Social Security's retirement age and COLA are just two of the changes for the new year. ·Motley Fool
Matthew Frankel, The Motley Fool
Updated
For 2018, the basic structure of Social Security is the same in terms of how workers are taxed and how benefits are calculated and paid. However, there are a few notable changes to be aware of, such as the gradually increasing full retirement age and several thresholds and other Social Security figures that adjust over time with inflation.
With that in mind, here's a rundown of eight 2018 Social Security changes that are set to go into effect.
Social Security card inserted in a stack of money.
Image source: Getty Images.
1. The full retirement age is increasing for some eligible seniors
The full or normal retirement age for Social Security benefits has been 66 years of age for some time now, but is set to gradually increase to 67 for Americans born after 1954.
If you were born in...
Your full retirement age is...
1954 or earlier
66 years
1955
66 years, 2 months
1956
66 years, 4 months
1957
66 years, 6 months
1958
66 years, 8 months
1959
66 years, 10 months
1960 or later
67 years
Data source: Social Security Administration.
The reason this is important now is that the change has begun to affect people who are reaching the age of eligibility for Social Security benefits. Specifically, Americans who will turn 62 in 2018 (born in 1956) have a full retirement age of 66 years and four months, and those who will turn 63 in 2018 have a full retirement age of 66 years and two months.
Here's why this is important. Since most Americans claim Social Security before they reach full retirement age, this means that early retirement will have a more dramatic reduction. For example, if a worker with a full retirement age of 66 claims at 62, he or she would face a 25% reduction. If their full retirement age is 66 years and four months, the reduction percentage would be 25.8%.
2. Finally, a decent cost-of-living adjustment for retirees
The Social Security Administration announced a 2% cost-of-living adjustment, or COLA, for beneficiaries, starting with the December 2017 payment.
This is the highest COLA in six years, and is due to higher inflation -- specifically, the rise in the CPI. However, this is still historically low. Social Security COLAs have averaged roughly 3.8% since the current method was implemented in 1975. Furthermore, for many retirees, this year's increase could be consumed by rising Medicare Part B premiums.
3. Higher payments for beneficiaries
While many beneficiaries will see some or all of their increase swallowed up by rising Medicare premiums, the COLA should produce higher checks for beneficiaries. The SSA estimates that the average retired worker will get a $27 raise to $1,404, and that the average couple receiving benefits will see their combined payments rise by $46 to $2,340.
Additionally, because of the higher taxable earnings cap from 2017, the maximum benefit is increasing significantly. The highest possible benefit payable to a worker retiring at their full retirement age is rising by more than $100 to $2,788 per month in 2018.
4. A slightly higher taxable earnings cap
Speaking of the taxable earnings cap, this is rising for 2018 as well. Each year, there is a maximum amount of wage income that is subject to Social Security tax. For 2017, this maximum was set at $127,200 -- meaning that any amount of earned income above this threshold was not taxable for Social Security.
In 2018, the maximum taxable earnings amount is rising by $1,500 to $128,700, meaning that high-income individuals will end up paying more in Social Security tax than they did in 2017.
5. Disability thresholds are rising
Social Security pays disability benefits to more than 10 million people, and there are maximum amounts of income that people can still earn while collecting disability benefits. For 2018, these monthly thresholds are rising slightly.
Type of Disability
2017 Threshold
2018 Threshold
Non-blind
$1,170
$1,180
Blind
$1,950
$1,970
Data source: Social Security Administration.
6. So are SSI payments
There are two Social Security disability programs -- Social Security Disability Income (SSDI) and Supplemental Security Income (SSI). SSDI payments are based on a beneficiary's work record, just like retirement benefits are.
On the other hand, SSI payments are based on a standard payment amount. For 2018, the SSI federal monthly payment standard is increasing.
Status
2017
2018
Individual
$735
$750
Couple
$1,103
$1,125
Data source: Social Security Administration.
7. The earnings test limits are going up
If you claim Social Security before reaching full retirement age, and are still working, the amount of money you earn could potentially reduce your Social Security benefits.
This is known as the Social Security earnings test, and there are two different versions of the test, depending on your age.
If you will reach full retirement age after 2018, $17,040 in earnings ($1,420 per month) will be excluded from consideration. Beyond this threshold, your retirement benefits can be reduced by $1 for every $2 in excess earnings.
If you will reach full retirement age during 2018, $45,360 in annualized earnings ($3,780 per month) are excluded. Beyond this threshold, your retirement benefits can be reduced by $1 for every $3 in excess earnings. For this test, only the months before you reach full retirement age are considered.
If your benefits are withheld because of the earnings test, it could permanently increase your benefit once you reach full retirement age, so this money isn't necessarily lost.
8. Social Security "credits" represent more earnings
As a final Social Security change for 2018, the "credits" workers need to earn to qualify for benefits are getting a little more expensive.
Specifically, in order to be eligible for a retirement benefit, you need to earn 40 Social Security credits, up to a maximum of four per year. In 2018, each credit represents $1,320 in earnings, so you'll need to earn at least $5,280 in order to earn the four possible credits for the year.
The biggest changes could be yet to come
Social Security isn't exactly in the most sustainable financial condition, and is expected to run out of money by 2034 unless something is done to fix the problem. This would likely mean either a benefit reduction or Social Security tax increase or some combination of the two.
The point is that while nothing changed regarding the basic tax and benefit structure of the Social Security program for 2018, there's a strong possibility that major changes could be on the horizon.
