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Source: Social Security Administration. 

Social Security, the program designed to provide a financial backdrop to senior citizens in their golden years, as well as protect workers' families in case of their passing or a disability, is in trouble. This is a statement that few Americans would argue against.

After more than seven decades of divvying out benefits payments to eligible Americans, the Old-Age, Survivors and Disability Insurance Trust, or OASDI, is set to run out of its reserve cash by 2033. If Congress is unable to come to a solution that entails raising additional revenue, cutting benefits, or some combination of the two, then benefits paid will fall by 23% to ensure the survival of the program through 2087 -- at least according to estimates from the Social Security Administration.

Why is the program in such dire straits? It primarily pertains to two major demographic shifts.

First, baby boomers are retiring in greater numbers and putting pressure on the worker-to-beneficiary ratio. Between 2014 and 2040, this ratio will fall from 2.8-to-1 to an expected 2.1-to-1. In plainer terms, with more people being paid benefits there simply aren't enough people coming into the labor force to counteract the cash outflow from the OASDI.

The other major component is that we're living longer than ever. Average life expectancy in the U.S., based on data from the Centers for Disease Control and Prevention, has nearly reached 79 years compared to five decades ago when life expectancies in the U.S. was roughly 70 years. Having to make payments to seniors for a longer period of time is acting as a cement block on the feet of the Social Security program.

But apparently these aren't the only problems the Social Security program and seniors are currently facing.

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Source: Social Security Administration.

Cost-of-living adjustments are falling short for seniors
According to a study released this past week from The Senior Citizens League, or TSCL, the cost-of-living-adjustment, or COLA, for the Social Security program isn't keeping up with the general costs that today's seniors are facing.

The COLA is designed to closely follow the rate of inflation within the United States. If the price for goods and services rises, COLA is designed to provide a boost to beneficiaries' payments so they can afford that increase. But TSCL's survey of seniors would suggest that, in general, the COLA isn't living up to its end of the bargain.

TSCL's survey allowed seniors to select between four options to most accurately describe their feelings about Social Security benefits. Overall, 42% described their benefits as "not keeping up with household budget needs," another 25% described their benefits as "keeping them out of poverty," and yet another 9% described their benefits as "too low to sustain even basic needs." Just 24% of seniors, less than a quarter, suggested that their benefits allowed for a "comfortable retirement."

As TSCL astutely points out, lower-than-expected cost-of-living adjustments hurts everyone: both seniors already in retirement that could struggle to pay for their basic needs, as well as workers who have yet to retire.

Since 2010, annual COLA's have averaged 1.4%, including no adjustment in 2010 or 2011. All the while, rental costs, electricity, and other basic-needs continue to tick higher. TSCL estimates that a beneficiary who retired in 2009 and receives approximately $1,000 per month in benefits will have received $5,000 less in benefits than if the COLA were closer to 3%, its historical average. Furthermore, speculation has it that seniors may once again receive no COLA in 2016.

Workers are also punished when COLA fails to increase. Just as we're advised to use time and compounding gains to our advantage when investing early and often, workers who've yet to retire can see the purchasing power of their eventual benefits erode if COLA doesn't adjust higher.

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Source: Social Security Administration.

Exposing a hidden danger
If TSCL's survey demonstrates anything, it's that relying too heavily on Social Security benefits in retirement could be dangerous.

The Social Security Administration suggests that benefits payments are only designed to replace about 40% of a person's pre-retirement income. However, statistics show that some seniors lean heavily on Social Security benefits. One data point from the SSA suggests that close to half of all unmarried retired workers rely on Social Security benefits for 90% or more of their monthly income. If benefits are indeed failing to increase at a rate commensurate with seniors' living expenses, then this is a big hidden problem.

One of the roughly one dozen proposals designed to "fix" the Social Security program involves following a new formula for adjusting COLA. Switching to the Consumer Price Index for the Elderly, or CPI-E, would more accurately align cost-of-living adjustments to the expenses that many seniors are facing, rather than relying on the general CPI to guide COLA. TSCL and other pundits suggest that COLA based on CPI-E would result in immediate increases to seniors' benefits.

But there's more to be done -- and it starts with you!

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Source: Social Security Administration.

Consider taking these actions
The key takeaway from TSCL's survey is that Americans need to decrease their reliance on Social Security in retirement. Social Security benefits should be the icing on the cake, not the cake itself.

The first tactic is to delay filing for benefits for as long as possible. Although you can currently claim benefits as early as age 62, waiting until age 70 can increase your monthly benefit by 72% compared to claiming as soon as you're eligible. Understandably, not everyone can afford to wait until age 70, but if you can, it can result in a substantially higher lifetime payout (depending on how long you live, of course).

Also, consider working into your golden years. More baby boomers than ever are putting off their retirement for a few years in order to save more money and invest. More importantly, living off of wages earned from their job rather than Social Security benefits may allow boomers and future generations to avoid having to file for benefits until age 70, or closer to age 70, resulting in a higher payout and presumably a more comfortable retirement.

A final important point for those still in the workforce is to invest early and often. Based on data from the Urban Institute, the average lifetime benefits of a 65-year-old who retired in 2010 (based on 2012 dollars) would be about $290,000. In contrast, investing a mere $25 per week over 40 years with a return rate of 8% (the historical rate of return for the stock market) would yield close to $360,000 upon retirement. Imagine how much you could have if you could save more than $25 per week, or invest for longer than 40 years. Time and compounding are powerful tools, and they're important to utilize so you don't become overly reliant on Social Security benefits come retirement.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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