Growing up, my father always told me to save as if Social Security wouldn't be around when I retired. At the time I didn't know (or care) much about what he was saying, but as an adult, his advice has served me well.
However, those who assume that Social Security won't be around in 30 years completely miss how important the program is to the vast majority of Americans.
Social Security is the primary source of income for American retirees. A 67-year-old who retires now and earned an inflation-adjusted $50,000 per year during their career will collect about $16,700 in benefits per year. To give you an idea for how big of a deal that is, consider that this same retiree would need a nest egg worth roughly $420,000 to safely make such yearly withdrawals, using the 4% rule.
Therefore any changes in Social Security are more important than you may realize. Here are the four biggest story lines retirees need to be aware of in 2016 when it comes to Social Security.
1. No cost-of-living-adjustment (COLA)
In order to ensure that Social Security payouts keep up with inflation, retirees' monthly checks are sometimes adjusted at the start of the year. The amount of the increase is based on the third quarter's Consumer Price Index (CPI-W).
But for only the third time since 1975, the CPI-W showed no increase; there was actually a slight decrease between 2014 and 2015. It's hard to tell what could happen between 2015 and 2016, so there's little use in speculating. That said, based on the October 2015 CPI-W data (the most recent available), the COLA isn't showing signs of growing anytime soon.
2. No more "file and suspend" payouts for spouses
In the past, there's been a loophole that allowed married individuals to claim spousal benefits before their spouse even started to collect their own monthly Social Security checks.
With the file and suspend strategy, the primary earner in a household would file for Social Security, thus allowing the spouse to start collecting, and then immediately suspend their own payments. This would allow the breadwinner's monthly payout to continue growing up until age 70 while their spouse collected benefits based on the breadwinner's earnings record.
When Congress passed its budget in late 2015, the loophole was closed. Starting on May 1, 2016, spouses can only receive spousal benefits if the primary breadwinner is also receiving a monthly check.
3. Debate about future funding?
Let's go back to my dad's warning. While it's smart to save as if Social Security will soon be no more, the fact remains that it's unlikely to disappear. Even though the Social Security Trust for Old Age and Survivors-Insurance (OASI) is predicted to run dry sometime between 2034 and 2038, even if no changes were made, payments would continue -- albeit at a level roughly 25% lower than today's.
That's because the Social Security taxes you and I pay right now will go directly to paying benefits for today's retirees. In their 2015 Annual Report, the Social Security and Medicare Board of Trustees came to the conclusion that if the government wants to continue providing full benefits, then lawmakers need to take action now.
Sadly, that's unlikely to happen in 2016: We're in a presidential election cycle, so many politicians are waiting until after November to open this can of worms. However, given that retirees and near-retirees comprise a huge and politically active segment of the U.S. population, legislators have plenty of incentive to make at least patchwork changes to Social Security and Medicare when it comes down the wire.
4. Here's what payouts are predicted to look like
Below, I've compiled a list of what the estimated average annual benefit will be for recipients of Social Security based on different life situations. These numbers come from the Social Security Administration's January 2016 projections and are multiplied across 12 months.
No matter how you slice it, Social Security matters. Retirees and nonretirees alike would benefit from keeping an eye on any potential changes that could crop up in the year ahead.