When will the Social Security system run out of money?  Well, the US Treasury Department announced recently that 2011 will mark the first tipping point for Social Security since we emerged from the last protracted recession in 1983.  That is, more benefits will be paid out in 2011 than will be collected by the Treasury Department.  Fortunately, this is expected to be a short-lived phenomenon (for now).  An ultra-high unemployment rate approaching 10% has resulted in a substantial reduction in wage tax collections in recent months.  The current shortfall is expected to last for a couple of years at which point the Treasury predicts we will return to a surplus situation for a few more years as the economy picks up some steam.

But beginning in 2015 and thereafter, an enormous wave of Baby Boom Retirees will push the Social Security plan into a permanent death spiral – where payouts to retirees will overwhelm incoming wage taxes to the point that the surplus that has been built up over decades of time will begin to be drawn down at an increasingly rapid rate.

So what is the end game?  For starters, if the most recent actuarial statistics are accurate, the Social Security surplus fund, which currently stands at about $2.5 Trillion will run out of money and be completely depleted by 2036 – a year sooner than earlier estimates.  Of course, this so-called $2.5 trillion dollar surplus is not real money mind you, but an IOU from Uncle Sam who has already spent the money with a promise to repay it.  Once the “surplus fund” is depleted, the Social Security system will rely completely on new tax revenues to pay for an increasing level of benefits.  Unfortunately, as the Administration looks into its crystal ball it expects that wage tax revenues will only generate enough to cover about 75% of the demand for benefits after 2036.  Someone will have to go without…

So how worried should you be? To some degree it depends on when you were born — and how long you expect to live.  With a retirement age currently set at 67 for the latest generation of baby boomers and assuming an average lifespan of approximately 78 years (based on latest published averages), if you were born in 1958 or before you are home free (assuming you have any faith at all in the current system).  For those born in 1959 and beyond, the outlook is murkier.  In all likelihood the Federal Government will make good on its commitments to Social Security beneficiaries – in the same way it will make good on its obligations to investors and foreign countries that fund our ongoing deficits by purchasing US Treasury Bonds.  Of course “making good” may come at a high cost in terms of potential inflation, which will serve to erode the real value and purchasing power of any benefits received.

Another thing to keep in mind is that there is a lot of attention focused on trying to fix the soon to be defunct social security system prior to D-day. This may mean some combination of increasing the retirement age for younger workers, reducing benefits to retirees, and increasing the social security wage tax rate in an effort to right the ship before it sinks.  Stay tuned!

The  United States Social Security Administration has posted a list of official retirement ages. The Full Retirement Age is important as it determines when an individual will qualify for full social security retirement benefits. The Full Retirement Age (FRA) for receiving Social Security Benefits has been increasing gradually since Social Security benefits became effective. The FRA – Full Social Security Retirement Age began at age 62 and has increased to age 67. It is virtually certain that the Social Security FRA will continue to creep up as financial resources continue to become strained under the burden of a rapidly growing elderly population. As it currently stands, those born in 1960 or later will have to wait till they reach the age of 67 before they qualify for a full social security retirement benefit.

Of course it is possible to qualify for an early retirement benefit at a younger age – and in truth, with the state of the economy, many individuals approaching retirement have been taking advantage of this opportunity to get benefits now rather than delaying them until they reach the full retirement age.  In fact, according to Social Security Administration statistics, about 70% of all individuals who qualified for early retirement benefits last year chose to take the early retirement benefit - settling for a likely overall reduction in total benefits paid over the course of their lifetime.

In a few cases taking less money now may make more sense than waiting for the higher payout.  For example, if you are in poor health and/or are stretched beyond your current financial means you may feel it advisable or even necessary to sacrifice future earnings potential for a lower payout beginning today.

Either way, there is no getting around the fact that by opting for an early benefit stream today, the total benefit you will receive over the balance of your life will most likely be substantially reduced. I say most likely because we never really know when it will be our time to go. Someone who delays taking benefits and then passes on unexpectedly before reaching the magic Full Retirement Age will be out of luck.  Of course it is always wise to keep in mind that a surviving spouse may be entitled to a higher survivors benefit the longer you wait.  But let’s look on the bright side and assume that you will live well past your Full Retirement Age – a pretty valid assumption in most cases.

From a purely financial perspective then, it is generally not advisable to begin drawing social security benefits at an early age – if it is at all possible to avoid it. By claiming your social security retirement benefits early you stand to forfeit thousands or even tens of thousands of dollars over the course of your remaining life.

According to the Social Security Administration you can expect to lose a whopping thirty percent of your monthly income by beginning to draw retirement benefits 5 years ahead of schedule. So, for example, if you are scheduled to draw retirement benefits at age 67 but choose instead to file for social security benefits at the age of 62, then you will receive benefits – but at a level that is 30% less than what you would have received by waiting till your FRA Full Retirement Age. If you file 4 years ahead of schedule you can plan to receive a 25% reduction in your benefits. A three year early retirement will cost you 20% of your income, and so on. It makes a lot of sense to wait till you reach your Full Retirement Age before you file for Social Security Benefits.

Conversely, if you are in a position to delay your filing for social security benefits until some years after you qualify for full benefits, you will enjoy an even higher level of monthly and yearly income for the balance of your life. Call it delayed gratification… For this reason, some retired individuals choose to continue to work past the age of 70 in order to make ends meet so they can delay filing for social security benefits past their Full Retirement Age.  By following this strategy, they ensure a higher level of social security income  and attendant standard of living through their remaining retirement years.  And as our health care expenses tend to increase over time, those later years may be the years we need that extra income the most.