Social Security Administration recently announced 2018 Social Security COLAs (cost of living adjustments) and other benefits. The 2018 COLA will be 2.0% for 2018. That's the largest since 2012. In July, the Social Security Board of Trustees estimated a 2.2% COLA for 2018. The Social Security Administration says that COLA increase applies to over 65 million recipients.
Sadly, for 70% of those consumers, the extra income from the Social Security COLA is lost to an increase in Medicare premiums. That rule is the “hold harmless' provision. It states that the rise in Medicare premiums cannot cause a decrease in the Social Security check. Since there was no COLA in 2016 and a minimal increase in 2017, the increase in Medicare premiums would have caused a decrease in their Social Security. So nothing changed for them.
This year, however, will be different. Medicare premiums for 2018 have not announced. Even though the increase did not apply to the 70%, premiums went up from $109.00 to $134.00. If they stay at that level for 2018, the increase in Social Security will be wiped out by the higher Medicare premiums from the prior years. For a more detailed discussion of Medicare, read this article from Forbes, Gotcha! Social Security Benefits Rising 2% In 2018, But Most Retirees Won't See Extra Cash.
How the COLA determined
The Social Security COLA is calculated based on the Consumer Price Index (CPI-W) increase from the third quarter of 2016 to the third quarter of 2017. They announce those changes in October of each year for the following year. There is much discussion on whether the CPI-W is the correct measure to use in the calculation. According to the Bureau of Labor Statistics‘ (the agency responsible) website, the CPI-W index is meant to “track retail prices as they affect urban hourly wage earners and clerical workers.” The CPI-W covers around 37% of the workforce.
The CPI-U, on the other hand, is “a more general index and seeks to track retail prices as they affect all urban consumers. It encompasses about 87 percent of the United States' population.” One of the major criticisms of the CPI-W index used is that it dramatically underestimates healthcare costs. For senior citizens, that represents a much more significant percentage of expenses than the working population. Follow this link to the Social Security Administration page on cost of living adjustments.
Other 2018 Changes
For 2017, the maximum taxable earnings for Social Security taxation went to $127,200 from $118,500 in 2016. That's an increase of 7.3% For 20148, the maximum taxable income goes to $128,700, an increase of just 1.2%. The tax rate percentage for FICA (Social Security and Medicare) taxes remains the same at 7.65%. Social Security tax represents 6.2% up to the maximum $128,700. There is no maximum income for the Medicare tax of 1.45%.
If you earn above $17,040 and file for benefits before full retirement age (FRA), your benefits are lower. The reduction is $1 for every $2 you earn over that amount. In 2017, the earnings limit was $16,920. For boomers born between 1943 and 1954, that is age 66. If you were born in 1955 or later, your FRA gradually increases to age 67. Go to this retirement age calculator to find yours.
Download this 2018 Social Security Fact Sheet for a complete list of the Social Security changes for 2018,
The goal of this blog is to make complex financial topics easier to understand. When it comes to government programs like Social Security and Medicare, the massive amount of rules involved make it difficult to simplify. If you have further questions, free to go to my online calendar here or the box to the right to find a time to talk. I'll do my best to answer any remaining questions.
Free PDF: Will Working Longer Help - Or Hinder Your Social Security Benefit?