By and large, there are few greater investing enigmas than Social Security.
Ask most people, and they'll tell you that they expect to be paid "something" from the Social Security Fund when they retire. But, ask them how Social Security is directly affecting them now, or how much they plan to rely on Social Security in their later years, and you're liable to get a "deer in the headlights" look in return.
The general observation is that the older you are, the more likely you are to have had a monetary benefit from Social Security. As a CNN/ORC International poll noted in 2011, 85% of people aged 65 or higher reported a good effect from Social Security compared to 62% of 18- to 34-year-olds which reported no effect whatsoever. The end result is that Social Security is somewhat well understood by seniors, while it remains a head-scratcher for most everyone else.
However, if you ask practically any age group, they'll tell you that the Social Security Trust Fund is in trouble. This same CNN/ORC International poll notes that between 57% and 82% of all age groups respondents believed the Social Security System was in "crisis" or had a "major problem." In other words, the fund is already paying out more money than is coming in, which threatens the sustainability of Social Security disbursements.
Social Security's problems, in a nutshell
"What's causing this problem?" you ask.
The primary culprit is a massive demographic shift whereby the lower-birth-rate generation begins to replace the baby-boomer generation. With fewer workers and a rising number of baby-boomer beneficiaries, the worker-to-beneficiary ratio is expected to fall to as low as 2 by 2035, according to the Social Security Administration. Fewer workers and more qualifying for benefits certainly creates a cash flow problem.
In addition, there's the simple fact that we're living longer because of improvements in health care, as well as increasing education from the Centers for Disease Control and Prevention regarding our nation's top killers, such as heart disease and cancer. If people are living longer, it means a greater length of time they'll be able to collect Social Security benefits, further draining the fund.
The greatest Social Security myth of all
These concerns have manifested into the notion that sometime by the mid-2030s the Social Security Fund will be bankrupt and future generations will simply be left to fend for themselves. This is, without question, the greatest Social Security myth of them all.
The simple notion that the Social Security Trust will be bankrupt by 2033-2037 is so blatantly incorrect it's not even funny. Based on the current projections from the Congressional Budget Office and the Social Security Administration, the reserve fund will be out of money by 2033 or 2037, depending on your source. However, income will still be coming in via workers' paychecks.
What this means is that the Social Security Trust Fund, without doing anything more than lowering payout benefits from 100% to 75%, could extend those benefits to citizens through 2087. That's right ... dropping benefits just 25%, even with increasing longevity, a smaller workforce, and a huge number of boomer retirees could yield another 50 to 54 years of viability before more minor cuts may again be needed.
So relax, younger generation: Social Security looks as if it should be there for you when you're ready to retire. Of course, that doesn't mean you shouldn't consider taking a few steps to help improve your chances of a comfortable retirement.
Consider taking these steps
Although you can't do a whole lot to stop a major generational shift, you can take specific steps that will increase your payout when you do retire.
For example, waiting as long as possible to take your Social Security disbursements will increase the amount you're eventually paid out. According to Bankrate.com, a person who begins taking Social Security distributions at age 70 will receive 76% more than an individual who begins taking their disbursement when they're first eligible at age 62. If you can comfortably live off your retirement accounts until age 70, then this could be a smart move.
Another big factor is paying into the system. Even though you need to earn only $4,640 over 10 years to qualify for some form of SSA benefits, your SSA benefits are determined by averaging your 35 highest-earning years. This means someone who works 25 years and then retires or stops working is going to have the SSA average in 10 zeroes into their eventual benefit disbursements. Put simply, if you can work a full 35 years, do it!
Lastly, don't wait till it's too late to start an individual retirement account. For the younger generation, a Roth IRA can be a particularly powerful tool that could provide more than enough income to allow them to push their Social Security disbursements to age 70. Roth IRAs allow investments to grow completely tax-free as long as no disbursements are taken before age 59 1/2, so it likely represents a smart money move for people currently under age 50.
You can also increase your retirement income through other means: dividends. You can find some of the best by reading this report.