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In 2017, big changes are coming to Social Security, arguably the most important social program for retired workers. About five weeks ago, we took a brief look at seven of these major changes.
Topping the list was the smallest cost-of-living adjustment (COLA) on record for Social Security -- just 0.3%. Though this beats the three years since 2009 in which no COLA was granted, other costs, such as medical expenses, are rising at a much quicker pace than 0.3%. In other words, seniors are getting a small raise, but it doesn't appear to be keeping up with their actual expenditures.
We're also going to see wealthier Americans paying more into the program. The payroll earnings tax cap is rising by more than 7% to $127,200 from $118,500 in 2016. This means all wages between $1 and $127,200 will be taxable at 12.4%. For an employee earning up to $127,200 annually, this means about $539 in extra taxation each year (since employers and employees split the payroll tax down the middle), while self-employed people would owe about $1,079 extra.
Maximum Social Security retirement benefits are on the rise
For those of you who are patient, the maximum Social Security retirement benefit payable in 2017 also rose.
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As you may be aware, seniors become eligible to claim Social Security beginning at age 62. However, the longer they wait to enroll, the bigger their monthly benefit will be. Benefits tend to grow by around 8% per year that you wait (though they grow fractionally on a per-month basis throughout the year, so waiting even a month longer can raise your eventual benefit).
The basis of your monthly benefit revolves around how long you worked (the SSA averages your 35 highest-earning years into its benefit calculation), how much you earned on average during the years you worked, and when you file for benefits. The key factor here is what's known as your full retirement age (FRA) benefit. Your full retirement age is a fluid number that changes based on your birth year, and it's the point at which the SSA deems you eligible to receive 100% of your retirement benefit. For people born between 1943 and 1954, FRA is 66 years. However, beginning in 2017, the FRA is increasing, and it will continue to do so for the next couple of years. People born in 1955 will have to wait until 66 years and two months to collect 100% of their FRA benefit. You can find your full retirement age using this handy table from the SSA.
According to the SSA, maximum monthly benefits payable at age 66 are set to rise in 2017 to $2,687 a month, their second-highest ever. The maximum benefit early filers can get is rising as well. Well-to-do filers claiming at age 62 can max out their monthly benefit at $2,153 a month, up from $2,108 a month in 2016, per the SSA. However, because the FRA is beginning to move higher, the maximum accrual for waiting until age 70 is falling a bit. Instead of the $3,586 monthly maximum that could be earned by wealthy retirees in 2016, the maximum benefit payable in 2017 at age 70 is $3,538.
Below, you can see how the maximum benefits have changed over the years by claiming age.
Data source: Social Security Administration. Based on 2017 dollars. Age 62 payout based on retirement at exactly age 62 and one month. Chart by author.
Don't forget about your tax liability
As you can see, waiting to claim benefits is a powerful way to boost your maximum payout. In the end, only around 10% of seniors wait to enroll until after hitting their full retirement age, based on data culled from the SSA by the Center for Retirement Research at Boston College. Nearly a third file for benefits around their full retirement age, while the remaining 60% take a reduced benefit and file before reaching full retirement age.
For the roughly one in 10 who choose to wait, as well as those who are wealthy and are simply maxing out their monthly benefit based on their earnings history, keep in mind that Social Security benefits are indeed taxable at certain thresholds.
Individual taxpayers earning between $25,000 and $33,999 per year, and joint filers earning between $32,000 and $43,999, will pay taxes on 50% of their Social Security benefits. For those who earn beyond those levels, 85% of their Social Security benefits become taxable. These Social Security tax thresholds haven't been updated in decades, so chances are better than not that you'll owe some tax on your Social Security benefits when you retire, especially if you claim later, rather than sooner.
It's unknown whether the incoming administration will address the fact that some of these thresholds haven't been adjusted for 33 years, so for the time being, seniors earning the maximum payout or near the maximum payout should plan ahead to make their lives easier come tax time in April.
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Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.
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