By and large, Social Security is America's most important social program for seniors. The Urban Institute estimates that a single male with average earnings turning 65 in 2015 would receive $294,000 over his lifetime from Social Security. By comparison, while still very important, lifetime Medicare benefits for this same individual are only expected to total $195,000.

Statistics straight from the source, the Social Security Administration, also confirm the importance of this income during retirement. Data from last year found that 61% of all retired workers receiving benefits relies on Social Security to account for at least half of their monthly income. This figure jumped to 71% for unmarried elderly individuals.

Dice sitting next to a piece of paper that reads "Will Your Social Security Be Enough."

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Social Security's downward spiral

But, there's a big problem with America's most important retirement program: It's slated to exhaust its excess cash by 2034. The 2016 report from the Social Security Board of Trustees suggests that if Congress fails to find a way to boost revenue and/or cut benefits, a benefits cut of up to 21% may be needed by 2034 to sustain the program through 2090. That's worrisome, with so many seniors leaning heavily on Social Security.

Frequently, the finger-pointing heads to two primary sources: baby boomers and life expectancies.

To begin with, baby boomers are retiring at a rate that tops an average of 10,000 per day. With so many new retirees becoming eligible for Social Security benefits, there simply aren't enough new workers entering the labor force, and new income being generated via the payroll tax revenue, to keep up. As a result, the worker-to-beneficiary ratio is expected to fall from 2.8-to-1 in the mid-2010s to 2.1-to-1 by the mid-2030s.

The other problem here is increasing life expectancies. Over the past five decades, according to data from the Centers for Disease Control and Prevention, the average life expectancy of Americans has jumped by nine years to nearly 79 years. With about 60% of all retirees claiming Social Security income between ages 62 and 64, this means anywhere from 15 to 17 years of claiming eligibility when the architects of Social Security in 1935 had only figured on doling out payments for a few years.

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We're focusing on the wrong issue

But what if these two things aren't really the problem at all? What if, instead, the real issue lies with consumers' expectations of Social Security?

According to the Social Security Administration (SSA), Social Security benefits are only designed to replace 40% of the average workers' wages during retirement. We would expect this number to naturally be lower for wealthier individuals, especially with monthly maximum payouts capped, and possibly higher than 40% for lower-income individuals. Nonetheless, the recommendation from the SSA very strongly hints that retirees should have other sources of income beyond just Social Security benefits.

The data suggests that people are leaning, or are expected to lean, considerably harder on Social Security than the SSA's recommendation. Aside from the data already listed (61% of retired workers relying on Social Security for at least half of their income), an AARP study on baby boomers released in September 2015 found that 30% of respondents expect between 71% and 100% of their retirement income to come from Social Security. On the other hand, just 49% have planned it such that Social Security comprises 40% or less of their monthly income during retirement.

Put simply: Retirees and baby boomers are expecting too much from Social Security. If those expectations became more reasonable and meet the guidelines set forth by the SSA, there's a good chance the program would be on more solid footing.

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Pre-retirees need a better understanding of Social Security

The easiest way to fix the expectations of consumers is twofold: Improve their understanding of the Social Security program, and ensure that more Americans have a Plan B in place when it comes to retirement income.

Arguably one of the biggest issues with Social Security is that retirees are claiming well before they reach their full retirement age (FRA). While this does mean a reduction in benefits paid out to these individuals, it also could mean paying out benefits for a longer period. It's pretty clear that the American worker doesn't have a great understanding of how the Social Security payout structure workers.

Generally speaking, for each year you hold off claiming Social Security between ages 62 and 70, your eventual payout rises by approximately 8%. Your full retirement age, which is based on your birth year, is when you're entitled to 100% of your monthly benefit. Claim benefits before your FRA, and your benefit could be cut by up to 30%, depending on your birth year. Claim benefits at age 70, and they could grow by 24% to 32% over what you'd have received at your full retirement age.

Just one in 10 retired workers claims Social Security after hitting his or her FRA. Obviously, not everyone can choose to wait. Those in poor health, or who can't find a job or generate income, are usually best off claiming earlier than later. But people with little or nothing saved for retirement are considerably better off waiting to claim benefits, because it'll mean a larger payout when they eventually do sign up. If more retirees held off on their claim, the program would likely be in considerably better shape.

Two hands cradling an egg with the word "retirement" written on it, representing a nest egg.

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A Plan B is a must

The other clear need for pre-retirees is to have alternative sources of income in place when they retire. This means taking advantage of employer-sponsored 401(k) plans when they're offered, and utilizing individual retirement accounts (IRAs) to bolster your nest egg.

More and more employers are using 401(k)s as a means to retain talent and put their valued employees on the right track to a comfortable retirement. A majority of employers that offer a 401(k) also offer to match a percentage of their employees' salary (around 3% is average for businesses that offer a match). Additionally, businesses with 401(k) plans are increasingly moving toward an automatic enrollment platform that requires the employee to opt out rather than opt in, which has a tendency of encouraging saving and participation.

Individual IRAs and Roth IRAs are another source of saving and investing. A traditional IRA provides upfront tax benefits, while the Roth IRA allows your money to grow completely tax-free for life. The money that funds a Roth IRA is after-tax, and is thus free of being taxed again, assuming it's withdrawn after age 59 1/2.

It's also important for working Americans to invest in the right assets. Far too many are avoiding arguably the greatest wealth creator of all time -- the stock market. Stocks have historically returned 7% annually, including dividend reinvestments, over the long haul.

Long story short: If consumers were to adjust their own expectations for Social Security, as well as their saving and investing habits, many of Social Security's issues would probably be resolved. 

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