There are some important changes in Social Security for 2018 that may have an impact on your financial plans. Social Security remains an integral part of retirement planning, and for many Americans, represents a substantial portion of their retirement income. Today, we will take a look at some of the changes for 2018.
Increase in Benefits
In case you haven’t heard, Social Security benefits will increase by 2 percent in 2018, which happens to be the most substantial cost of living adjustment since the early part of this decade.
Cost of Living Adjustments
For many people, most, if not all, of the cost of living adjustment will go toward increased Medicare Part B premiums. For new Medicare Part B enrollees, the premium was $134 in 2016 and 2017.
Social Security has a rule known as the “hold harmless” rule, which prevents an increase in Part B premiums from causing a reduction in a recipient’s Social Security benefit. Therefore, the cost of living benefit increase this year means an increase from the roughly $109 in Part B premiums many Social Security recipients have paid in the past, according to the Center for Medicare and Medicaid Services.
Increase in the Maximum Benefit Payable
It’s pretty easy to see that the more you pay in, the more benefits you may receive. There is a limit on what anyone may receive because Social Security has an earnings cap on the annual amount of earnings that may be taxed. This cap goes up a little most years and is based on increases in the national average wage index.
In 2017, Social Security increased the cap from $118,500 to $127,200, a 7.3% increase. As a result of the increase in 2017, those who are fortunate to be higher earners have seen an increase in the maximum Social Security benefit possible from $2,678 a month to $2,788 a month at Full Retirement Age, which represents a 3.7% increase from 2017. The average benefit paid by Social Security in 2018 is $1,372 per month, so not very many people are affected by this change. By the way, your Social Security benefit is calculated based on the highest 35 years of earnings. If you are earning more as you get closer to retirement, you are replacing the lower earning years with higher earning years that will be used in the highest 35 years to calculate your Social Security benefit.
Reduction in Benefits While Working
Did you know that if you are still working and claim your Social Security benefits before Full Retirement Age (FRA), your benefits are reduced if your income is above a certain level? To learn more about your FRA, you can visit the Social Security Administration website for more details.
If you are younger than 66 in 2018, you can earn up to $17,040 in 2018 without having a reduction in benefit Anything over that income amount and your benefit will be reduced by $1 for every $2 over the income limit of $17,040.
If you turn 66 in 2018, the reduction in your benefits is relaxed. In this latter case, you are allowed to earn up to $45,360 without losing any of your Social Security benefits. If you’re earning over that amount, then your benefits are reduced by $1 for every $3 over the limit of $45,360 until you reach your birthday. The good news is there is no reduction in benefits once you reach your FRA.
Increase in Taxable Earnings
Social Security is funded by a tax paid on earned income imposed by the Federal Income Contributions Act (FICA). The tax rate of 6.2 percent remains the same for 2018.
In 2017, workers only had to pay Social Security tax on the first $127,200 of earned income. In 2018, workers will pay tax on the first $128,400 of income. This will result in an increase in the payroll tax of $74.40 for a person with an income of $128,400 in 2018. The increase in 2018 is substantially less than the 7 percent increase in the earnings cap imposed in 2017.
Higher Medicare Premiums
If you earn a high income in Medicare Part B, you will have to pay more for your Medicare Part B premiums in 2018.
If you are an individual with Modified Adjusted Gross Income (MAGI) between $133,500 and $160,000, your total premium will increase from $267.90 a month to $348.30 a month.
For couples with MAGI above $428,000, the combined Part B premium will be $10,286.40. The surcharges are based on MAGI reported on your 2016 tax return.
Conclusion
There are some skeptics out there who believe we just can’t count on Social Security in the future, perhaps justifiably so. It has been known for some time that the Social Security Administration is projecting that future benefits will be reduced to around 77 percent of the current benefit beginning in 2034. While this news may be troubling, it’s not the first time Social Security has faced similar issues. In 1983, Congress made some changes that gradually increased the FRA from 65 to 67, and started taxing benefits above certain levels of income. I believe the good news is that Congress will act in the future to make similar changes to ensure Social Security will be viable for future generations.
Making good decisions about Social Security is crucial because, for so many people, it represents a major portion of their retirement income. Fortunately, there are a number of good strategies available to enhance your benefits. We love to help people get the most out of their Social Security benefits, so give us a call and let’s talk.
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