Since 1940, many of our nation's retired workers have counted on the income provided by the Social Security Administration (SSA) to make ends meet during their golden years. Statistics released by the SSA this year show that just over 3 in 5 seniors (with a particular leaning toward elderly unmarried individuals) rely on their benefits to provide at least half of their monthly income during retirement. If that doesn't demonstrate the importance of Social Security to the financial well-being of seniors, then I'm not sure what will.
Seven big changes are coming to Social Security next year
Because of the importance of Social Security to seniors, when the SSA speaks, the entire nation tends to listen. Perhaps the most important release the Administration puts out all year comes in mid-October, when it announces the changes to America's most important social program in the upcoming year. Earlier this month the SSA released this data, and Americans can look forward to seven potentially huge changes to Social Security in 2017.
1. Seniors are getting a raise
Arguably the most followed SSA decision each year involves whether the benefits received by the more than 60 million Social Security beneficiaries, two-thirds of whom are seniors, are going to increase on par with inflation in the upcoming year. These cost-of-living adjustments, or COLA, are based on the movements of the Consumer Price Index for Urban Wage Earners and Clerical Workers, or the CPI-W. The average reading during the third quarter of the previous year serves as the baseline, while the average reading during the third quarter of the current year provides the percentage basis for increasing the COLA in step with inflation. If the CPI-W falls year over year, benefits remain flat, just as they did in 2009, 2010, and 2016.
According to the SSA's press release, COLA is set to rise by 0.3% in 2017. Based on estimates provided by the SSA, this works out to an estimated $5 increase in Jan. 2017 -- from $1,355 a month to $1,360. However, based on the SSA's August snapshot, the average retired worker was bringing home $1,350.64 a month, equating to a $4.05 monthly increase based on a 0.3% COLA.
At least COLA is moving up this year, unlike 2016, but the amount of the increase is the lowest on record.
2. The rich are going to pay more
Another pretty sizable change is that higher-income people are going to be paying more into the Social Security program.
The SSA sets a payroll tax earnings cap each year that dictates what earned income is subject to the 12.4% tax that funds Social Security. In 2016, earned income between $0.01 and $118,500 was subject to the payroll tax, with earned income above this amount not taxable. This means that roughly 9 in 10 Americans are paying this 12.4% tax on every dollar they earn, whereas the wealthy are paying tax on a much-smaller percentage of their earned income.
Heading into 2017 we're going to see a change as the payroll tax cap rises to $127,200 from $118,500. Though workers making less than $118,500 will see nothing change, workers earning in excess of this amount will be paying more into the program. If you're employed by someone else, it could cost you an extra $539 a year (since employers and employees split payroll tax responsibility down the middle, 6.2% each). Meanwhile, the self-employed, who are responsible for the full 12.4% tax, could owe an extra $1,079 a year in payroll taxes in 2017.
3. The maximum monthly benefit rose
However, if you've earned a lot of money throughout your lifetime and were disappointed to see the maximum monthly benefit decline in 2016, you'll be pleased to discover that the maximum monthly benefit is increasing in 2017.
Based on the SSA's press release, the maximum monthly benefit is increasing by $48 a month, to $2,687 from $2,639. For you math-phobic people, this works out to a little more than $32,200 a year in benefits for top income earners. Keep in mind, though, that combined income above $25,000 for an individual and $32,000 for a couple will result in some percentage of your Social Security benefits being subject to federal income tax.
4. You'll have to work a little bit harder to earn your Social Security benefits
Social Security benefits are often thought of as an entitlement program for seniors, but the fact of the matter is that Americans need to work throughout their life to guarantee they qualify for at least some Social Security income later in life. The figure that all workers are aiming for is 40 lifetime work credits.
According to the SSA, a maximum of four work credits can be earned annually, meaning most people have to work at least part time for 10 years in order to qualify for Social Security income during retirement. To earn one credit in 2016, you had to have earned $1,260 in income -- thus $5,040 would have maxed out your annual work-credit limit for Social Security. In 2017, the value of one work credit is increasing by $40, to $1,300. This means workers need to earn $5,200 next year to get the maximum number of annual work credits (four).
5. The full retirement age has begun to increase for new retirees
It's been well over three decades since Congress passed legislation to alter the full retirement age -- the age at which you become eligible for 100% of your monthly benefit -- but seniors born in 1955 are in for a surprise in 2017 if they decide to file for benefits at age 62.
For seniors born between 1943 and 1954, the full retirement age (FRA) has remained at 66 years. However, beginning in 2017 the FRA is slated to increase by two months for those born in 1955, to 66 years and 2 months. This two-month increase will continue with each successive year, reaching 67 years for those born in 1960 or later. This means seniors who file for Social Security benefits as early as possible (age 62) could see an even bigger reduction in their monthly benefit than just 25%. Likewise, top-end benefits (which stop accruing by age 70) will no longer max out at 132% of the FRA benefit. Instead, they'll be capped at some point between 124% and 132% for the coming five years.
6. Withholding thresholds for early filers increased
A sixth change that seniors receiving Social Security benefits are liable to notice is that the benefit withholding thresholds have increased from the previous year.
It may not be a well-known Social Security fact, but seniors who file for benefits prior to reaching their full retirement age are subject to having some, or all, of their benefits withheld by the SSA if they earn too much. In 2016, early filers who had not reached their FRA, and would not do so during the year, would have $1 in benefits withheld for each $2 in earned income over $15,720. For persons hitting their FRA during 2016, but who had not yet done so when they filed, $1 in benefits could be withheld for each $3 in earned income above $41,880.
For 2017, both of these thresholds have been pushed higher. Early filers not who have not reached their FRA during 2017 can earn up to $16,920, or an extra $100 a month, before the withholding begins to kick in. Similarly, early filing seniors expected to hit their FRA during 2017 can now earn up to $44,880 before the withholding threshold kicks in, representing an increase of $250 per month from the previous year.
7. Disability thresholds increased
Last but not least, the earned income thresholds that allow people with disabilities to qualify for and receive Social Security benefits are changing. In 2016, non-blind disabled individuals had to earn $1,130 or less per month to be considered for disability income from the SSA. The figure for the blind was $1,820 a month.
In 2017 these thresholds are getting a boost. Non-blind disabled persons can now earn an extra $40 a month, or $1,170, and still qualify for benefits from the SSA. Meanwhile, blind people are getting a boost of $130 a month, bringing their threshold up to $1,950.
These are big changes, and chances are they affect nearly all Americans in one way or another.