Have you ever wondered who received the first official Social Security card? In 1936, the first official card was given to John D. Sweeney Jr., and from there a program of "social insurance" was born that provided payments to those who were unable to work because of retirement or disability. This program was designed by President Roosevelt to be self-funded, so that a person would pay into the fund and then withdraw a similar amount of funds many years down the road. (For related reading, also check out 6 Things To Know About Social Security In 2011.)

IN PICTURES: 10 Last-Minute Retirement Tips

In 2011, there is considerable concern that the program is no longer self-sustaining, and that the Social Security fund could be depleted by 2037. Here we take a look at the challenges Social Security faces going forward - and why.

Social Security Contributions
According to the Social Security Administration, in 2010, the Social Security program officially began paying out more than it was bringing in. Although economists predicted that this problem would not occur before 2017, the economic downturn of 2009, which has driven unemployment to nearly 10%, has caused many people who would have otherwise not applied for benefits to do so. It is believed that as the economy improves this shortfall will temporarily be remedied, but if you believe some economists, the outlook is still pretty bleak. (For more insight, see 10 Common Questions About Social Security.)

It is also estimated that by around 2041, payroll taxes will have to be raised by 28% in order to fund the projected deficits.

The Boomers
The massive wave of 80 million baby boomers entering retirement age is being blamed for the extra pressure on the system. 1946 (give or take a few years) began the baby boom and those boomers have been integral to funding the Social Security system and providing funding for the generation behind them. As the boomers retire, Generation X, with 15 million fewer people will have to fund the baby boomers.

The upside is that the baby boomers have created quite a surplus in the system, although these funds have been loaned to the U.S. government. As you will see, this presents a third challenge for the system. (For more, see Why Boomers' Retirement Is Different From Their Parents.)

Debt Payments
When the Social Security Trust Fund has surplus assets, it lends those assets to the federal government. If current projections are accurate, Social Security will fund itself with debt repayments from the federal government. Sounds OK, right? But there's a potential problem with that.

Some economists wonder if the federal government, which is trillions of dollars deep in debt, will have the ability to pay these debts back. If the worst-case scenario happened and the United States defaulted on these loans, Social Security would become insolvent much sooner than 2041.

IN PICTURES: Top 7 Social Security Myths - Exposed

Also, in 2011, the federal government may run up against its debt ceiling. In February of 2010, Congress passed a bill raising the maximum amount of debt allowed to $14.3 trillion dollars. If this ceiling is reached, programs would have to be cut or scaled back. There's a possibility that this could include Social Security too.

What the Government Says
If you believe the federal government, Social Security needs an overhaul but it's future is far from dire.

"The fact that the costs for the program will likely exceed tax revenue this year is not a cause for panic but it does send a strong message that it's time for us to make the tough choices that we know we need to make," Commissioner of Social Security Michael J. Astrue said in an August 2010 news release that accompanied the Social Security's Board of Trustees annual report on the Social Security program's outlook.

The Bottom Line
Social Security can be a politically charged discussion but the best way to protect yourself from these problems is to make sure you are adequately funded for retirement. Figure out how much money you need to live the way you would like and prepare for that now. Don't rely on the government to provide it for you, because the jury's still out on whether it will be able to do so. (For related information, also take a look at 10 Common Questions About Social Security.)

Related Articles
  1. Professionals

    Social Security 'Start, Stop, Start' Explained

    The start, stop, start Social Security strategy is complicated. Here's what retirees considering it need to consider.
  2. Professionals

    Your 401(k): How to Handle Market Volatility

    An in-depth look at how manage to 401(k) assets during times of market volatility.
  3. Professionals

    Don't Let Your Portfolio Be Trump'd by Illiquidity

    A look at Donald Trump's statement of finances and the biggest lesson every investor can learn.
  4. Professionals

    Top Social Security Issues for Divorced Women

    What female divorcees need to know about the twists and turns of figuring out Social Security benefits.
  5. Professionals

    Is it Time to (Finally) Push Kids Out of the Nest?

    Parents should make sure their kids realize their home is a launching pad not a landing spot, and advisors can help clients talk to their children.
  6. Professionals

    Top Questions to Ask When Choosing a Robo-Advisor

    Think a robo-advisor might be the right choice for you? Be sure to ask these questions first.
  7. Insurance

    Picking the Best Longevity Insurance

    What you need to know before buying a "reverse life" policy.
  8. Retirement

    How do you calculate penalties on a 401(k) early withdrawal?

    Find out how to calculate the penalties on early withdrawals from your 401(k), including the impact of the additional 10% tax penalty, vesting and income tax.
  9. Professionals

    3 States Where Taxes Can Hammer Retirees

    Knowing which states ding retirees with the highest tax implications should be part of your retirement research.
  10. Retirement

    What Are the Risks to Your Retirement Security?

    One of the biggest risks to your retirement security is something you may take for granted: your health, and more specifically, health-care costs.
RELATED TERMS
  1. Dynamic Updating

    A method of determining how much to withdraw from retirement ...
  2. Possibility Of Failure (POF) Rates

    The likelihood that a retiree will run out of money prematurely ...
  3. Safe Withdrawal Rate (SWR) Method

    A method to determine how much retirees can withdraw from their ...
  4. Mandatory Distribution

    The amount an individual must withdraw from certain types of ...
  5. Current Service Benefit

    The amount of pension benefit accrued by an employee who had ...
  6. Total Permanent Disability (TPD)

    A condition in which an individual is no longer able to work ...
RELATED FAQS
  1. Are Social Security payments included in the US GDP calculation?

    Social Security payments are not included in the U.S. definition of the gross domestic product (GDP). Transfer Payments For ... Read Full Answer >>
  2. Where are the Social Security administration headquarters?

    The U.S. Social Security Administration, or SSA, is headquartered in Woodlawn, Maryland, a suburb just outside of Baltimore. ... Read Full Answer >>
  3. What is the Social Security tax rate?

    The Social Security tax rate is 12.4% as of 2015. Of that amount, the employee is responsible for half, or 6.2%, and the ... Read Full Answer >>
  4. What is the Social Security administration responsible for?

    The main responsibility of the U.S. Social Security Administration, or SSA, is overseeing the country's Social Security program. ... Read Full Answer >>
  5. Is the Social Security administration part of the executive branch?

    The U.S. Social Security Administration, or SSA, is an independent government agency under the purview of the executive branch. ... Read Full Answer >>
  6. What are the maximum Social Security disability benefits?

    The maximum Social Security disability benefits for a single eligible person in 2015 are $2,663.  What Are Social Security ... 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!