Social Security Benefits: Will They Be There When You Retire?

The uncertain future of Social Security benefits could impact your retirement plans.

If you're like most Americans, Social Security is a key part of your retirement plans around 96% of the workforce is currently covered by some sort of Social Security plan. But the current economic downturn has many people seeing an increasingly uncertain (if not downright bleak) future for their Social Security benefits.

This article describes how the Social Security benefit process works and explains how your Social Security benefits might be impacted by funding shortages.

How Does Social Security Work?

When you work, you pay taxes into the Social Security system, usually in the form of deductions from your wages and other earnings. (You can see the amount withheld for Social Security by looking at your paycheck stub or accessing your direct deposit records.) Once you retire or are unable to work due to disability, you can apply for the benefits you've earned. The amount of your Social Security benefits will depend mainly on three things:

• the number of years you worked at Social Security-qualifying jobs
• how much money you made at those jobs, and
• the age at which you retire.

The longer you work and the more money you make the higher your Social Security benefits will be. Benefits don't kick in automatically, though. You need to apply for your benefits through an application process. You must also accumulate the appropriate number of credits (more on credits below) and reach the age of 62 before you can apply for any Social Security benefits. Your spouse, any dependent children, and eventually your survivors will also be able to receive your Social Security retirement benefits.

How Do Social Security Retirement Benefits Work?

As you pay your Social Security taxes over the years, you accumulate credits that can be used towards your Social Security benefits. The number of credits you need before you can apply for your retirement benefits depends on your date of birth. For example, people born after 1929 currently need 40 credits to apply for their benefits. This is equivalent to ten years of work. You can't receive benefits if you stop working before you reach the required number of credits, but you don't lose those credits either. When you return to the workforce, your credits will begin accumulating again from the point at which you left off, until you have enough to qualify.

You can begin gauging what your retirement benefits might look like by carefully reviewing the Social Security Statement you receive every year (it should come in the mail about three months before your birthday, if you're 25 or older). For information on reviewing your statement, see Nolo's article Social Security: Checking Your Earnings and Benefits.

Are Social Security Benefits in Trouble?

The short answer is "Somewhat." This is because the next decade will see the largest drop in worker-to-beneficiary ratios in history, as baby boomers begin to retire. The problem gets compounded when you consider that people's life-spans are growing longer, the birth rate is declining, and the cost of living is only going up.

When Social Security was first established, the worker to beneficiary ratio was over 15 to 1; today it's closer to 3 to 1, with odds that it will shrink even further over the next few decades. This means that less money will be put into the Social Security system, while more gets taken out. In fact, projections for 2010 show the federal government paying out more money in Social Security benefits than it will take in via payroll taxes.

Economically speaking, this shortfall is not sustainable, and without an infusion of money from another source, the Social Security benefit system will face problems within the next 50 or so years. Current predictions indicate that the Social Security trust fund will run out in 2037 if nothing is done. After this point, retirees can generally expect about 75 cents return on every dollar of their scheduled benefits. That's because once the trust fund is depleted, there will be no surplus left. From that point on, the amount that's paid out in the form of benefits can only match what's coming into the Social Security system through employment taxes.

If You're About to Apply for Social Security Retirement Benefits

If retirement is right around the corner, you probably have nothing to worry about when it comes to your Social Security benefits. The problems described above are highly unlikely to affect current retirees or even those who plan to retire in the next ten years. The SSA has also stated that it has no plans to cut current benefits.

The Social Security Landscape for Current 25-to-35-Year Olds

If you're decades away from retirement, this is where things get dicey in terms of your Social Security benefits. This is the primary focus of the current debate taking place on Capitol Hill. It is very likely that those currently entering (or relatively new to) the workforce will see a very different Social Security system than the one that's in place now absent some sort of drastic change in the numbers.

Unless changes are made, current 25-to-35-year olds face an over 25% reduction in benefits once the Social Security trust fund is gone. The response to this problem varies among politicians, educators, and economists. Some (including the Chairman of the House Budget Committee) believe that though recovery will be slow, it will happen in time to fix the shortfall in the benefit system by the time this younger generation is ready to retire. Others (including various economic think tanks) warn that drastic reform must occur to prevent the inevitable bottoming out of the Social Security system.

Addressing the Social Security Problem

In places like the United Kingdom, governments have begun to prefund their Social Security plans. In the United States, prefunding is being considered, and so are other solutions like infusions from general revenue and increases to payroll tax.

Social Security is seen as too important of a safety net for millions of American workers to risk losing. If small changes to the Social Security system are made now, they'll go a long way toward ensuring that drastic measures don't become necessary in the future.

For More Information

To learn more about how Social Security benefits can affect your retirement plans, visit Nolo's free legal information on Social Security and Retirement Planning. You will find all the latest information and instructions you need to get your retirement and disability benefits, and dependents and survivors benefits, in Social Security, Medicare & Government Pensions, by Joseph Matthews and Dorothy Matthews Berman (Nolo).