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News on Social Security Benefits

Posted by on November 3rd, 2015

The Social Security Administration (SSA) recently announced some important news. Rumors about a benefits freeze had surfaced in the summer. Finally, on October 15, the SSA formally announced that the consumer price index it uses to gauge inflation wasn’t high enough to trigger cost-of-living adjustments (COLAs) for the upcoming year. Although the announcement is generally good news for higher income individuals in the workforce, it’s bad news for retirees and others who receive Social Security benefits.

Here’s a quick rundown on seven key developments involving Social Security benefits for 2016.

1. Retiree Benefits

It may come as a shock to some people living on a fixed income, but there won’t be any increase in their monthly benefits next year without the usual COLA. That fate was decided by the consumer price index for Urban Wage Earners and Clerical Workers. It’s only the third time that the SSA hasn’t increased monthly benefits since the COLAs were implemented in 1975. (The other two occurred in 2010 and 2011.)

Based on information provided by the SSA, the average monthly benefit for retirees is expected to be $1,341 in 2016. Retired couples where both spouses are eligible for benefits are expected to receive an average monthly benefit of $2,212 in 2016.

2. Wage Base

The SSA limits the amount of earnings that are subject to the Old-Age, Survivors, and Disability Insurance (OASDI) tax in a given year. This threshold is referred to as the Social Security “wage base.” For 2016, the wage base will remain at $118,500, the same as in 2015.

Workers will continue to be taxed at the 6.2% OASDI tax rate on wages up to this base amount. Thus, an individual with wages equal to or above $118,500 would contribute only $7,347 to the OASDI program in 2015 and 2016, and his or her employer would contribute the same amount.
However, workers must pay the 1.45% rate for Health Insurance (HI) tax on all wages, similar to paying state and federal income tax. In other words, a worker will pay a combined 7.65% Social Security tax rate on the first $118,500 of wages and only 1.45% on wages above that threshold in 2016. The wage base for self-employment tax remains the same as the Social Security wage base.
Important note: The OASDI and HI tax rates for self-employed individuals are doubled; however, these taxpayers can deduct half of these employment tax payments on their federal income tax returns.

3. Earnings Test

The Social Security program allows workers to start receiving benefits as soon as they reach age 62 — or to put off receiving benefits until age 70 1/2.

“Full retirement age” (FRA) is the age at which individuals become eligible to receive 100% of their Social Security benefits. Those born in 1942 or before were eligible for full Social Security benefits at age 65. For those born between 1943 and 1960, full retirement age increases incrementally until it reaches 67. For example, individuals born in 1955 can receive 100% of their benefits at age 66 years and 2 months.

Starting Social Security benefits before reaching your FRA brings into play the so-called “earnings test,” which limits the amount you can earn while collecting Social Security retirement benefits. As with the wage base, these limits won’t change in 2016.
If you’re under the FRA, the limit is $15,720. This means that for every $2 over this limit, you must forfeit $1. For individuals who reach the FRA age of 66 in 2016, the earnings limit is $41,880 for the months before you reach your FRA. In this case, $1 must be forfeited for every $3 over the limit. Starting in the month you reach your FRA, your Social Security benefits won’t be reduced no matter how much you earn.

4. Maximum Benefits

The maximum possible Social Security benefit available to someone who reaches the FRA in 2016 will be $2,639 per month, down $24 from a high of $2,663 in 2015. A decrease in full maximum benefits occurs when there’s no COLA for the year, but there’s still an increase in the national average wage index used for this purpose.

5. Medicare Premiums

Generally, retirees who already receive Social Security benefits will continue to pay the same Medicare Part B monthly premiums in 2016 as they did in 2015. Legally, Medicare Part B premiums can’t increase faster than Social Security payments for most existing beneficiaries. However, a retiree who first signs up for Medicare Part B in 2016 as well as certain high-income Medicare beneficiaries may be forced to pay higher monthly premiums than those already enrolled in Social Security.

6. Tax on Benefits

Even though you’ve worked your entire life to become eligible for Social Security retirement benefits, you still may have to pay federal income tax on part of those benefits. You’re liable for tax if your provisional income — the sum of your adjusted gross income, tax-exempt interest income and one-half of the Social Security benefits received — exceeds the first tier of $25,000 for a single filer and $32,000 for a joint filer. A greater portion of benefits is taxable if your provisional income exceeds a second tier of $34,000 for single filers and $44,000 for joint filers. These two tiers are not subject to COLAs.

7. SSA Services

Finally, the SSA is continuing to explore ways to improve its online services. You can already create a “My Social Security” account that provides estimates of benefits at various ages, as well as other functions, such as enabling you to adjust your direct deposit information.

After years of cutting back, the SSA also expanded its field operation hours last March. But note that most SSA offices still close their doors to the public at noon on Wednesdays to give its employees a chance to catch up on their paperwork.

Is there more to come for Social Security in 2016? It’s possible. We’ll keep you updated on any other significant new developments during the year.

Copyright © 2015 Thomson Reuters/PPC