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Each and every year we see some small changes to Social Security and Medicare. This year is no different. How much you will receive from Social Security during retirement, to the caps on payroll taxes to fund future benefits are just a couple of the common areas with changes. Medicare beneficiaries will mostly pay more for their health-care premiums in 2018. There are also changes to new income rules that determine your Medicare surcharges for 2018.
Here are a few of the highlights of the changes in 2018.
Good News – Cost of Living Adjustments for Retirees
Retirees will finally get a cost-of-living adjustment (COLA) of two percent. This marks the largest COLA increase in the past six years and results in an average monthly increase of $27 per person. For 2018, the average Social Security check will be an estimated $1404 per month and the maximum Social Security check at full retirement age is $2,788. If that doesn’t sound like a lot, you can dramatically increase that number by waiting until age 70 to collect Social Security benefits.
Bad News – Higher Medicare Premiums
It should be no surprise that Medicare premiums are on the rise. For many recipients, this increase will more than eat up the Social Security COLA. Most beneficiaries of Medicare will shell out around $134 per month for Part B in 2018. That’s up $25 per month from 2017 and just two dollars below the average COLA for Social Security.
More Taxes for Those Still working
Just about all you hear in the news is how taxes are going down for millions of Americans. Keep in mind that only applies to income taxes. The Federal Insurance Contributions Act (FICA), aka the payroll tax, is not going down. In fact, payroll taxes will be increasing for many workers and this is the money that actually funds Social Security.
The cap on income subject to payroll taxes increased by $1,200 to $128,400 this year. Employees and employers each pay 7.65% of the first $128,400 of income for 2018.
Included in the 7.65% is a 1.45% tax used to fund Medicare. The thing to point here is there is no cap on this portion of the payroll tax. For example, anyone making more than $128,400 will still be subject to the 1.45% Medicare tax.
Additionally, single folks earning $200,000+ or married couples earning $250,000+ (another example of the marriage penalty) will pay an additional high-income surcharge of 0.9% in 2018.
Early Retirees can earn more and avoid the dreaded Social Security Claw back
For those who take Social Security early and continue to work, you will be subject to a potential benefit claw back/reduction in benefits. For 2018, the income limit is just $17,040 before you will begin losing benefits. That is a whopping $120 more than 2017. Those who earn more will forfeit one dollar in benefit for every two dollars of earned income above $17,040.
For those at full retirement age this year (66), you can earn up to $45,360 in the months preceding your birthday without putting any benefits at risk. That is a $480 increase from last year. Those earning more than $45,360 will lose one dollar of benefit for every three dollars earned over that amount.
The good news here is these earning caps disappear once you reach full retirement age because the benefits lost will be restored in the form of higher benefits. In the grand scheme of things, it’s probably not that big of a deal, but it has surprised many people who continue to work part-time in retirement.
For years it was thought that retirement began once you turned 65 years old. I’m sorry to be the one to tell you but that number has changed. Today, people born after 1954 should plan on retiring when they are 66. In addition, it will now cost even more for those who need to take retirement benefits early.
For example, people born in 1956, and who turn 62 this year, will have a full retirement age of 66 and 4 months to be exact. The earliest you are allowed to claim Social Security benefits is when you are 62 years old, regardless of when your full retirement age is.
Using this example, let’s assume a 62-year-old wants to take early retirement. In this case, that person would see their retirement benefits reduced by 26.67%. If you were eligible for $2000 per month at full retirement you would get just $1466.60 if you choose take benefits at 62.
This is a higher penalty than someone born between 1943 and 1955 who would have had a penalty of just 25% for taking Social Security at the earlier possible age of 62. If this person chose to take benefits at 62 they would get $1500 per month. Assuming the same $2000 per month benefit at full retirement age.
The younger you are today, the older your full retirement age will be, and the larger the penalty for taking benefits early. The penalty is based on how early your benefits start compared to your full retirement age.
Changes to Medicare Surcharges
Would you believe high earners in retirement are defined by a modified adjusted gross income (MAGI) exceeding $85,000 for individuals. That number doubles to $170,000 for couples. Make more than these incomes and you will pay even more for both your Medicare Part B and Medicare Part D insurance premiums. Part D is the prescription drug plan.
The underlying premiums for Part B remain the same this year with a range between $187.50 to $428.50, per person, per month. Keep in mind the income tiers that set those premiums have changed. Your surcharges in 2018 are based on your 2016 tax returns so if you had income above $133,500 single / $267,000 married, you will pay higher Medicare premiums in 2018. In case it wasn’t clear, full Medicare benefits aren’t free in retirement.
The Cost of Qualifying for Benefits is Rising
To qualify for Social Security and Medicare you must earn at least 40 credits. You receive up to four credits per year of work. For 2018, each credit represents $1,320 in earning which is up $20 from last year. To earn the maximum four credits per year, you will need to have a MAGI of at least $5,280 for the year.
Yes, Social Security Benefits are Taxable
I hate to break it to you, but Social Security benefits are taxable if you make too much money. That number is not some huge income that will have you living a glamorous and rich lifestyle.
Social Security benefits are taxed based on your combined income. This will include your adjusted gross income, plus tax-exempt interest (from things like Muni Bonds) and half of your Social Security benefits. This applies to people earning between $25,000 and $34,000. Once your income surpasses $34,000 you will pay taxes on 85% of your Social Security benefits.
The numbers are slightly higher for married couples. Couples earning between $32,000 and $44,000 will have to pay taxes on 50% of their Social Security benefits. Those with incomes more than $44,000 will have 85% of that number being taxed.
These may not sound like earth shattering changes, but when you are on a fixed income every penny counts. Also, these changes could have potentially dramatic effects when compounded out over 30 or 40 years of retirement. I know I’ve been behind people at the grocery store scrounging the last few pennies to pay for their necessities.
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