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Changes to Social Security could have wide-ranging impacts on both the program's current 60 million recipients and individuals who plan on claiming Social Security in 2017. Here's what you need to know about Social Security heading into next year.
A tiny increase is expected
The Social Security Administration decides whether to provide an annual cost-of-living increase based on inflation data provided by the Bureau of Labor Statistics, or BLS.
Specifically, Social Security compares the average Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, during the third quarter of the current year to the average CPI-W during the most recent third quarter in which an increase in Social Security was calculated to be required.
Since last year's inflation data resulted in no Social Security cost-of-living increase in 2016, Social Security will therefore compare this year's average third quarter CPI-W to the third quarter CPI-W of 2014. If average CPI-W in Q3 is higher than the average CPI-W in Q3 of 2014, then Social Security recipients will get a raise in 2017.
The good news is that CPI-W is tracking higher in 2016 than it was in 2014. The bad news is that the increase is small. The CPI-W was 234.789 in July (the last month for which data is available) and that's only 0.24% higher than the 234.232 average reading during the third quarter of 2014.
Smaller take-home in 2017
If CPI-W remains roughly 0.20% higher than 2014 throughout the remainder of this quarter, then Medicare's board of trustees says the increase in the average Social Security benefit will be insufficient to cover the increase in Medicare premiums.
If so, then a hold-harmless provision preventing Medicare premiums from increasing more than Social Security -- in dollar terms -- kicks in for about 70% of Americans enrolled in Medicare Part B. The hold-harmless provision limits increases for the majority of people enrolled in Part B, but Americans unprotected by it could see premiums soar next year.
For example, a 0.2% increase in Social Security income would result in at least a $149 monthly Part B premium for new enrollees. High-income Americans subject to Medicare premium adjustments would pay even more. Overall, Americans unprotected by the hold-harmless provision could end up paying 22% more for Part B than they're paying this year. Since most Americans pay their Part B premiums directly out of their Social Security income, singles and couples with incomes north of $85,000 and $170,000 annually could pocket less in Social Security income in 2017 than they did in 2016.
Fewer strategies
If you're claiming Social Security next year, friends and family may have told you about strategies that they've used in the past to maximize their lifetime Social Security benefits. Unfortunately, one of the most useful of these strategies, "file and suspend," got the ax this year.
The file-and-suspend strategy allowed couples to generate current Social Security income for one spouse while allowing both spouses to forgo their primary benefits until age 70, when payments are bigger.
Here's how it worked: Once a spouse qualified for 100% of their primary benefit, that person filed for Social Security and then suspended their benefit. Then, that person's spouse filed a restricted application so that they could claim their spousal benefit, thereby allowing their own primary benefit to grow until 70. When file and suspend was done correctly, it could increase Social Security benefits by tens of thousands of dollars over a lifetime.
Unfortunately, Washington closed the file-and-suspend loophole in April, 2016, so it won't be available next year.
One Social Security "loophole' that may still be available next year, however, is the restricted application. If you were born before 1954 or you're a widow or widower, then you might still be able to delay your primary benefit until age 70 while collecting a spousal benefit.
If you turned 62 prior to 2016 and your spouse collects Social Security benefits, you can file a restricted application so that you collect your spousal benefit while your primary benefit grows until age 70. A widows or widower can similarly receive spousal benefits while their primary benefit grows until age 70.
Tying it together
Social Security remains a critical source of retirement income, but small annual increases and rising Medicare premiums are straining retiree budgets. While some strategies still exist that can boost Social Security benefits, changes have eliminated one of the best options. Overall, Social Security planning is complex, so it pays to educate yourself about your options. That's one thing that isn't changing in 2017.
