Social Security is at a critical tipping point—the system is paying out more dollars than it’s taking in, a recent article from CNN.com indicates. Obviously, that’s not good news for the long-term health of Social Security, or those depending on it.

The State of Social Security

The Social Security system, designed as a state-run support fund for working Americans as part of the New Deal, works on a fairly simple principle: people pay a certain amount of money into the Social Security coffers whenever they’re employed, and if and when they need more money than they’re making (based on government standards), they can collect money from those coffers.

Currently, Social Security benefits include:

• Payments to the retired and disabled;
• Payments to the unemployed;
• Funds for medical care for the aged and poor;
• Financial assistance for needy families; and
• Funds for children in need.

But, according to sources, both 2010 and 2011 will see the Social Security system pay more in benefit to needy Americans than it collects in taxes, meaning that the fund will diminish. That trend should reverse itself for a few years, but most experts apparently expect that the fund will be exhausted (that is, able to pay out only 76 percent of benefits) by 2037.

Blame the Economy

So what pushed the Social Security fund into the red? Sources note that the rough economy has played a significant role:

• High unemployment: The steady 9.5 percent jobless rate means that fewer Americans than usual are paying into the Social Security fund, which translates to less money coming into the system. Meanwhile, more people than usual are drawing unemployment benefits, which strains the system.
• Early retirement: With work difficult to find, many older Americans are opting for early retirement. This means they’re pulling money from the Social Security fund earlier than they would have normally. While early retirees are eligible for smaller payments than those who wait until their full retirement age, this still means that the system is paying out more money and taking less in.
• Government borrowing: Since the Social Security system was reformed in the early 1980s, the federal government has reportedly borrowed significant amounts of money from the trust with promises of repayment—which has yet to materialize.

So what does this mean for you? For many years now, experts have emphasized that the average American should not depend on Social Security alone to finance their retirement years. The dire state of the nation’s retirement fund reinforces that point and underlines the importance of having a personal retirement savings and/or investment fund.