Social Security is a federal benefits program the United States developed in 1935. While the program encompasses disability income, veterans' pensions, public housing and even the food stamp program, it is most commonly associated with retirement benefits. However, if you still have many working years ahead of you, you may not be able to depend on these benefits as a source of income. In this article, we go over how the Social Security system works and why it is predicted to fail in the future.

TUTORIAL: Qualified Plans

The Social Security system is funded through payroll taxes. The Federal Insurance Contributions Act (FICA) mandates a 10.4% levy on the first $113,700 (2013 limit) of each individual's earned income each year. The employer pays 6.2% and the employee pays 4.2%. Self-employed individuals pay the full 10.4%.Contrary to popular belief, this money is not put in trust for the individual employees who are paying into the system, but is used to pay existing retirees. Any excess is invested in U.S. Treasury bonds.

Earning Social Security Credits
Eligibility for Social Security benefits is accrued over time. Prior to 1978, workers were required to earn $50 in a three-month quarter in order to receive one Social Security credit. The achievement of 40 credits, accrued over 10 years of working, provided eligibility. Today, employers report earnings once per year instead of quarterly. Credits are accrued based on your earnings, not on a quarterly basis, so it is possible to earn all four credits for the year even if you only work a short amount of time each year. In 2013, workers will be required to earn $1,160 per credit.

Collecting Social Security Benefits
The amount of your Social Security benefit is calculated by averaging the earnings from your 35 highest income-generating years. The maximum monthly Social Security check that you can earn is $2,533 per month in 2013. To sign up for Social Security benefits, it is recommended that you apply three months prior to your retirement date. (For additional information about how and where to apply for Social Security benefits, go to

The Wobbly Three-Legged Social Security Stool
According to the Social Security Administration, "the three major elements of your retirement portfolio are benefits from pensions, savings and investments, and Social Security benefits." Just keep in mind that the Social Security Administration expects the program to be unable to meet its financial obligations beginning in 2042. Simply put, the number of people taking money out of the system will be greater than the number of people putting money into it. According to statistics released by the Social Security Administration, by 2031, there will be almost twice as many older Americans than there are today, rising from the current 37 million to 71 million over that period. At present, the government's solution for addressing this imbalance is to raise the retirement age, delaying payouts to younger workers. While past generations could enjoy full eligibility for Social Security at age 65, everyone born after 1937 must adhere to the following eligibility requirements:

Year of Birth Full (normal) Retirement Age
1937 or earlier 65
1938 65 and 2 months
1939 65 and 4 months
1940 65 and 6 months
1941 65 and 8 months
1942 65 and 10 months
1943-1954 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 and later 67

In addition to delayed benefit eligibility in a Social Security system that is running out of money, younger workers face challenges on another front - corporate-sponsored defined-benefit plans. These plans are closing down their offerings at a record pace. They are being replaced by defined-contribution plans, which offer no guaranteed payout, rely on the stock and/or bond markets to produce gains and must be funded by the employee. (For additional information, see The Demise Of The Defined-Benefit Plan.)

Plan for Your Retirement
According to the Social Security Administration, Social Security was never designed to serve as the sole source of a retiree's income. The Administration notes that, "Social Security replaces about 40% of an average wage earner's income after retiring, and most financial advisors say retirees will need about 70-80% of their work income to live comfortably in retirement." (For further reading, see Determining Your Post-Work Income.)

With the stability of the Social Security system in doubt and defined-benefit plans disappearing at an alarming pace, the best way to achieve a secure retirement may be to take matters into your own hands. Advocates of so-called "private savings accounts" have gone so far as to suggest abandoning the Social Security system altogether and eliminating the FICA tax. Instead of sending 4.2% of their income to the government to support existing retirees, current members of the workforce would keep that money, giving them the opportunity to invest it on their own - theoretically, in an investment that has the potential to deliver better returns than those typically provided by Treasury bonds. (Check out Why is retirement easier to afford if you start early? and Delay In Saving Raises Payments Later On.)

Conclusion: Social Security
While the final chapter in the Social Security saga has yet to be written, one thing is for certain: planning for your retirement is a good idea. If you reach retirement and other sources of income, such as Social Security and defined-contribution plans, are still available to provide income, your personal savings will add to the mix and you'll have more money than you need. If you reach retirement and those other sources of income are no longer available, you'll still be able to rely on the nest egg that you built on your own.

For more on retirement planning, read Fundamentals Of A Successful Savings Program and Retirement Planning Basics.

Related Articles
  1. Retirement

    5 Reasons to Leave Retirement Planning to Your Wife

    Wives live longer than their husbands, so their retirement stakes are higher. Luckily, certain qualities make women especially good at long-term planning
  2. Retirement

    Top 4 Retirement Cities in Uruguay

    With options from a cosmopolitan capital to a South American St. Tropez, the livin' is easy for expats in this coastal neighbor of Argentina and Brazil.
  3. Retirement

    6 Ways to Give Back After Retirement

    Discover the various ways that retired individuals can give back, donating their time, skills and money while still maintaining a comfortable retirement.
  4. Retirement

    Top Retirement Community Developers

    Learn which companies are the top developers of communities for active adults and the history behind each of these popular and well-known companies.
  5. Professionals

    Are ETFs a Good Fit for 401(k) Plans?

    The popularity of ETFs among investors and advisors continues to grow. But are they a good fit for 401(k) plans?
  6. Professionals

    Going Back to School as a Retiree? Here's a Guide

    The options for becoming a student after your working life ends are easier and less expensive than you might think.
  7. Professionals

    Do Robo-Advisors and Retirees Mix?

    Robo-advisors have democratized investing for many, but can they help retirees? Here are some things to consider before choosing one as a retiree.
  8. Retirement

    The 5 Best Retirement Communities in Fort Myers, Florida

    Discover why Fort Myers, Florida has become a popular retirement destination, and learn about five of the best retirement communities located in the city.
  9. Retirement

    Using Your 401(k) to Pay Off a Mortgage: The Pros and Cons

    Learn the advantages and drawbacks of using assets accumulated within a 401(k) retirement savings plan to pay down a mortgage balance.
  10. Retirement

    When Annuities Are the Wrong Investment

    Understand how annuities provide several unique benefits, but many drawbacks as well, and identify the situations where they are not the best investment.
  1. What would privatized Social Security mean for Americans?

    The current Social Security system in the United States operates in a pay-as-you-go framework; the Social Security taxes ... Read Full Answer >>
  2. What are the main differences between Social Security Benefits & Social Security ...

    While the names are very similar and they have similar purposes, there are a few marked differences between Social Security ... Read Full Answer >>
  3. How do I track my pending application for Social Security benefits?

    Once you have submitted an application for Social Security benefits, you are supplied with a confirmation number which allows ... Read Full Answer >>
  4. What is the maximum I can receive from my Social Security retirement benefit?

    The maximum monthly Social Security benefit payment for a person retiring in 2014 at full retirement age is $2,642. However, ... Read Full Answer >>
  5. How safe are variable annuities?

    Life insurance companies are facing a challenging environment. Those that sell variable annuities have been able to mitigate ... Read Full Answer >>
  6. Are estate distributions taxable?

    In general, most estate distributions are not subject to income tax. In some cases, however, a distribution from an estate ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!