Should You Be Worried About Your Social Security Benefit?

(MoneyWatch)  The annual Social Security Trust Fund Report was issued this week, and it's no surprise that the numbers look a little worse than they did last year. Given the state of the trust fund, how worried should you be about your Social Security benefit?

In the short term, I don't think there is anything to worry about. Longer term, I'd be moderately concerned.

By short term, I mean over the next 15 to 20 years. The Social Security program is well funded through about 2037. This means that based on contributions and the surplus, Social Security has enough money to pay projected benefits for the next 28 years. So benefits aren't going to disappear.

Social Security in many ways is a terrific program. It provides a base retirement income for all of us workers regardless of how the financial markets perform. But the program has to be adequately funded. You need to be contributing enough money to eventually pay out the promised retirement benefits. Under the current structure, Congress has promised too many benefits and not adequately funded those benefits.

The good news is we know how to fix the problem. It will take either an increase in taxes, a reduction in benefits, or some combination of the two. For example, the Trustee's report indicates that the funding problem could be fixed with an immediate 13 percent reduction in benefits.

Since it's likely there will be reductions, it's a good idea to get a handle on it now and plan accordingly. And since Congress will probably delay acting until the problem gets even bigger, you should bump up the potential size of the benefit cuts.

Here's how you can estimate what your reduced benefits might look like:

• Each year you get a Social Security statement a few months before your birthday. It lists all of your wage history and provides projections on your future benefits, assuming you continue to work.
• A prudent thing to do is reduce those projected benefits by 15 to 25 percent. If you don't reduce the benefit estimates, you may end up relying too heavily on an income stream that won't be there when you need it.
• To help offset what you might not receive from Social Security, bump up your own retirement savings rate by a few percentage points .

Bottom line: Social Security is well funded for the short term but underfunded over the long term. Social Security will be there, but expect some benefit cuts. To soften the blow of reduced benefits, increase your savings rate.

Social Security photo from Flickr, courtesy of Solo, with others, CC 2.0