Senior Hand On Chin Thinking Social Security Retirement Getty
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According to the Social Security snapshot from November, nearly 61 million people were receiving monthly benefit checks. Of these recipients, more than 41 million were retired workers.

For many of these retired workers, Social Security is a critical financial lifeline that ensures they can afford to put a roof over their head and food in their mouths during their golden years. Data from the Social Security Administration (SSA) shows that 61% of total elderly beneficiaries and 71% of unmarried elderly individuals count on Social Security to provide at least half of their income each month. Needless to say, when the Social Security Administration announces changes to the program each October, tens of millions of seniors pay very close attention.

Big Social Security changes take center stage

In mid-October, there were a number of headline changes. Chief among those was the 0.3% cost-of-living adjustment (COLA) that was incorporated into benefits as of Jan. 1, 2017. Social Security's COLA hasn't budged in three of the past eight years, and the 0.3% "raise" seniors are getting in 2017 marks the lowest increase on record. Nonetheless, a 0.3% raise is better than receiving nothing at all.

Social Security

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Equally notable was the announcement that the payroll tax earnings cap was increasing by more than 7% to $127,200 in 2017 from $118,500 in 2016. Working Americans paid a 12.4% payroll tax into the Social Security program on wages earned between $1 and $118,500 in 2016. Any wages beyond $118,500 were free and clear of the payroll tax. Most employees have the responsibility of this tax split down the middle, 6.2% each, between them and their employer. In 2017, wealthier Americans are going to have to hand over just a little bit more of their income if they earn up to $127,200.

Even adjustments to the retirement earnings test exemption grabbed attention. For individuals who claim Social Security prior to reaching their full retirement age (the age at which you're deemed to be eligible for 100% of your benefit), the SSA can withhold part, or all, of your benefits if you cross certain income thresholds. These thresholds increased by $100 a month if you won't reach your full retirement age in 2017, and $250 a month if you will.

You can get an all-encompassing look at the wide gamut of Social Security changes here.

The biggest Social Security change in 2017 is flying under the radar

However, one major change that began on Jan. 1 and hasn't been widely advertised, but could very well be the most important Social Security change of 2017, is the increase in the full retirement age for brand-new retirees.

In each of the past 12 years, the full retirement age has held steady at 66 years. Anyone born between 1943 and 1954 could retire at age 66 and collect 100% of the benefits they were due based on their earnings history. They also had the option of claiming as early as age 62 and receiving 75% of what their full retirement age benefit would be, or waiting all the way until age 70 (the point at which benefits stop accruing) and netting a 32% raise on top of their full retirement age benefit.

Social Security Benefit Application Getty
Image source: Getty Images.

Beginning in 2017, brand-new retirees who can enroll for Social Security benefits, but were born in 1955, won't reach their full retirement age until age 66 years and 2 months. Starting this year and in each successive year thereafter through 2022, the full retirement age will increase by two months to account for lengthening life expectancies, as outlined by the Social Security Amendments of 1983. This will culminate in a full retirement age of 67 years for those born in 1960 or after.

Increasing the retirement age is designed to encourage healthier older Americans to work longer, as well as save more of their hard-earned money. Working longer has a doubly positive effect in that it generates more payroll tax revenue for the program and reduces the length of time seniors are drawing payments from the Trust.

Wait longer or receive less

However, raising the retirement age also has an adverse impact on payouts. Future retirees either have to wait longer to receive their full retirement age benefits, or they have to be willing to accept a bigger reduction in their benefit from enrolling before reaching their full retirement age.

Senior Worker Social Security Labor Force Getty

Image source: Getty Images.

For anyone born between 1943 and 1954, the least they can receive is 75% of their full retirement age benefits if they claim as early as possible. For seniors born in 1955 who plan to claim Social Security as soon as possible, they'll only be netting 74.2% of their full retirement age benefit. Similarly, waiting until age 70 to file for benefits no longer nets a person born in 1955 a 32% raise over their full retirement age benefit; instead, the benefit of waiting as long as possible is a 30.7% raise.

By the time the full retirement age hits 67 years for those born in 1960 or later, claiming as early as possible would result in a payout of just 70% of your full retirement benefit, and waiting until age 70 would boost your top-end payout by 24%.

A rising full retirement age could be yet another wakeup call for America's workers to have other channels of income at the ready when they retire. Social Security is only designed to replace about 40% of the working wages of the average retiree, so with the full retirement age rising, and the program facing a budgetary shortfall by 2034 (as predicted by the Social Security Board of Trustees), it's time for America's workforce to get serious about reducing its expected reliance on Social Security income during retirement.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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