Image: FDR Presidential Library and Museum via Flickr.
This article was updated on April 5, 2016.
2016 is here, and for the tens of millions of Americans who receive Social Security benefits, now is a good time to review what they can expect from the program this year. New provisions that Social Security recipients need to keep in mind often take effect in a New Year, but 2016 is shaping up to be unusual in several ways. Below, you'll learn more about six key aspects of Social Security and what will happen with them for 2016.
1. No cost-of-living adjustment for Social Security benefits happened in 2016.
During most years, Social Security benefits get at least a modest increase in their monthly benefits to reflect inflation over the preceding year. In 2015, recipients got a cost-of-living adjustment, or COLA, amounting to 1.7%, which gave the typical retired worker about a $22 per month increase in their benefit. Yet for 2016, benefits stayed the same, as a drop in the Consumer Price Index meant that no cost-of-living adjustment occurred according to the Social Security Administration's existing formula.
Some lawmakers have considered adding a COLA to Social Security for 2016, arguing that the inflation metric used to calculate the COLA doesn't reflect the costs that retirees pay. That hasn't happened, and barring special legislation, though, recipients will see stagnant payments all year.
2. The maximum Social Security benefit fell in 2016.
Curiously, the combination of a lack of COLA and a rise in the national average wage index produced an unusual situation for high-income workers applying for Social Security. For 2016, the maximum possible Social Security benefit actually declined, with workers claiming Social Security at full retirement age seeing their potential payments max out at $2,639 per month, $24 less than in 2015.
Typically, maximum benefits increase from year to year, with 2015's increase amounting to $21. Yet the calculation of the maximum benefit amount depends on the relationship between wages and prices, and 2016 is one of those rare instances where that relationship has the opposite effect on the maximum.
3. Social Security taxes still max out at $118,500.
Social Security imposes a 6.2% payroll tax on earnings up to a certain maximum amount, with employers matching that with a 6.2% tax payment of their own. That maximum amount, known as the Social Security wage base, is subject to change every year, with the amount of the change determined by increases in the average wage index.
However, a provision of the law prevents the Social Security wage base from rising when there is no COLA for a given year. Therefore, 2016 has the same wage base as 2015, with up to $118,500 in earnings subject to Social Security payroll taxes.
4. It takes more earnings to earn Social Security credits.
To get Social Security benefits, you're required to have a minimum number of quarters of coverage, also known as credits. 40 credits are required for most retirees to get worker benefits, and you can earn up to four per year depending on your wages.
For 2016, the amount of earnings you need to earn one credit went up to $1,260, a rise of $40 from 2015's figure. That's a small increase, but it means that it'll take you more than $5,000 in earnings to max out your credits for 2016.
5. Earnings test figures remain the same in 2016.
Those who take Social Security early and still work can forfeit some of their benefits if their earnings exceed certain limits. Those limits won't change from 2015 levels next year.
As a result, for those who are younger than full retirement age throughout 2016, earnings above $15,720 will lead to forfeiting $1 in benefits for every $2 you earn above the limit. Those who reach full retirement age during 2016 have a higher limit of $41,880, and it takes $3 of earnings above the limit to lose $1 in benefits. Once you reach retirement age, though, you can earn as much as you want without any risk of forfeiture.
6. The benefit-calculation formula has some changes.
To calculate your benefits, a complex formula takes your average earnings and produces a primary insurance amount. This base figure is then adjusted to reflect certain factors, such as age and the type of benefit you receive.
Specifically, the formula has two "bend points." Up to the first bend point, workers get 90% of their average monthly earnings included in their primary insurance amount. Between the first and the second, that percentage falls to 32%, with only 15% of earnings above the second bend point showing up in the primary insurance amount.
For 2016, the first bend point rises $30 to $856, while the second rises $177 to $5,157. Wage inflation is to blame, with the primary insurance amount calculation not being subject to the same safe harbor as the wage base determination above.
It takes some work to keep up with Social Security's changes. Still, doing so will leave you better prepared to handle what's coming and give you the ability to manage your Social Security in 2016 more effectively.
