Social Security office in Baltimore. (Photo: Bloomberg)

What population group will suffer the most if the federal government does not address the shortfall in the Social Security Trust Fund for retirees?

The answer, not surprisingly, is millennials because they will be collecting smaller payouts for longer, according to a new report from the Employee Benefit Research Institute (EBRI). The oldest age group would suffer the least.

The Social Security trust fund is on track to deplete its reserves by 2034, which would mean a 23% benefit cut if nothing is done to shore up reserves, restructure benefits or both.

Individuals ages 35 to 39, who are among the oldest millennials, will have to save an additional $58,000 in their retirement funds by the time they reach 65 to make up for the pro rata cuts in Social Security benefits, according to EBRI's baseline scenario. Their retirement savings deficit would be 17% larger than more recent EBRI projections. Both retirement shortfalls are based on present values, in 2019 dollars, at age 65. (EBRI's analysis does not include population groups under age 35).

Those between 60 and 64 would be short $44,000, and their deficit would be less than 1% greater compared with current projections.

The EBRI baseline scenario assumes that a population group draws Social Security benefits and any defined benefit plan benefits at age 65 along with payouts from individual retirement accounts, including IRAs and DC plans, if expenses exceed after-tax annual income from Social Security and defined benefit plans.

In addition to the projected pro rata cuts in benefits the EBRI study, also looked at two extreme cases for retirement savings and their impacts: one where future coverage by defined contribution plans is eliminated; the other where universal coverage for defined contribution plans is created.

Jack VanDerhei, EBRI research director and author of the study explained that EBRI studied these extremes because "in recent years there have been a number of policy proposals that call into question the value of existing defined contribution plans," but "the suggested alternatives have not included a detailed analysis of the impact of terminating DC plans on retirement income adequacy for American households. This study is an important step in analyzing the pivotal role DC plans play in retirement security."

EBRI found that if DC plans were eliminated, younger people, single women and those with incomes in the second and third income quartiles would suffer the most. The average deficit for those age 35 to 39, for example, would increase 23%, from roughly $49,000 to $60,000 while the deficit for those over 50 would rise by less than 10%.

The opposite was true for the best-case scenario of universal coverage. Younger people, single women, and those in the low to upper middle income percentiles would benefit the most. The average retirement deficit for the youngest population group studied, for example, would decline 24%, from approximately $49,00 to $37,500. The average deficit for households above age 55 would decrease by less than 10%.

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