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.

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.

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

For the first time in more than a quarter-century, Social Security ran a deficit in 2010: It spent $49 billion dollars more in benefits than it received in revenues, and drew from its trust funds to cover the shortfall. Those funds — a $2.7 trillion buffer built in anticipation of retiring baby boomers — will be exhausted by 2033, the government currently projects.

Those facts are widely known. What’s not is that the Social Security Administration underestimates how long Americans will live and how much the trust funds will need to pay out — to the tune of $800 billion by 2031, more than the current annual defense budget — and that the trust funds will run out, if nothing is done, two years earlier than the government has predicted.

To save Social Security, which has lifted generations of elderly people out of poverty, tough choices have to be made. One option is to continue raising the retirement age, perhaps to as high as 69 or 70. While the full retirement age is gradually increasing to 67 (for people born in 1960 or later) from 65, this increase is not enough to counterbalance the gains in longevity.

Social Security: It’s Worse Than You Think

Why are teenagers and twenty somethings today responsible for what Congress did before they could vote?

[P]oliticians enjoy spending and do not enjoy taxing. These natural proclivities must emerge so long as politicians are responsive to constituents. I have often used this example as the simplest possible illustration of public choice logic. The normative implications are clear; ordinary politics contains a procedural flaw that can only be corrected by the imposition of constitutional constraints.

James Buchanan, “Better Than Plowing”

Math is hard.

Ozymandias

Mockery, truculence, and minimalist living are best, then enjoy the decline. We also need a Revolving Door Tax (RDT) and to prosecute politicians and staff and their “family and friends” who profit from insider trading.