If you rely on Social Security for a large portion of your income, you may be nervous about what the new year will bring. It's no secret that Social Security is feeling the strain of the Baby Boomer population drawing benefits larger than the program's incoming funds. Lawmakers have proposed several rules to slow the bleed.
If you want in on some very important changes for Social Security in 2016, read on.
One Feature That Isn't ChangingSay it ain't so! The one thing retirees want to change each year is staying the same: their payout. The Bureau of Labor Statistics calculates the Consumer Price Index (CPI) for Urban Wage Earners and Clerical Workers (CPI-W), and this calculation ensures that a person's Social Security check has the same buying power that it did the previous year. If the CPI-W increased more than 0.1% year over year between the third quarter of the previous year to the third quarter of the current year, Social Security will raise beneficiaries' checks by the same amount. Unfortunately, the CPI-W didn't change from 2014 to 2015, so Social Security recipients won't get a raise this year. This is only the third time in 40 years that this has happened, and economists believe that the CPI-W remained flat largely due to lower gasoline prices.
But does this mean that Medicare Part B premiums won't rise since they're tied to Social Security for about 70% of seniors? At one point it looked like some seniors would pay as much as 52% more for their benefits, but if your Part B premiums are taken from your Social Security check, most recipients won't see an increase. (For more information—including whether you fall into the higher-income group that could see premiums rise—see Medicare Changes for 2016.)
Social Security Tax CapIf you're still paying in to Social Security but not yet pulling out, you may be happy to hear there's no cost-of-living adjustment again due to the stagnant CPI-W figure. For example, once you earned more than $118,500 in 2015, no additional Social Security taxes were taken from your income. That number would normally rise based on CPI-W, but no change in that figures means no change across the board, so if you earn a higher salary in 2016, you'll keep a little extra money in your pocket.
Watch Your EarningsPut this one in the column of working against you. If you work and receive Social Security before reaching full retirement age, you know that you can only make so much money before your benefits are reduced. In 2015, the amount was $15,720 for individuals 65 years old or younger or $41,880 for those turning 66 sometime in the year. If you bumped up against either limit, a slight increase in those figures was good in terms of the size of your Social Security check, but the limits won't change this year. Again, blame CPI-W. (For more, see How Does My Part-Time Job Affect Social Security?)
Maximum Paycheck Is DecliningIf you're one of the lucky individuals eligible for the maximum amount of monthly Social Security benefits, be prepared to see a slight decrease in the amount you receive. According to Social Security, the maximum will fall from $2,663 per month in 2015 to $2,639 per month in 2016. Why? It's something that an economist might have to answer. A decrease in full maximum benefits occurs when there is no COLA (cost-of-living adjustment), but there is an increase in the national average wage index, Social Security says.
File and Suspend Going AwayWashington actually agreed on a budget deal, but it contains some provisions that won't make some recipients very happy. One of those is the banning of the file-and-suspend strategy. Here's how it works: If you are age 66 or older, you can file for full benefits and then turn around and suspend them. For each year you suspend your benefits up until age 70, you get an extra 8% added to your check. By age 70, you could see a 32% increase in your checks. That's a huge amount of money.
Why file in the first place? It entitles the person's spouse—provided he or she is the lower wage earner—to receive spousal benefits even if the beneficiary suspends his/her payouts. Furthermore, if the person receiving spousal benefits also qualified for his/her own benefits, that individual could wait until age 70 and get an 8% annual raise too.
But that's going to change. Under the new law, starting April 30, 2016, if you file and suspend, your spouse is no longer eligible for spousal benefits. Until that date, you and your spouse may still be able to gain the advantages of this strategy. By the way, that's not the only reason people file and suspend. Be sure to talk to a financial planner about this topic. (For more, see File and Suspend: Still An Option, But Act Fast.)
No More Lump-Sum PayoutOnce you turn 66 years old, you're eligible for full retirement benefits. If you choose to suspend your benefits, you can later collect those back benefits in one of two ways: an increase on each of your checks or a lump sum payout for back benefits. If you were to wait until age 70 to collect benefits and you're eligible for the maximum benefit, that could amount to more than half of a million dollars. Even the average lump sum payout if you wait until age 70 is more than $250,000.
Under the new budget law, the option of a lump-sum payout is no more. Once that spring deadline hits, no more giant, six-figure checks for anyone.
More Online ServicesFinally, the Social Security Administration understands that visiting an office to do anything is about as fun as having a root canal done, which is why the agency is continuing to expand its online offerings (it's also increasing its office hours).
The Bottom LineWouldn't it be nice if, at some point, you learned that the Social Security Administration is making changes that favor the retiree? That's not going to happen any time soon. In fact, full retirement age is already age 67 if you were born in 1960 or later, compared to age 66 for those born six years earlier.
The claims that Social Security will likely be gone within a few years are almost certainly overblown (see How Secure Is Social Security?). But if you're still well below retirement age, putting your trust in Social Security to provide most of your monthly income probably isn't a good idea, given how expensive costs of living are now and given the growing cost of healthcare. Practice responsible retirement-planning habits to boost the balances in your own accounts, and use Social Security as the financial icing on the cake.
As always, your retirement is much too important to do on your own. Become as educated as you can on financial planning topics, but find a trustworthy financial advisor to set you up for success as well as establish attainable goals for you and your family. (For background, see Become Your Own Financial Advisor.)