For the typical American, it might appear that little has changed when it comes to Social Security benefits. That was actually the case for the vast majority of Americans. But there were some important loopholes that closed, and benefits will be nudging up in the year ahead.
Closing some popular loopholes for Social Security benefits
Imagine this: You and your spouse are trying to figure out how to maximize your Social Security benefits. One of you earned a lot more than the other (let's called it the "husband"), so much so that it makes more sense for the wife to claim spousal benefits instead of her own benefits based on her working record. Spousal benefits are 50% of whatever the higher-earning spouse gets.
But there's a problem: The husband wants to wait until age 70 to claim Social Security in order to maximize his monthly check. In years past, the couple could do the following:
- The husband files for Social Security benefits.
- The wife files for spousal benefits.
- Once step two is done, the husband immediately suspends his benefits so they can continue to grow.
This was the best of both worlds: The wife got her benefit, and the husband's continued to grow. But with the bipartisan budget that passed in 2015, this strategy -- dubbed "File and Suspend" -- is no more.
A similar approach -- referred to as "File and Restrict" -- also closed in 2016. This allowed someone to file for spousal benefits while the benefits associated with their working record continued to grow. Now, you can only choose one type of benefit -- spousal or retired worker -- and have to stick with it.
No growth in 2016 Social Security benefits, but a small bump coming up
Every year, Social Security checks increase based on a benchmark. These increases are in place so that beneficiaries maintain the same amount of purchasing power relative to inflation; they are referred to as "cost-of-living adjustments" or COLAs.
The benchmark used to measure inflation is the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The reading is taken in the third quarter of the previous year, and any growth here goes straight to a COLA increase.
During the third quarter of 2015, the CPI-W actually decreased by 0.4%, but benefits did not decrease -- they stayed the same. However, during 2016, the CPI-W increased by 0.76%. Because of this, benefits will increase 0.3% in the coming year.
Why aren't they going up by more? That's because 2016's benefits were technically higher than they should have been; they didn't drop along with the CPI-W dip. If we refer back to the third quarter 2014 CPI-W numbers -- which is what 2016 benefits were actually based on -- the jump was actually 0.34%, or just about what the COLA jump will be.
The big takeaway from this all, however, is that Social Security benefits were almost exactly the same in 2016 as year's past -- and they'll continue to be in 2017. Only the savviest of filers used the loopholes, and many will only see a small bump in 2017 Social Security checks.