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The big news for Social Security in 2018 is a small pay hike for the program’s 61 million beneficiaries. The average monthly payment will go up by 2 percent: from $1,377 to $1,404 next year.
It’s not much—and, worse, not everyone will see that extra money in their check because of the way deductions for Medicare premiums are taken (see more on this below). But it’s noteworthy because it represents the first significant cost-of-living adjustment (COLA) since 2012, when there was a 3.6 percent hike. Last year, seniors got just a 0.3 percent increase, and there was no raise at all in 2016.
“Any cost-of-living adjustment is welcome if you’re on a fixed income,” says Jonathan Peterson, author of “Social Security for Dummies” (For Dummies, 2012). “But this one doesn’t amount to much. For millions of people, the price of necessities like healthcare and prescription drugs is rising a lot faster than 2 percent.”
Other changes to Social Security are on the horizon for next year as well—small but significant tweaks that could affect you, no matter what your age. That makes now a good time to understand the intricacies of how this important program works, so you will be able to make the right planning and claiming decisions.
A 2017 survey by The Nationwide Institute found that 91 percent of people don’t know what factors determine the maximum payout they can receive—a lack of awareness that can cost you big bucks if you file for benefits earlier than necessary. Today almost two-thirds of retirees rely on their monthly check for at least half of their income, and for about for a third, it represents 90 percent or more.
To avoid making claiming mistakes, pay attention to these Social Security changes taking place next year:
If You’re on Medicare, You Probably Won’t Get Much of a Benefit Increase in 2018
Even though Social Security payments will rise next year, much of that will be offset by increased Medicare premiums (Part B premiums are typically deducted from Social Security checks.)
“About 70 percent of Social Security beneficiaries on Medicare will only see an increase of about 2 dollars in their monthly check,” says Dan Adcock, a policy expert at the National Committee to Preserve Social Security and Medicare (NCPSSM), an advocacy organization in Washington, D.C.
The remaining 30 percent who don’t pay Part B premiums will see that 2 percent increase starting in January. This group includes people brand-new to Medicare, retirees whose premiums are covered by workplace plans, and low-income seniors who collect both Medicare and Medicaid.
The Full Retirement Age Is Shifting Closer to 67
People born in 1956 will be eligible to collect early Social Security when they turn 62 in 2018, but they will need to wait until they are 66 years and 4 months before they’re eligible for the full benefit. That’s up from 66 years and 2 months for those born in 1955. (For the past several decades, the age for full benefits, which had been 65, has been inching up in two-month increments and will continue to do so until it reaches 67. To find your full retirement age, use this Social Security Administration chart.)
Many advocates for seniors advise waiting until at least full retirement age before claiming Social Security. You can start collecting as young as 62, but you’re penalized for doing so. “If you start collecting early, you permanently reduce your benefit,” says Kathy Stokes, an adviser at AARP.
By holding off until full retirement age, you are ensured that you will get the full payout. Delaying beyond that, up until age 70, has additional advantages: Your Social Security check will increase by 8 percent annually. “Not everyone can do that, but if you can, it can be a very smart option,” Stokes says.
A caveat: There are some circumstances where people actually maximize their benefits by claiming early. For instance, someone with a terminal illness who doesn’t expect to live much beyond full retirement age should start to collect as soon as possible. And there may be certain financial reasons as well, such as having dependent children who can also collect benefits. Talk to a financial planner if you think you’re in that group.
If You Earn More, You’ll Pay Slightly More Into the Program
Employees will continue to pay a 6.2 percent Social Security tax, but the amount of income subject to that tax is going up. This year, workers paid into program until they reached the so-called “earnings cap” of $127,200. That cap is increasing to $128,400 in 2018. (Earnings beyond that cap are not subject to Social Security tax.) As a result, an estimated 12 million people will pay higher Social Security taxes. According to the SSA, almost 20 percent of workers are projected to have earnings above the taxable maximum for at least one year of their working life.
A Few High Earners Will See Their Payouts Increase
The amount of money you collect in Social Security is determined by your lifetime earnings: Simply put, the more you’ve paid into the system, the more you will be able to collect. For high earners who enrolled in the program at full retirement age, the maximum benefit will increase by 3.7 percent, from $2,687 a month, or $32,244 a year, to $2,788 a month, or $33,456 a year. But only a handful of people are eligible for the maximum payout: The average Social Security benefit in 2018 will be $16,848 for the year.
If You Filed Early but Are Still Working, You Can Keep a Bit More of Your Benefit
If you’ve claimed Social Security before full retirement age and you’re still working, you can earn a little bit more without a penalty in 2018: up to $17,040 from $16,920 last year. After you hit that amount, you lose $1 in benefits for every $2 you earn. The earnings limit is $45,360 for those reaching full retirement age in 2018, but once you reach your full-retirement-age birthday, the penalty no longer applies.
Those earnings aren’t lost permanently. When you arrive at full retirement age, your benefits will be adjusted to account for the number of months you lost some or all of those payments, so you can eventually catch up.
Younger People Should Plan Now for Possibly Lower Benefits
Social Security is not addressed in the tax bill that’s moving forward in Congress, but there is one aspect of the proposed reform that is troubling advocates for older Americans. Currently, Social Security uses one version of the consumer price index, known as the CPI-W, to calculate cost-of-living adjustments each year. The proposed tax bill uses a different, more stringent version—called the Chained CPI—that yields a lower rate of inflation.
Adcock of the NCPSSM says that if the tax bill passes, that alternate version of the CPI may become the standard and ultimately be used to calculate COLAs for Social Security. “The end result is that seniors could end up getting even lower cost-of-living increases in their benefits in the years ahead,” he says.
What’s more, advocates are concerned that when lawmakers start to focus on reducing the massive federal debt, cuts in spending may be necessary and programs like Social Security could end up on the chopping block. That’s why it’s important for younger workers to save for a retirement where Social Security isn’t as secure a safety net as it is now.
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