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Are These Social Security Surprises Coming in 2016?

By Dan Caplinger - Jan 10, 2016 at 7:22AM

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After a tough 2015, is more bad news coming for Social Security this year? Find out.

Image source: Hermanturnip via Flickr.

A lot of things happened to Social Security in 2015, with some like the elimination of the file and suspend and filing as a spouse first strategies coming as a shock to many of those planning for their retirement. Some expect even more surprises for Social Security in 2016, thanks to typical election-year posturing among elected officials, and although some of those changes might be beneficial for retirees, others could be problematic. Here are three potential Social Security surprises that could come this year.

Higher benefits for low-income workers
For years, the debate over Social Security has centered on how to cut back on benefit outlays in order to keep the system financially sustainable. Yet in 2015, those who favor expanding Social Security finally made their voices heard, and they proposed a number of initiatives that could lead to at least some benefit recipients getting bigger Social Security checks.

Some proposals center on boosting benefits for surviving spouses as well as those who have taken extensive periods of time out of the workforce in order to care for family members. Others would set a new minimum Social Security payout that's tied to the federal poverty level, essentially ensuring that any Social Security recipient would receive enough in benefits to get by on a subsistence lifestyle regardless of how limited their work history might have been. Along with those benefit increases would come higher taxes, and most proponents are looking at increasing or eliminating the current $118,500 wage-base cap on Social Security payroll taxes as the primary funding source for such initiatives.

The cost-of-living adjustment debate will heat up
One catalyst for discussions about a broader increase in Social Security benefits was the lack of a cost-of-living adjustment for 2016. The zero COLA came about due to flat to downward moves in the Consumer Price Index, which in turn fell because of the plunge in energy prices throughout 2015.

Some believe that seniors need a one-time payment in order to get over the financial hardship of having no COLA this year, with Sen. Elizabeth Warren proposing a $580 check for current Social Security recipients. Yet discussions about a one-time payment to replace COLAs so far haven't resulted in any action.

That could change in 2016, especially if it came along with legislation to change the way in which Social Security calculates COLAs. Some believe that measures of inflation that would result in smaller COLAs in the future are more accurate, while others point to measures that focus on senior-specific expenses as being more appropriate and providing potentially larger benefits. Regardless of which positions end up winning the day, the potential for change in the cost-of-living adjustment structure has never been greater.

The return of private accounts?
Finally, some proposals have brought back an idea with a long history: privatization of Social Security. By diverting payroll taxes away from the regular Social Security system and allowing people to invest what's withheld from their paychecks in a way that resembles what some other countries around the world do, proponents of private accounts believe that the shift will give workers more ownership over their retirement benefits and allow them to take steps to invest that the current Social Security system doesn't allow.

Opponents of private accounts point to the shift from private pension plans to 401(k)-style defined contribution plans as a key reason not to make changes to Social Security. By shifting the burden of investing successfully onto retirees, private accounts arguably leave retirement benefits at the mercy of the financial markets. Nevertheless, with the concepts involved at the core of the fundamental differences between the two major political parties, you can expect to see proposals on both sides of the debate in 2016.

Social Security will be front and center in the consciousness of Americans in 2016, and there's a good chance that surprises like we saw last year could show up in the Social Security system at some point. Those who rely on Social Security need to keep on their toes to make sure they don't get blindsided by an unexpected change to their benefits.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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