Social Security income is often seen as the modest financial cushion earned by millions of Americans to provide support in retirement or in case of disability.
Over 60 million Americans are expected to receive monthly benefit checks from Social Security this year, while around 170 million workers will pay Social Security taxes to ensure that they have some government income when they need it.
But the Social Security system is an evolving animal, and the start of 2017 has already ushered in a number of changes that will impact current beneficiaries and future participants.
Here are five key takeaways about Social Security that you should be aware of as you plan for your financial future.
After two years with no additional cost of living adjustments due to low inflation, Social Security beneficiaries have been promised a modest 0.3 percent COLA bump this year. For an individual receiving $1,000 in monthly benefits, that would translate to an additional $3 in their check.
But that additional cash is unlikely to ever make it into the bank accounts of most beneficiaries. That’s because around 70 percent of Medicare beneficiaries choose to pay their Part B premiums directly through Social Security. And those premiums are set to increase by around $4 in 2017.
“It becomes a complete wash at the end of it,” said Michael Foguth, president of Foguth Financial, who specializes in retirement financial planning. “For some, it’s even a loss.”
High earners and self-employed workers may feel a financial pinch in 2017, as Social Security raises its maximum taxable earnings level.
Under current rules, workers that make less than the maximum taxable earnings must pay a 6.2 percent tax rate on those earnings. Employers pay a matching amount into Social Security until the worker’s salary reaches the maximum earnings level. Any earnings above that cap are not taxed and can’t be used to calculate Social Security payments upon retirement.
In 2017, that maximum earnings level jumped to $127,200 from $118,500. That 7.3 percent increase is the highest one-year increase in the program’s history and is the result of wage increases over the past two years.
Those who make $127,200 or more can expect to pay a total of $7,886 toward Social Security this year—an increase of $539 over the maximum contribution last year. For self-employed individuals who pay both the employer and employee portion into Social Security, that amount doubles.
It’s no secret that individuals who choose to claim Social Security benefits before reaching full retirement age can expect to see a permanent reduction in the amount they receive. For the last decade, 66 was the magic milestone to receive full benefits.
In 2017, however, the full retirement age was revised to 66 and two months for those born between January 2, 1955 and January 1, 1956—those eligible to apply for early retirement this year. And it will increase by two more months every year for the next five years, until the normal retirement age reaches 67 years old for anyone born in 1960 or later.
While two months may not seem like a big deal, when it comes to calculating your benefits, it’s important to keep them in mind so you don’t accidently reduce your eligibility. Accidently retiring at age 66 instead of 66 and two months would see their checks reduced by 1.11%. While that might not seem like much, the difference can add up over the years.
The Social Security department has a formula to calculate early retirement benefits. Benefits are reduced five-ninths of a percent for each month ahead of your full retirement age, up to 36 months. If the number goes beyond 36 months, benefits will be reduced by an addition five-twelfths of one percent per month.
There is some good news to report for those who plan to work in retirement. Last year, Bloomberg reported that 20 percent of Americans 65 and older are still in the workforce – the highest number of older Americans working since the early 1960s, when the U.S. introduced Medicare.
Many of these individuals who opt to receive Social Security benefits while still working can expect to see some important changes to earnings limits that could put a few extra dollars in their pockets.
If you are claiming Social Security benefits but will be under full retirement age for the full year (remember, that’s 66 years old for those born between 1943 and 1954, and increasing to 66 years and two months for those born in 1955), you can earn up to $16,920 for the year without seeing any reduction in benefit. That’s up from $15,720 a year. If you are earning more than that amount, you will see $1 in benefits withheld for every $2 earned.
For those who will turn 66 in 2017 to reach full retirement age, you can earn up to$44,880 in the months before your birthday month. However, if you earn more than that amount over the course of the year before you reach 66, you will see $1 withheld for every $3 in earnings.
Once you hit the month in which you reach full retirement age, your earnings will no longer reduce your benefits, no matter how much you earn.
There is also some good news for high-earners reaching full retirement age: maximum Social Security payouts climbed to $2,687 a month from $2,639 a month in 2016.
Social Security benefits are calculated based on your lifetime earnings—taking into account the earnings for the highest 35 years that you worked indexed to reflect the change in general wage levels over the years, —so your eligibility may vary. But if you were a high earner with averaged indexed monthly earnings of more than $8,843 a month, your maximum payout got a bump.
Understanding all of the changes coming to Social Security is just one piece of the puzzle you can use to create a financial plan for retirement that includes government benefits, but also your other retirement assets.