About 10,000 Baby Boomers turn 65 each day. A Baby Boomer is a term that denotes a person who was born between 1946 and 1964. The Baby Boomer represents nearly 20% of the American public. The large numbers of Baby Boomers turning 65 each year could have a direct impact on the future of the Social Security system for Millennials.
The increase in the number of Baby Boomers retiring each day is expected to have a direct impact on the number of available workers in the U.S. workforce as the Social Security program is primarily funded by payroll taxes assessed on wages in the United States. The increasing number of Baby Boomers leaving the workplace along with historically low U.S. birth rates could very well impact the future of the Social Security program.
The figures are the latest signal that the U.S. safety net for seniors will become even more strained for cash. Earlier this month, the trustees for Social Security said the Social Security program’s cost will exceed its income this year for the first time since 1982, forcing the program to dip into its nearly $3 trillion trust fund to cover benefits. In addition, state pension funds had $2.6 trillion in assets to cover liabilities of $4 trillion in fiscal 2016, according to an April analysis of the most recent publicly available data by the Pew Charitable Trusts.
What is the main impact of the large number of Baby Boomers turning 65 each year? For Millennials, it should be taken as a wake-up call to take advantage of the attractive, privately-funded retirement options Congress has made available, specifically the IRA and 401(k) retirement plans. Relying on a Social Security benefits for all of one’s retirement benefits may not be wisest approach for Millennials when taking into account the potential stress being placed on the Social Security program as a result of having a large influx of baby boomers retiring each day.
The primary advantages of making private retirement contributions is that the earnings will grow tax-deferred, or in the case of a Roth IRA or Roth 401(k) plan, tax-free. Tax deferral is premised on the notion that all income and gains generated by the pre-tax retirement account investment would flow back into the retirement account without tax. Instead of paying tax on the returns from the retirement account investment, such as on the sale of a mutual fund, tax is paid only at a later date, or never in the case of a qualified Roth IRA or Roth 401(k) plan distribution, leaving the investment to grow unhindered. For Millennials, which consists of individuals born between 1977 and 1994, the concept of tax-deferral has added value due to the many years the account can grow unhindered from tax until the individual turns 70 1/2.
For example, if a thirty-year old individual contributed just $1,500 a year to an IRA through the age of seventy, assuming she earned an 8% annual rate of return, she would have $419,672 at age seventy, versus just $293,770 in a taxable account. In addition, making a pre-tax IRA or 401(k) plan contribution provides an immediate tax deduction which can reduce one’s taxable income.
Congress has giving all of us, but especially millennials, a golden ticket to save for retirement by making the private retirement system so tax advantageous. However, it is up to all of us to take advantage of it so that we do not become excessively dependent on the need for full government Social Security benefits in the future, which may or may not be available.
