocacy group.
Younger workers should be pushing back against any cuts to Social Security. The 1983 reforms mean they will receive less from the Social Security system than previous generations - although they continue to pay 6.2% of their wages into FICA (matched by an equal amount paid by employers).
Beyond that, younger workers should be pressuring their elected officials to increase benefits. That would be the best way to address generational inequity in the program.
The opinions expressed here are those of the author, a columnist for Reuters.
(Writing by Mark Miller Editing by Matthew Lewis)