What Social Security benefits are you entitled to?

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(MoneyWatch) Regular readers of this column may be confused by the topics of this week's posts on Social Security. Monday's piece said that Social Security isn't in financial trouble, but Wednesday's itemdiscussed Social Security's funding problems.

Which is right? Well, both perspectives are correct.

If and when Social Security's trust fund runs dry, benefits will need to be reduced to the level that can be supported each year by taxes collected from workers that year. In effect, there's a drastic fail-safe mechanism in place that automatically balances benefits paid with taxes collected. Social Security actuaries predict that if Congress does nothing to change benefits or taxes, Social Security benefits would need to be reduced by 23 percent in 2033 to balance benefits paid to retirees and taxes collected from workers in that year.

Then Wednesday's post described the significant projected imbalance between Social Security taxes collected and benefits paid in the next few decades, an imbalance primarily caused by the drop in the U.S. fertility rate.

So is Social Security in trouble or not? Social Security is literally not in trouble because of the fail-safe mechanism described above. If and when the trust fund runs dry, Social Security will continue to pay benefits, although at a reduced level.

Now, politicians may get into trouble with their constituents if benefits are significantly reduced, and many retirees will be in financial trouble, but Social Security will continue to exist.

But what about the benefits you're entitled to? Over the years, I've received many comments from readers who expect to receive back all the money they paid in Social Security taxes, as if they were entitled to that money.

You might even feel morally entitled to benefits because you paid your Social Security taxes, which are actually called "contributions." In fact, President Franklin Roosevelt encouraged this line of thinking when he described in 1941 why Social Security was based on payroll taxes: "We put those payroll contributions there so as to give the contributors a legal, moral and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program."

However, the reality is, you're legally entitled to the Social Security benefits that Congress and the president decide you're entitled to. Tomorrow, for instance, Congress could pass a bill -- and the president could sign it into law -- that changes Social Security in any way they see fit. They could eliminate all benefits without compensating you for the taxes you've already paid. Of course, if they do that, they may get voted out of office or get challenged in court, but they wouldn't be breaking any laws.

Like it or not, there's no mechanism in Social Security that guarantees you'll receive in benefits all the taxes you paid during your employment career. Your Social Security benefits aren't directly tied to the Social Security taxes that you pay. This is very different from most investment programs, where there's a direct connection between the money you contribute and the benefits you ultimately receive.

Your Social Security benefits will be calculated by the formula that's in place when you retire. One ingredient in the current Social Security benefits formula is the 35-year average of your earnings that have been covered by Social Security. So in effect, there's an indirect connection between the benefits you ultimately collect and the taxes you paid. But there are many, many examples of situations where workers will receive less benefits -- or more benefits -- compared to the taxes they paid into Social Security.

A more accurate way to look at Social Security comes from the late Sen. Russell Long, a lifetime supporter of Social Security, who once said, "Social Security is nothing more than a promise to a group of people that their children will be taxed for that group's benefit."

Social Security is really the formalizing of the long-revered, ancient tradition of supporting elders who are less able to fend for themselves. Ancient tribes and clans often provided food and shelter to older members who could no longer hunt or gather food. And I'd be willing to bet that at the time, the younger tribe members didn't keep track of the amount of food or housing they gave to their elders with the expectation that they would eventually receive similar amounts. They did it simply because they thought it was the right thing to do, and they hoped their children would to the same for them.

I'm also willing to bet that the elders were well aware that their tribe needed to be strong and healthy to be able to support them, and the elders did their part to keep the tribe going.

Similarly, we'll collectively decide through public debate and our congressional representatives the amount of support we're willing to provide the elderly, with the hope that we'll be treated the same when we reach our later years. And we need to be aware that countries that are strong economically and politically will be in the best position to support their elders.

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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