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The Social Security Board of Trustees has released its annual report on the financial health of the long-standing safety net for retirees, and the findings are worrisome. The trustees report that Social Security's trust funds will fall short of supporting Social Security payments to recipients beginning in 2034. If that forecast is correct, it could mean that millions of Americans who are counting on Social Security to support them in their golden years will be left struggling to make ends meet.

Digging into the details

Social Security is a pay-as-you-go system in which current workers pay payroll taxes that fund payments to current Social Security recipients.

However, the amount that is collected in payroll taxes has fallen short of Social Security's annual costs since 2010, and as a result, the program is making up the difference between taxes and spending by tapping its trust funds.

Unfortunately, the gap between tax revenue and outlays is increasing, rather than shrinking, because tens of millions of baby boomers are retiring.

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U.S. population aged 65 and over: 2012 to 2050. Source: U.S. Census Bureau.

According to Social Security's trustees, this dynamic puts the program on a perilous path that could lead to significant cuts to recipient's benefits in the future.

Specifically, the trustees forecast that the trust fund will be exhausted in 2034, requiring an across-the-board 25% cut in Social Security benefits.

Big trouble

If Washington fails to take action to close the gap between tax revenue and Social Security spending, then a big cut in benefits could push millions of seniors into poverty.

Over the past two decades, the percentage of Americans who will receive a pension from work has dropped dramatically, and that means more Americans than ever are responsible for funding their own retirement savings.

Unfortunately, a significant number of Americans are falling short in socking away money for their golden years. Despite the availability of workplace retirement plans, such as 401(k) plans, 54% of workers have less than $25,000 put aside for retirement, according to the Employee Benefit Research Institute. Most often, workers who aren't putting money away for retirement cite tight budgets as the primary reason for falling short of their goals.

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Workers' current level of savings and investments. Source: Employee Benefit Research Institute.

Because so many Americans' retirement savings are shy of their targets, a significant proportion of retirees rely on Social Security as their primary source of income. According to the Social Security Administration, the average retiree receives $1,341 per month in 2016, and nearly half of all single retirees rely on Social Security for 90% of their annual income.

Making changes

Politicians are considering a slate of alternatives to fix Social Security, including increasing taxes and reducing benefits to high-income earners.

Currently, Social Security payments are financed by a 12.4% payroll tax that's split equally between workers and employers. However, payroll taxes only apply to earned income up to $118,500. Because of that, some policymakers believe that increasing the income limit makes sense. One suggestion under consideration is instituting a payroll tax holiday on income between $118,500 and $250,000, and then taxing any income above $250,000.

Social Security's finances could also be strengthened if rules change so that the program spends less every year.

Changes that could reduce annual outlays include altering the inflation measure used to calculate annual increases to an index that grows more slowly and increasing the full retirement age, or the age at which recipients qualify for 100% of their benefits. Currently, full retirement age is 67 for people born after 1960.

It's also been suggested that Social Security payments should be reduced or eliminated for Americans earning a high income.

Looking forward

It's uncertain if any of these Social Security fixes will be adopted, so Americans ought to start saving much more aggressively for retirement than they are today. 

Rather than relying on a dartboard approach to determining how much to save every year, a better plan is to crunch the numbers to determine how much you'll need in retirement income. Typically, it's recommended to plan on replacing roughly 70% of your pre-retirement income, and while everyone's specific situation is different, the Bureau of Labor Statistics reports that average spending among people age 65 to age 74 was $48,885 in 2014.

Getting enough socked away to support your income needs in retirement will likely require maximizing workplace retirement plans and IRAs. It can also help to dedicate time every month to educate yourself about the various options and strategies available that can help boost retirement income.

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