The retired worker population in America is growing. Contrary to popular belief, these retired workers are not using Social Security as disposable income. Theyíre not using it for their trip to Italy or their huge RV to travel the country. For many, social security benefits are a lifeline and crucial source of income. Without them, millions of seniors would be in poverty.
As of June 2017, over 40 million retirees received an about $1,300 per month. For more than 60 percent of seniors, this accounts for at least half of their total income.
Therefore, it is important for seniors to stay current with changes expected to Social Security in the coming years. Hereís what is coming down the road.
The retirement age keeps increasing, so you have to be older to get your Social Security in 2018. Why? To handle the enormity of the baby boomer generation, thatís why. The largest generation in American history is steadily reaching retirement age. In 2007, the oldest boomers turned 62, so the SSA steadily began increasing the retirement age over time.
Retirement age has steadily increased for years, so people have to wait longer to get their social security benefits. However, many are opting for earlier retirement benefits, even though they receive 25 percent less money by doing so.
In 2018, full retirement age will increase by two months to age 66 and four months. This affects people born in 1956 and later.
The Boomer Effect has a tremendous impact to the already beleaguered Social Security system. The sheer number of boomers retiring creates a financial challenge. Because the boomer generation is so large, there is more burdens on working people to support more and more boomers. Boomers gave birth to fewer babies than their parents and grandparents, so there are fewer people in general of working age. To complicate matters, life expectancies are much greater these days, so we will very soon have a very large aging population. In 1935, when the government created social security, life expectancy was about 77 years old, meaning benefits were paid out at age 65 for only another 12 years. By comparison, life expectancies today are approximately 85 years old, so benefits are needed for significantly longer periods.
This creates a situation of a rapidly growing beneficiary population without a corresponding rapid increase in tax revenues. The cost of social security will grow faster than the tax income generated by working people. Tax rates remain steady under current law, so thereís no new increase to help.
The SSA determines your full retirement age by birth year, and declares that age as the age of qualification for full monthly social security benefit payout. The amount of the benefit is determined by the amount you earned in three decades of your highest-earning years.
Next yearís age increase was enacted into law by Congress decades ago in the 1980s. Congress foresaw the increase in life expectancies and the sheer size of the boomer population, and tried to take measures to make Social Security last.
The bottom line is that, as a boomer, the younger of a boomer you are, the longer youíll have to wait for benefits. Either that or youíll take a sizably reduced benefit payout if you opt in before age 66.
Cost of Living
Although the 2018 cost-of-living adjustment (COLA) hasnít yet been officially announced, seniors could see the biggest adjustment in years. Inflation trends over the last few years are the driver for the expected adjustment.
The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is the driver for whether to make a COLA increase. The government will use the third-quarter 2017 numbers (July to September) to determine the 2018 COLA. If the CPI-W drops, there will be no COLA, but if there is an increase, which is expected, seniors in effect get a raise. Data from July 2017 suggests there will likely be a 2.2 percent rise in the COLA. General economic inflation is the reason the CPI-W has risen, but moreso higher fuel prices are the major driver.
Keep in mind that when the government raises the COLA, theyíre just trying to keep steady pace with the inflation rate. So seniors are not going to go to the bank with the raise. While any increase is good, many say seniors are still getting the short end of the stick because the medical care inflation rate has skyrocketed over the last decades, and there is no raise for that. In 2017 alone, seniors have lost 30 percent of their buying power.
Nevertheless, the expected 2018 COLA increase is the highest since 2012, so itís definitely moving in the right direction. Most seniors living on a fixed income say any increase is welcome. Most experts are suggesting the COLA will come in at 1.9 to 2.1 percent in 2018.
The experts also say that seniors will never catch up on just COLA increases alone. New legislation will be required. COLA is calculated based on spending patterns of working people, not retirees, who have very different needs and thus spending. For example, COLA doesnít account for one of the biggest costs seniors have today--that is Medicare Part B premiums, which have increased nearly 200 percent since 2000. Medical costs in general are under-accounted, because younger families in the CPI-W spend much less on medical care than seniors do.
Senior advocates say that new legislation to give people a modest benefit boost would be helpful.
More Taxes on Wages
Social Security payroll tax provides the revenue to pay for social security benefits. In 2017, wage earners who made up to $127,000 were taxed 12.4 percent payroll tax. But most workers split this cost with the employer, with each paying 6.2 percent.
The cap is at 12.4 percent, so if you make more than $127,000, you donít pay more. Most experts think that the government is going to raise the taxable rate to $130,000, which equates to an approximate 3 percent increase in maximum taxable earnings.
Social Security has been at a surplus since 1983 because more payroll tax has been collected than the system paid out. 2018 is the first year when payroll taxes wonít cover the benefits that were promised to senior citizens. The system will be in a deficit.
There is a social security trust fund that some say will cover this shortfall from 2017 until 2042, and that taxpayers have no obligations until 2042. Believers in the system say theyíre confident that Social Security will be able to pay all promised benefits until 2042. But there are some who are not so confident, because they say the trust fund is a myth. Supposedly, surpluses since 1983 have gone into the trust fund.
As such, the fund should have over $5 trillion in it. It does in theory, but Washington has loaned the money to the U.S. Treasury to spend on defense, education and welfare programs. So the Treasury owes SSA over $5 trillion; theyíre supposed to start paying it back starting in 2018. So if everything goes well, the coffers will be replenished by 2042.
But the Treasury gets money from taxpayers, and many say the payback plan assumes huge tax increases, massive spending cuts and even possibly borrowing more money to make it all work.
After 2042, unless there are drastic changes, 25 percent of social security will not be covered by incoming payroll taxes. Itís not hard to determine what the options are at that point. There would have to be fewer boomers (unlikely), more workers (maybe likely), or Congress would have to increase taxes or cut social security benefits. Maybe they will need both measures. For example, increasing the payroll tax by 1 percent for workers and employers would keep social security going for 75 more years.
From 2018 forward, social security will be in a deficit on two fronts. The amount funded by payroll tax will decrease because there are fewer people contributing. The amount needed to pay back the trust fund will have to come from either tax increases or severe cuts to current senior benefits.
Itís always hard to predict what the government will do, particularly in the politically charged environment that is 2017. President Trump has said that he will not target the Social Security program for any cost-cutting measures. Instead, he has said he will create economic growth, which increases payroll tax and thus brings more dollars available to pay out social security benefits.
Since experts project a $12.5 trillion social security shortfall over the next 75 years, economic growth would be a good thing.
In 2018, expect small changes that slightly move the ball in the right direction.