Picture your retirement: traveling, relaxing, and doing all the projects you put off over a lifetime of work and family commitments while comfortably living off your Social Security check.
Can you afford that on the monthly average retirement benefit of about $1,800? What if that benefit disappeared altogether?
Without action from Congress to close the current financing gap, the Social Security fund is set to run out by 2033. That means Generation X and younger are helping fund a system with their payroll taxes today that may not exist as they know it by the time they’re eligible at age 62.
According to retirement expert Bob Powell, lower- and middle-income earners will be squeezed the most based on how Social Security is set up now.
“[Social Security] represents 85% of retirement income for those in the lowest income quintile,” Powell said, adding it’s “about 15% for those in the highest income quintile and maybe on average about 40%.”
How retirement planning became a ‘do-it-yourself affair’
Some experts believe Social Security will survive due to political pressure.
“Never ever, ever will Social Security be eliminated,” Teresa Ghilarducci of the New School for Social Research told Yahoo Finance. “The politics for Social Security are just way too strong.”
But while no politician wants the optics of leaving retirees with an empty or significantly drawn-down Social Security fund, Congress has yet to act or agree on how to fund it. That means decisions younger generations make today about their careers, investments, health, and where they live take on more importance as they determine how to fund retirement.
In the meantime, more Americans have become reliant on Social Security in recent decades as the program has evolved.
“For the middle class, it was only supposed to supplement,” Ghilarducci said. “But in the past 20 years, that private sector … system has not filled in what Social Security has provided. So over the past 20 years, Social Security has gotten more important for retirees.”
Gen X, millennials, and Gen Z will likely have to reimagine retirement without relying solely on Social Security payments. And according to Surya Kolluri, the head of the TIAA Institute, there are risks beyond the typical market and inflation swings that aren’t being factored into retirement planning.
“There’s longevity risk people are taking on and, inside that, what I might call cognitive risk,” Kolluri said. “I’ve learned that when you get to age 85, the chances of getting deep, deep dementia or Alzheimer’s disease is 1 in 3. So we’re living longer, … [and] we need income that’s going to support us to address all these risks.”
It’s an especially vital issue for African Americans and Latinos, Kolluri said, who tend to be “ever reliant” on Social Security and have lower incomes compared to other demographic groups. While fintech and artificial intelligence have helped democratize access to retirement planning tools, the firehose of advice can be overwhelming and inconsistent.
“We’ve turned financial planning into a do-it-yourself affair, as if we now told the younger generations, ‘Now you have to do your own dentistry,'” Ghilarducci said. “Most nations don’t do it the way we do.”
5 solutions for stronger retirement strategies
So what does the next iteration of smart retirement planning require? According to the experts, five key changes should happen.
First, as complexities in financial planning grow, there is an urgent need for education that simplifies and demystifies financial planning for younger generations. At the same time, active advocacy for policy reforms to safeguard the future of Social Security is needed.
Experts also pointed out the need for a cultural shift, where financial stability is celebrated and prioritized over ritz and Rolexes as markers of success.
As Powell explained: “We need to reverse the bragging rights. The bragging rights today are I own a nice car … versus I have a large 401(k) account.”
Similarly, the experts noted that those in Gen X, Y, and Z should take personal responsibility for their retirement planning and view it as an integral and urgent part of their life journey, rather than life’s spinach that gets pushed around the plate until the end.
Lastly, the financial sector must also respond with innovative solutions tailored to the unique needs, risks, and extended lifespans of modern generations, the experts said.
As Kolluri pondered, “You might be expected to have 100-year lives, and compared to your grandparents’ generation, you’ve been accorded a longevity bonus of 17 years, 20 years, 25 years. How are you going to spend it?”
