During the campaign debates leading up to the 2016 election, Social Security was a hot topic. No matter where we fall on the political spectrum, it’s safe to say that we’re all interested in the future of the program. After all, Social Security benefits are available to all Americans once they reach retirement age.
While the long-term future of the program remains unclear, definite changes to the program for the year 2017 were released by the Social Security Administration (“SSA”) in 2016. People of all ages, from all income brackets, and with all different types of retirement savings strategies should be aware of the changes.
Here is a breakdown of the changes to Social Security that took effect starting in 2017:
1. Full retirement age will increase: This one isn’t much of a surprise. That’s because it had been over three decades since Congress passed legislation to change the full retirement age — the age at which you become eligible for 100% of your monthly benefit. Retirees born in 1955, however, may have been surprised in 2017 if they decided to file for early benefits at age 62. Why? Beginning in 2017, the full retirement age increased by two months for those born in 1955, to 66 years and 2 months. This two-month increase continues with each successive year, meaning that retirees who file for early Social Security benefits could see a bigger reduction in their monthly benefit than their predecessors. The flip side is that higher-end benefits — which stop accruing by age 70 — will no longer max out at 132% of the full retirement age benefit. Instead, 2017 began a new cap somewhere between 124% and 132%.
2. The maximum monthly benefit will increase: Even though your monthly benefit is based on your individual earnings history, there is a cap on how much Social Security anyone can receive each month. For 2016, the maximum benefit for an individual retiring at age 66 was $2,639. In 2017, that amount increased to a maximum of $2,687—a bump of $48 per month. This modest increase may not seem worth noting, but it amounted to an annual increase of $576. For retirees who depend on Social Security as their main source of income, this bump is a welcome change to the decrease in the maximum amount that happened from 2015 to 2016. In 2021, the maximum monthly benefit went up to $3,113.
3. Folks are getting a (small) raise: Many seniors wince each year that passes without a cost of living adjustment (“COLA”) to their benefits. News on the COLA for 2017 was a mixed bag. The good news was a COLA adjustment for 2017; the bad news is that it was the smallest increase on record. According to the SSA's press release, the COLA rose by 0.3%. From estimates provided by the SSA, the average retired worker would receive $1,360 a month, equating to a $5 monthly increase from 0.3% COLA. But, every little bit counts, right?
4. You’ll have to work a little harder to earn your benefits: What does this mean? Americans need to work throughout their lives to guarantee Social Security benefits later in life. The figure that workers shoot for is 40-lifetime work credits. These credits are calculated based on our yearly earnings and we are eligible to earn four credits each year. In 2016, in order to earn the maximum four Social Security work credits, a worker needed to earn at least $5,040 (which translates to $1,260 per work credit). This threshold for credits increased to $5,200 for 2017, meaning individuals will have to earn an extra $160 for the year to secure all four work credits. For 2021, individuals have to earn $1,470 for each credit, to a maximum of $5,880 for the four credits.
5. Early retirees will see an increase in withholding thresholds: Perhaps not a well-known fact is that retirees who take early retirement benefits are subject to a reduction in benefits if they choose to continue working. For example, in 2016, retirees who took early benefits would have $1 in benefits withheld for each $2 in earned annual income over $15,720. In 2017, this threshold was higher. Early retirees could earn up to $16,920 a year before any withholdings began to kick in. For 2021, the maximum you can earn annually before deductions kick in is $18,960.
6. Wealthier individuals will pay more into the program: All working adults make contributions to the Social Security fund by way of payroll taxes. Generally, the payroll tax has been 6.2% each for employers and employees for income between the brackets of $1 to $118,500 (for a total tax of 12.4%). For income earned above $118,500, there was no Social Security tax. Under this formula, about 90% of Americans were paying tax on all of their earned income. The remaining 10% were paying a much smaller percentage of their earned income because they made more than the $118,500 limit. For 2017, we saw a change in this upper-limit cap. The high-end taxable amount increased to $127,200, meaning that more wealthy workers paid more towards Social Security than in 2016. For 2021, the income amount increased to $142,800.
7. Disability thresholds will increase: Social Security benefits are synonymous with retirement, but they are also available to individuals who are disabled and unable to work. In 2016, non-blind disabled individuals had to earn $1,130 or less per month to be considered for disability income from the SSA. The figure for the blind was $1,820 a month. For 2017, these thresholds got a boost: non-blind disabled persons could earn an extra $40 a month, or $1,170, and still qualify for benefits from the SSA. Meanwhile, individuals who are blind saw an increase of $130 a month, bringing their threshold up to $1,950. In 2021, the income threshold for non-blind individuals went up to $1,310 and for blind individuals it went up to $2,190.