One of the great things about the Social Security retirement benefit is that is pays you each month for as long as you live and it has a Cost of Living Adjustment each year to keep pace with living expenses. Recently announced changes to Social Security could mean an increase in retirement benefits for many in 2018.
Social security increase for 2018
On Friday, October 13, the Social Security Administration announced the annual Cost of Living Adjustment (COLA) for monthly benefits would be 2 percent starting in January of 2018. This is the largest increase in retirement and survivor benefits for workers and their families since 2012.
The average retirement benefit will increase by $27 per month to $1,404 per month next year. The maximum benefit for someone who retires at full retirement age in 2018 will be $2,788 per month, compared to $2,687 per month this year.
The 2018 COLA marks the first significant increase in Social Security benefits in several years following a modest 0.3 percent hike this year and no increase in 2016.
For some beneficiaries, their Social Security increase may be partially or completely offset by increases in Medicare premiums next year. However, individuals receiving both Medicare and Social Security will not experience a rise in premiums if the Social Security COLA is not enough to cover the increase in premiums thanks to a “hold harmless” rule.
To qualify as “held harmless” in 2018, beneficiaries must receive Social Security in November and December this year and have their Medicare premiums deducted from their Social Security check. They also must not earn enough money to qualify for Medicare’s income-related monthly adjustment amount, or IRMAA.
We won’t know exactly how the math works out until the new Medicare premiums for 2018 are announced later this year.
Social security earnings limit
Individuals who claim any type of Social Security benefit before their full retirement age — including retirement and survivor benefits — are subject to earnings restrictions if they continue to work while receiving benefits. The earnings restrictions, which will increase in 2018, apply only to wages and net self-employment income, not pensions, withdrawals from retirement accounts, interest, dividends or other investments.
In 2018, beneficiaries who are under full retirement age for the entire year would lose $1 in benefits for every $2 earned over $17,040 in 2018 compared to $16,920 in 2017.
There is a higher limit in the year someone turns 66. During the months preceding their birthday, they can earn up to $45,360 per year without losing any benefits in 2018. That compares to $44,880 per year in 2017. If they earn more than the limit, they will forfeit $1 in benefits for every $3 earned over that amount.
The earnings restrictions disappear once a beneficiary reaches full retirement age, meaning they can earn any amount of money without losing any Social Security benefits. And, at full retirement age, benefits will increase to account for benefits withheld prior to full retirement age.
Social security wage limit
Workers are also affected by the inflation adjustment. Some will pay higher payroll taxes next year as the maximum taxable wage base increases to $128,700 in 2018, up from this year's maximum taxable wages of $127,200 per year. Of the estimated 175 million workers who pay Social Security taxes in 2017, about 12 million employees will pay more payroll taxes next year because of the increase in the taxable maximum.
Employers and employees each pay 7.65 percent of earnings up to the taxable wage base to fund Social Security and Medicare. Self-employed individuals pay a combined rate of 15.3 percent. The 1.45 percent Medicare portion of the payroll tax applies to all wages, even those above the maximum wage base. High-income workers also pay an additional 0.9 percent on earned income above $200,000 for individuals and $250,000 for married couples filing jointly to fund Medicare.
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Are you wondering what your Social Security might look like? Wondering how best to maximize your total Social Security benefits over your lifetime? Dunncreek Advisors provides a free assessment of your Social Security situation and can help formulate a strategy to get every dollar to which you are entitled. Contact my office at firstname.lastname@example.org. I am happy to talk with you about your Social Security strategy.
Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.