Though debatable, Social Security can be called the most important social program in the United States. As of August, 61.5 million people were receiving benefits and more than 42 million of those folks were retired workers. Many of these retired workers -- 62% to be exact -- count on their monthly stipend from the Social Security Administration (SSA) for at least half of their income.
Social Security in 2018 could look a bit different
Put plainly, there's no more important time of the year for Social Security beneficiaries than mid-October. You see, in mid-October, the SSA announces its annual changes to Social Security. Just as the U.S. economy isn't static, neither are the payment, tax, and qualifying guidelines that are tethered to Social Security. With the SSA releasing its adjustments this past week, let's take a look at the seven biggest changes to Social Security in 2018.
1. Social Security beneficiaries are getting a raise
Make no mistake about it, the headline figure that everyone's been waiting for is now known, thanks to the release of the Bureau of Labor Statistics' September inflation data. In 2018, Social Security beneficiaries will receive a 2% cost-of-living adjustment (COLA). While that may not sound like much -- it works out to about $27 more a month for the average retired worker -- it's actually the best inflationary increase we've seen in six years.
If you're looking to send a thank you card for the increase, don't. Hurricanes Harvey and Irma, which shut down refineries and drilling platforms and were responsible for pushing gas prices higher by 6% in August and 13% in September, are wholly responsible for pushing inflation higher during the third quarter. The average inflation reading from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is the tether used to calculate inflation for Social Security.
Also, don't break out the champagne on account of a 2% raise. A majority of recipients may actually see little or no raise at all. If you're enrolled in Medicare and have your Part B premiums (outpatient services) deducted from your monthly Social Security stipend, and you've been protected by the hold harmless clause in recent years, you're liable to have some, or all, of your raise eaten up by Medicare. Hold harmless is the clause that ensures Part B monthly premiums don't rise at a quicker annual pace than Social Security's annual COLA.
2. The maximum monthly payout rose quite a bit
How about more good news? Should you have earned enough throughout your lifetime to qualify for the maximum monthly benefit at full retirement age, you can expect a pretty sizable jump in your monthly payout in 2018. According to the SSA, the maximum payout at full retirement age -- the age at which you become eligible to receive 100% of your monthly payout -- will increase $101 a month, to $2,788 a month, next year.
When calculating your payout, Social Security takes into account your length of work history and earnings history. In particular, it accounts for your 35 highest-earning years. This better-than-$1,200 annual increase is for retired workers who were able to earn more than the maximum taxable earnings cap -- the point at which payroll taxes on Social Security cease -- every year for at least 35 years.
The downside is that not too many people are going to be dancing in the aisles for this increase. Just one in 10 Americans tend to earn more than the maximum taxable earnings cap each year, and it's difficult to do so for a period of 35 years.
3. Wealthy Americans will owe a little bit more in 2018
The average working American is likely to be thrilled to find out that wealthier Americans will be paying a bit more into Social Security next year. In 2017, workers were required to pay a 12.4% payroll tax into Social Security on earned income between $0.01 and $127,200. This $127,200 figure is what's known as the "maximum taxable earnings cap." Next year, it'll be rising to $128,700, an increase of $1,500.
There is, however, a pretty big exception that folks should be aware of. If you're employed by someone else, the company you work for usually covers half of your Social Security responsibility (6.2%). This means most Americans typically pay 6.2% of their earned income between $0.01 and the maximum taxable earnings into the Social Security program.
Nonetheless, wealthy individuals who earn up to $128,700 can expect to owe an extra $93 in tax, at minimum, next year. Income earned above and beyond $128,700 will remain untouched by Social Security's payroll tax.
4. The full retirement age is on the rise
Something you won't find in the SSA's Social Security changes release, but which is nevertheless extremely important, is the fact that the full retirement age is rising in 2018. Next year, newly eligible retirees who were born in 1956 will have to wait until they're 66 years and four months old before they'll be able to receive 100% of their monthly retirement benefit. That's a two-month increase from 2017 for those born in 1955.
For those not familiar with the way Social Security claiming works, you become eligible at age 62, with your benefits growing by 8% annually until age 70. In other words, the longer you wait to claim, the more you'll get. Your full retirement age is your 100% payout. If you claim at any point between age 62 and a month before your full retirement age, your benefits will be permanently reduced. If you lay claim to your benefits at any point after your full retirement age, you can actually earn more than 100%.
Don't know your full retirement age? This handy table from the SSA tells all.
5. Withholding thresholds for early filers will climb, once again
One aspect of Social Security you may not realize is that if you enroll prior to your full retirement age and you're still working, the SSA can withhold part, or all, of your benefits based on how much you earn per year. In 2017, early filers who were under the full retirement age and had earned income over $16,920 a year ($1,410 a month) would have $1 in benefits withheld for every $2 in earned income over $16,920. For 2018, this threshold is inching up by $10 a month, or $17,040 annually.
We're also going to see a similar change made for those folks who claim Social Security during the year they're set to reach full retirement age, but aren't there yet. In 2017, $1 in benefits could be withheld for every $3 in earned income over $44,880 ($3,740 a month) if you haven't yet reached full retirement age, but will do so late this year. Next year, this threshold is set to increase by $40 a month ($3,780), to $45,360 annually.
It's also worth noting that if the SSA withholds your benefits and keeps you from double dipping between Social Security income and working wages, you don't lose your benefits forever. Once you cross full retirement age, you'll get them back in the form of a higher monthly payout.
6. Disability income thresholds inch higher
If you receive disability income from Social Security, you're also in line to see a small bump up in what you can earn each month and still qualify for disability payments. Remember, Social Security isn't just for retirees. More than 10 million people qualify for monthly disability payments from the SSA.
According to the SSA's press release, folks who aren't blind will see their maximum monthly threshold increase by $10 a month, to $1,180. Meanwhile, legally blind folks can earn up to $1,970 a month, a $20 per-month increase over 2017. If non-blind or blind people receiving Social Security disability cross these thresholds in monthly earnings, their benefits can be stopped.
7. Qualifying for Social Security got incrementally harder
Last, but not least, it's going to be just a tad bit harder for working Americans to qualify to receive Social Security benefits when they retire.
First of all, no, you're not automatically given Social Security as a U.S. citizen. In order to qualify, you have to earn 40 lifetime work credits, of which a maximum of four can be earned annually.
In 2017, you were able to earn a lifetime work credit for every $1,300 in earned income. Therefore, $5,200 in earned income was enough to max-out your coverage credits for the year. As we head into 2018, it'll now require $1,320 in earned income per lifetime work credit, or $5,280 for the full year.
Big changes are afoot for Social Security, so make sure you're in the know!
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