Personal Finance

5 Changes to Social Security in 2017

Social Security Card In Money

As 2017 draws near, there are several changes to Social Security that current and future beneficiaries should be aware of. While benefits aren't increasing by too much, some workers could see their Social Security tax bill rise significantly, and working beneficiaries could end up with a lot more money in their pockets in 2017. Here are the details of these and a couple of other changes to Social Security set to take effect in the new year.

Social Security Card In Money

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1. A small cost-of-living adjustment (COLA), which most retirees will not actually get

After receiving no increase to their benefits in 2016 due to a lack of inflation, Social Security recipients will be given a 0.3% COLA in 2017. For the average retired worker, who has a monthly benefit of $1,355, this translates to an increase of just over $4 per month.

However, most workers will not see an increase, thanks to rising Medicare premiums. The 70% of Medicare beneficiaries who pay their Part B premiums directly from their Social Security benefits will see their premiums rise by roughly $4, an amount completely offsetting many beneficiaries' COLA.

In other words, for the average Social Security beneficiary, the COLA will make no difference whatsoever. Individuals with higher-than-average Social Security benefits will see their checks increase by a few dollars, and those with below-average monthly benefits should see a small decrease.

2. A big Social Security tax hike for high earners

The Social Security tax rate of 6.2% for employers and employees remains the same for 2017. However, the maximum amount of earnings subject to Social Security tax is rising significantly, from $118,500 to $127,200.

For highly paid employees, this means that the maximum Social Security tax in 2017 is increasing by about $540. For self-employed individuals, who pay both the employer and employee portion, the maximum Social Security tax bill is increasing by twice that amount.

3. Full retirement age is increasing

For seniors reaching the age of Social Security eligibility over the past decade or so, full retirement age (FRA) for Social Security has been 66 years old. In 2017, however, full retirement age will begin to increase for eligible beneficiaries.

Specifically, for people born in 1955 -- and therefore turning 62 in 2017 -- full retirement age will increase by two months, to 66 years and 2 months. Why is this important? It's a well-known fact that claiming Social Security before full retirement age results in a permanently reduced benefit. Now, people who claim Social Security as early as possible won't be four years early -- they'll be four years and two months early, which results in an even bigger reduction.

You can read about the rules for early or late retirement here , but in a nutshell, here's what this means:

Let's say that your Social Security benefit at full retirement age is estimated to be $1,500 per month. If you turned 62 in 2016, you would be entitled to $1,125 per month if you claimed your benefit as soon as possible. On the other hand, if you'll turn 62 in 2017, your benefit at that age would drop to $1,112.50.

4. Great news for beneficiaries who still work

People who claim Social Security before full retirement age and continue to work are subject to the " earnings test ." If these beneficiaries earn more than a certain threshold, their benefits can be reduced.

Fortunately, both thresholds of the earnings test have increased significantly for 2017.

  • Beneficiaries who will reach full retirement age after 2017 can earn up to $16,920 for the year ($1,410 per month) with no benefit reduction. Beyond this amount, $1 in benefits is withheld for every $2 in earnings.
  • Beneficiaries who will reach full retirement age during 2017 can earn up to $44,880 per year ($3,740 per month) with no benefit reduction. Beyond this amount, $1 in benefits will be withheld for every $3 in earnings. This test only applies in the months prior to the month the beneficiary will reach full retirement age.

These annual income thresholds are up from $15,720 and $41,880, respectively, so this could make a big difference for working Social Security recipients.

5. New retirees could get a higher maximum benefit

Finally, the maximum initial Social Security benefit for a worker retiring at full retirement age has increased, thanks to the higher taxable wage limits of recent years.

Specifically, the highest possible benefit a new retiree can get if they claim at full retirement age is now $2,687 per month, $48 higher than last year. Keep in mind that to get this amount, the worker would need to have earned more than the Social Security taxable wage limit for 35 years.

The biggest Social Security changes could be yet to come

President-elect Donald Trump has promised not to increase the retirement age beyond 67, and has also said that he won't cut any benefits. While this is a commendable goal, something will have to be done to keep Social Security financially viable in the future.

As of the latest projections , Social Security is expected to have money in reserves that, when combined with incoming payroll taxes and investment earnings on those reserves, will be enough to pay out every promised dollar until 2034. Trump's pro-growth economic agenda could indeed help, but it's likely to simply extend the program's solvency for a few years, not fix the problem.

Simply put, there are only two main ways to fix Social Security in a sustainable way: lower benefits or higher taxes. And it may come as a surprise that the vast majority of Americans prefer the latter. Since we're about to have an all-Republican Congress, a tax increase becomes less likely over the next few years, at a minimum.

The bottom line is that the actual fixes to Social Security that will get through Congress (if any) are anyone's guess at this point, but something will need to happen. And when it does, 2017's Social Security changes will seem like small potatoes.

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