For 2016, there were some pretty big adjustments to Social Security. This year, the changes were more subtle, but they are nevertheless noteworthy.
Last year, Congress finally caught on to strategies married couples were using to boost total household Social Security income, and the ensuing end to “file and suspend” and “restricted application” changed how those couples could prepare for retirement income.
For 2017, the more than 65 million seniors receiving Social Security benefits got a cost-of-living adjustment (COLA) (for 2016, the index used by Social Security didn’t show enough inflation to merit a bump). But worth thinking about is just how small that adjustment is, just 0.3%. That’s less than $5 a month for the retired beneficiary receiving the monthly average benefit of about $1,360.
If you’ve been thinking about how great it will be to have retirement income that automatically adjusts for inflation, this should serve as a reminder that the adjustment might not always be significant. And the announcement came with a warning about anticipated adjustments to Medicare Part B health insurance premiums, “for some beneficiaries, their Social Security increase may be partially or completely offset by increases in Medicare premiums.” So maybe forget about that five bucks a month.
The bigger change affects high-wage earners. Social Security increased the maximum taxable amount of wages by 7%, from $118,500 a year in 2016 to $127,200 for 2017. So if you made $127,200 in both 2016 and 2017, you’d pay (at the Social Security tax rate of 6.2% for employees) $7,886.40 this year, that’s about $539 more than last year.
Why the difference?
The difference between the 7% increase in taxable wages and the measly 0.3% increase in benefits is because the government uses two different indexes to calculate adjustments. For the COLA, Social Security ties adjustments to increases in the Consumer Price Index as determined by the Department of Labor’s Bureau of Labor Statistics. For taxable limits, the agency uses the national average wage index.
The change in taxable wages affects about 12 million workers. (Fun fact: Until 1950, only the first $3,000 of wages was taxed for Social Security).
When news of the COLA was announced last fall, AARP, a nonprofit organization that represents 38 million older Americans, urged politicians to get involved.
At the time, AARP CEO Jo Ann Jenkins said in a news release, “Over the last five years, Social Security COLAs have remained small or nonexistent at 1.7% or lower, even though every cent can matter to beneficiaries and their families.”
Jenkins also pointed to rising prescription costs and Medicare premiums and urged Congress to ensure Medicare premiums and deductibles don’t continue to rise.
Another senior advocacy group, The Senior Citizens League, at the time said continued low COLAs are forcing retirees to burn through retirement savings faster than anticipated.
“This is huge, and this loss of anticipated retirement income compounds every year,” said Mary Johnson, a policy analyst for the group, in a news release. “Unfortunately, this financial impact is not fully understood by the vast majority of the public and members of Congress.”
Another change announced for 2017, which may affect recipients who have chosen to supplement their income with a part-time job, is an increase in the amount recipients (under full retirement age) may earn without having a dollar in benefits withheld for every $2 earned. The current earnings limit is $15,720 per year, and that will rise to $16,920. (The amount is $44,880 for those in the year of their full retirement age).
A fact sheet listing all the new figures is available for download from the Social Security Administration.
Things to Consider:
• When preparing for retirement income, remember Social Security cost-of-living adjustments aren’t always going to be big and can vary. In 1980 the adjustment was 14%. In 2016 it was zero.
• Talk with a financial professional about how Social Security income fits into your retirement income plan.