There are few, if any, social programs in the U.S. that are more important than Social Security, at least according to recently released data from the Social Security Administration (SSA).
Recent SSA findings show that 62% of all elderly recipients get at least half of their monthly income from Social Security, and about a third overall get 90% or more of their monthly income from the program. This reliance is exactly why the Center on Budget and Policy Priorities estimated in a 2016 study that the senior poverty rate would be over 40% if Social Security income were not there for the elderly on a guaranteed basis each and every month. As of Dec. 2016, the senior poverty rate was just 8.8%.
Expect these Social Security changes next year
Because of its importance for current and future retirees, there may be no press release more awaited each year than the October announcement from the SSA detailing the changes to the program in the upcoming year. This announcement is often made in the third week of October since the inflationary tether used to calculate cost-of-living adjustments (COLA) isn't made official until about the midpoint of October. In other words, we're roughly two weeks away from a game-changing announcement by the SSA.
What can you expect in terms of Social Security changes for 2018? While only one is a guarantee, the following five Social Security changes appear very likely.
1. Seniors should be getting a modest raise
To start with, Social Security beneficiaries should expect to receive a modest raise in their payout beginning next year. It's not uncommon for recipients to get an annual raise, although no raise was divvied out in three of the past eight years. While it's unknown at this point what the magnitude of the raise, known as COLA, will be in 2018, my suspicion is that it's trending closer to 2% than it was just two months ago.
Why the sudden uptick in expected COLA? Look no further than the recent landfalls of hurricanes Harvey and Irma. While these hurricanes devastated two U.S. states, they also wreaked havoc on the energy industry through refinery and drilling platform shutdowns. The ensuing rise in crude and gasoline prices is expected to increase the national inflation rate and translate to a modestly higher COLA for Social Security beneficiaries. With the average retired worker bringing home about $1,370 a month as of July 2017 , a 2% COLA would put an extra $27.40 a month in his or her pockets next year.
2. The full retirement age will tick higher by two months
The one change that's guaranteed next year is yet another gradual increase to the full retirement age for those born in 1956.
In 1983, Congress and President Reagan passed the last sweeping overhaul to the Social Security program. Among the many changes implemented was a staggered increase to the full retirement age, or FRA. Your FRA is the age at which you become eligible to receive 100% of your benefits. If you claim benefits at any point before hitting your FRA, you'll receive a permanent reduction to your monthly payout. Conversely, if you wait until after you hit your FRA to enroll for benefits, your payout could grow even larger.
For those born in 1956, your FRA is 66 years and four months, up from the 66 years and two months for those born in 1955. It means the newest eligible retirees in the upcoming year (you can begin taking Social Security benefits upon turning 62) are going to have to wait just a little bit longer if they want every cent they're due.
3. The maximum taxable earnings cap should rise
There's also a very strong possibility that the maximum taxable earnings cap, which is tethered to the National Average Wage Index, is going to head higher in 2018.
Social Security's 12.4% payroll tax was responsible for 87.3% of all revenue generated by the program in 2016. This payroll tax currently applies to all earned income between $0.01 and $127,200, but anything beyond $127,200 isn't touched by the payroll tax. Usually, when the U.S. economy and wages are expanding, this maximum taxable earnings cap rises from one year to the next. With COLA looking to be positive in 2018 (the maximum taxable earnings cap remains flat if there is no COLA in a given year), there appears to be a very good chance of a higher taxable cap. Translation: the wealthy can expect to pay a bit more next year.
How much more? It's tough to say with any certainty, but nonfarm employee nominal wage growth has averaged about 2.4% this year based on data from the Economic Policy Institute and Bureau of Labor Statistics. This would suggest a move in the maximum taxable earnings cap up to a little more than $130,000.
4. You'll probably have to work harder to earn lifetime work credits
Despite the somewhat popular (and incorrect) belief that Social Security is an entitlement program, you have to work your way to benefits. In order to qualify for retired worker benefits, you'll have to earn 40 lifetime work credits. A maximum of four can be earned each year, with each credit have an earned income value attached to it. This year, for example, workers can earn a credit for each $1,300 in income. In other words, you can maximize your earned work credits for the year if you generate $5,200 in income.
Because of inflation, the amount that workers need to generate to earn a lifetime work credit rises most years. Last year, it rose $40 per credit to $1,300 from $1,260 in 2016. It appears likely to increase again in 2018, but the increase is probably going to be modest. Nevertheless, working part-time for 10 years should, at minimum, allow you to qualify for retirement benefits.
5. The maximum monthly payment should adjust upward
Finally, there's a pretty good likelihood that the maximum monthly Social Security benefit at full retirement age is going to head higher in 2018. In 2017, the maximum monthly payment at FRA is $2,687, which was up $48 a month from 2016.
However, the maximum monthly payment isn't something too many folks have to worry about. Roughly 60% of retirees claim benefits before reaching age 65, which means a majority of retirees are receiving less than 100% of their full retirement benefit. What's more, a person would have to work a minimum of 35 years, and earn at least the maximum earnings cap amount in those years, in order to have a shot at the monthly maximum benefit.
In just over two weeks, seniors and workers will have a clear grasp on what to expect from Social Security in 2018, so mark those calendars.