The Biggest Problem With Social Security Isn't Shrinking Reserves -- It's This

Source: Flickr user Jenn Durfey.

Social Security, the program designed to provide a financial safety net for low-income workers, the disabled, and family members of deceased workers, needs to change.

Something has to give Currently, the Social Security Trust Fund is on pace to burn through its remaining reserves by 2033. As baby boomers retire in droves and fewer young workers take their places in the workforce, the Trust Fund simply isn't taking in enough revenue to maintain full retirement benefits.

If nothing is done, the SSA will have to reduce benefits to roughly 77% of what they are now, and payments could continue at this reduced rate for another five-plus decades. This is a major concern. Our nation's elderly rely on Social Security in a big way: Nearly half of them count on SSA benefits for 90% or more of their monthly income.

Source: Pedro Ribiero Simoes via Flickr.

Yet although retirees' income is at risk of being cut in as little as 19 years, there's something else Americans should be far more worried about in regard to Social Security: their own lack of knowledge of the program.

This is far more frighteningAccording to research conducted in 2010 by the Financial Literacy Center, a large number of people don't have a good understanding of how Social Security works.

The study surveyed a total of 4,500 American adults. One line of questioning looked at how well-prepared respondents felt they were for retirement. Just 10% of respondents graded themselves with the equivalent of an "A." Meanwhile, 26% gave themselves a "C", 15% a "D," and 23% an "F." Researchers suggested that respondents' lack of preparedness stemmed from their lack of knowledge regarding how much money they'd need in retirement, when they should begin taking Social Security benefits, and how long they could expect to live.

But it gets worse.

Source: Flickr user Helga Weber.

The wheels really fell off the wagon when respondents were asked seven questions to gauge their understanding of Social Security's rules. Self-assessments showed that just two in 10 respondents felt "very knowledgeable" regarding Social Security's rules, while another 57% took the middle ground and felt "somewhat knowledgeable." However, the actual results differed from respondents' self-assessments.

Among the 2,000 respondents in this portion of the study, just 4% received the equivalent grade of an "A." On the other hand, a combined 50% received a grade of "D" or "F," with another 28% squeaking by with a "C." Not surprisingly, the survey results showed that those who made $50,000 or less per year were more likely to score poorly on the Social Security Literacy Quiz than those who made more than $50,000 annually.

Specifically, less than a quarter of respondents could correctly identify how SSA benefits are calculated, 42% were unaware that SSA benefits could be taxed and are adjusted for inflation, and 20% believed they needed to claim their SSA benefits as soon as they stopped working.

What needs to be doneThe results of this study are crystal-clear: Americans need to be better educated about the Social Security System.

A follow-up study by the Financial Literacy Center in 2011 yielded a few suggestions that could benefit consumers. For starters, researchers suggested that consumers need to be taught the importance of saving for retirement on their own. Social Security is only designed to replace about 40% of workers' income in retirement, yet 74% of all elderly retirees currently count on SSA benefits for at least half of their current income.

We have to reach the working generation now and encourage them to save for the future by taking advantage of tax-advantaged saving tools like employer-provided 401(k)s and IRAs. These accounts are designed to be retirement saving vehicles: They allow participants to grow their wealth tax-free and then withdraw their funds at their leisure once they reach age 59-1/2.

Source: via Flickr.

We also have to educate American youths early and often. Far too many students are leaving high school and college unprepared to manage their money and their financial futures. School curriculums need to place added emphasis on real-world money-management skills and saving strategies.

The Financial Literacy Center also suggests that the SSA needs to take a more proactive role in consumer education. Although the SSA can't direct what Americans should do with their money, its goal should be to ensure that everyone is informed enough to use the Social Security system to their benefit. The FLC gives a number of suggestions, and perhaps the best one is that the SSA needs to better communicate to consumers what their benefit would be depending on the age at which they claim Social Security benefits.

Ultimately, we need more effort on the part of consumers and the SSA to improve Social Security education. Otherwise a drop in benefits by 2033 could be the least of retirees' worries.

The article The Biggest Problem With Social Security Isn't Shrinking Reserves -- It's This originally appeared on

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