Should retirees be expecting a hefty raise or a pay cut in 2018?
by Sean Williams
Mar 4, 2017 at 6:43AM
The 2018 Social Security changes were announced in mid-October. You can read all about the big changes here. Please note that the Social Security Administration lowered the maximum taxable earnings cap to $128,400 in November 2017 from an initially reported $128,700 in mid-October.
For many retired workers, Social Security isn’t just some ancillary income channel that pads their pockets during retirement. It’s a vital source of income without which millions of seniors would likely be living in poverty.
According to the latest data snapshot from the Social Security Administration (SSA) in June 2017, more than 41.9 million retired workers were receiving an average of $1,368.67 per month. The data show that slightly more than 60% of these retired workers will rely on their Social Security benefits to comprise at least half of their monthly income.
Obviously, political changes are a bit hard to predict. President Trump has suggested that he wouldn’t be looking to directly alter the Social Security program, and would instead tackle things indirectly by focusing on economic growth. Since the payroll tax is the primary funding tool of Social Security, a faster growing economy could indeed lift Social Security’s coffers and help stem an estimated $12.5 trillion budgetary shortfall in the program over the next 75 years. Trump is hopeful that individual and corporate tax reforms, as well as a focus on new trade deals, domestic energy, and a long-term infrastructure plan, will add this desired growth and lift Social Security.
In the much nearer term (i.e., by next year), we have a bit more visibility when it comes to direct aspects of Social Security that are likely ripe for change. Here are three Social Security changes that I believe can be practically locked in as a given in 2018.
1. The full retirement age is rising once again
Unless there’s some serious cohesion in Congress and a new Social Security bill is passed, the full retirement age for new retirees born in 1956 will be rising by two months in 2018 to 66 years and four months.
Your full retirement age, which is determined by your birth year, is the age at which the SSA deems you eligible to receive 100% of your monthly benefit payment. This benefit is determined by factoring in your 35 highest-earning years of work. For persons born in 1956, claiming Social Security at any point between age 62 and age 66 and four months will mean accepting a reduced payout for life. Likewise, waiting until age 66 years and five months all the way until age 70 could lead to an even larger payout than what you’re due at your full retirement age.
The 2018 increase in the full retirement age was actually signed into law all the way back in 1983 by Congress in order to account for lengthening life expectancies. Long story short, if you’re born in 1956 (or later), you’re going to have to wait even longer to receive 100% of your benefits, or you’ll have to be willing to accept a steeper reduction in your lifetime payouts.
2. Seniors will get their biggest COLA in years
There are still a few months to go before Social Security’s inflation calculation is made and 2018’s cost-of-living adjustment (COLA) is announced, but as things stand now, it’s looking quite favorable that seniors will net their largest COLA in years.
Right now, Social Security’s COLA is governed by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The average third-quarter reading from the previous year serves as the baseline, while the average third-quarter reading from the current year serves as the comparison point. If the CPI-W falls year-over-year, there is no COLA (i.e., beneficiaries receive the same benefit payment without a “raise”). If there is an increase, beneficiaries receive the difference rounded to the nearest tenth of a percent.
Recently released data from the Social Security Board of Trustees in July predicts a 2.2% rise in COLA for 2018. The primary culprit behind this increase is higher fuel prices, with general economic inflation playing a smaller role.
However, it’s still important to remember that the “raise” seniors are receiving is merely meant to match the inflation rate, not put seniors ahead of the curve. If anything, with COLAs falling short of the medical inflation rate in 33 of the past 35 years, COLAs are doing a pretty poor job of keeping seniors on par with the real inflation they’re facing.
3. The rich will pay more
Also, with a growing economy, it’s not uncommon to see a nominal increase in wages among the nation’s labor force. The National Average Wage Index (AWI) is what’s behind Social Security’s maximum taxable earnings, meaning a steady increase in U.S. GDP probably means a healthy increase in maximum taxable earnings.
As noted above, Social Security’s payroll tax is what provides the bulk of revenue to the program (87.3% in 2016, according to the SSA). In 2017, earned income between $0.01 and $127,200 was subject to the 12.4% payroll tax to fund Social Security. It’s worth noting that most workers don’t pay the full 12.4%. Instead, the total is split down the middle between employers (6.2%) and employees (6.2%). For the wealthy, it means any earned income beyond $127,200 is free and clear of Social Security’s payroll tax.
While it’s tough to gauge how much of an increase we’re on track to see in the AWI, I wouldn’t rule out the possibility of a roughly 3% increase in maximum taxable earnings, pushing the upper boundary of the scale to north of $130,000. Long story short, expect the rich to pay more in 2018.
There’s still plenty of time for these scenarios to be altered, but these Social Security changes are looking very probable in 2018.
9600 S McCarran Blvd
Reno, NV 89523
Steve Lindquist is a registered representative offering securities and advisory services through Cetera Advisor Networks LLC, member FINRA/SIPC. Cetera is under separate ownership from any other named entity. Registered address: 9600 S McCarran Blvd., Reno NV 89523.
Investments are not deposits; not NCUSIF insured; and not insured by any federal government agency. No credit union guarantee. May lose value.
Investors should consider the investment objectives, risks, charges and expenses associated with municipal fund securities before investing. This information is found in the issuer’s official statement and should be read carefully before investing.
Investors should also consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state’s 529 Plan. Any state-based benefit should be one of many appropriately weighted factors in making an investment decision. The investor should consult their financial or tax advisor before investing in any state’s 529 Plan.