Social Security is a program all of us should be grateful for. Without it, millions of seniors would risk plunging into poverty, and many current workers would have a lot less retirement income to look forward to.

But as important as Social Security may be, it's also far from perfect. Here are a few aspects of the program that are glaringly problematic.

Social Security card in a person's hand


1. Benefits can be taxed during retirement

The monthly benefits you receive as a senior are supposed to help you pay your expenses during retirement. But if you have income outside of those benefits, then there's a good chance you'll pay taxes on them.

To see if your Social Security benefits will be taxed, you'll need to calculate your provisional income, which is your annual income outside of Social Security plus 50% of the yearly benefits you receive. You'll be taxed on up to 50% of your benefits if your provisional income falls between $25,000 and $34,000 for a single tax filer, or between $32,000 and $44,000 for a joint tax filer. Meanwhile, you'll be taxed on up to 85% of your benefits if your provisional income exceeds $34,000 or $44,000, respectively.

Also, states are allowed to tax Social Security benefits at the individual level, and currently, 13 of them do:

  • Colorado
  • Connecticut
  • Kansas
  • Minnesota
  • Missouri
  • Montana
  • Nebraska
  • New Mexico
  • North Dakota
  • Rhode Island
  • Utah
  • Vermont
  • West Virginia

If you settle down in one of these states during retirement, you may lose a portion of that income to state taxes in addition to the federal taxes you might pay based on your provisional income.

2. Cost-of-living adjustments can be stingy or nonexistent

The purpose of cost-of-living adjustments, or COLAs, is to help seniors retain their buying power in the face of inflation. But COLAs are based on fluctuations in the cost of common goods and services, as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). When things like fuel prices hold steady, Social Security benefits can follow suit, which is bad news for seniors.

In the past 10 years, COLAs have been notably stingy, averaging only about 1.5%, which is below the rate of inflation. And there have been several years in which seniors no COLA at all. All told, insufficient COLAs have caused seniors to lose an estimated 33% of their buying power since the year 2000, and unless the formula used to calculate COLAs is tweaked, things aren't likely to change.

3. Benefits may be subject to cuts in the future

You'll often hear rumors that Social Security is headed toward bankruptcy. Thankfully, that's not true, namely because the program gets the bulk of its revenue from payroll taxes. But what is true is that the program's trust funds, which it needs to address revenue shortfalls, are set to run out of money in 2035, and once that happens, benefits could be reduced by 20% across the board. That's bad news if you're counting on Social Security to provide a large chunk of your retirement income when you're ready to leave the workforce, and it's also bad news if you're a current retiree who can't afford a hit on your monthly income.

Though Social Security helps millions of seniors stay afloat financially, it has its share of flaws. Be mindful of them in the course of your retirement planning so you don't get hurt down the line.