Any change to Social Security warrants attention, but there was enough activity late last year to require close reading and maybe a little additional planning if you're getting close to retirement age.
To recap, in mid-October, the U.S. Social Security Administration announced there would be no annual automatic cost of living payment increase due to a drop in consumer prices over the previous year. It was the third suspension of the automatic increase in the past decade, due largely to the post-2008 economic environment.
Then came the late October federal budget agreement that prevented Medicare premium increases (Medicare is a program of Social Security), but altered increasingly popular but little-used rules affecting benefit-claiming strategies for married couples and certain retirees divorced for 10 years or more.
What follows is a summary of notable changes to Social Security at the start of the year - but a caveat first. If you're reading this, hopefully you know that relying on Social Security and its related programs alone won't guarantee a truly comfortable retirement, at least not in current times.
Bringing qualified financial and tax experts into the conversation about all aspects of your retirement planning can clarify how you should save, invest and claim your Social Security benefits. Above all, watch the news - policymakers and legislators in Washington know Social Security is a sensitive issue for their constituents and changes generally get widespread coverage.
Here's what's coming:
1. 2016 Social Security payments won't increase. Late October's announcement that there wasn't enough inflation in 2015 to create a cost-of-living adjustment (COLA) to monthly benefits this year understandably shook up recipients who look to Social Security for a significant part of their monthly income. It's only the third time payments were frozen in the past 40 years since automatic COLA adjustments began, but here's the rub - all three occasions occurred after 2010. In short, most seniors will have to live with an average monthly payment of $1,341 with married beneficiaries receiving a total of $2,212.
2. Married and divorced individuals may want to rethink the way they claim benefits. Washington closed some loopholes in Social Security law that allowed certain married couples to substantially increase their benefits over time and certain divorced individuals to claim former spousal benefits under certain circumstances. These new restrictions on so-called file-and-suspend and restricted-claim strategies go into effect in May, grandfathering certain older retirees and preventing others from taking advantage. In short, getting qualified advice on how you claim your Social Security benefits has never been more important, no matter what your marital status.
3. Other COLA-related issues. When there's no cost-of-living adjustment, there's no change in the maximum amount of earnings subject to the Social Security tax, which will stay at $118,500 in 2016. This means earnings above that level are neither subject to the Social Security portion of the payroll tax nor used to calculate retirement payouts. At the same time, the Social Security earnings limit for people who work and claim Social Security payments will stay at $15,720 in 2016 for people ages 65 and younger. Social Security beneficiaries who earn more than this amount will have $1 in benefits temporarily withheld for every $2 in earnings above the limit. However, for individuals who turn 66 this year (the current Social Security retirement age by law), the earnings limit climbs to $41,880, and the reduction in payments for earning above that level declines to $1 withheld for every $3 in excess earnings. Existing Medicare recipients will also see their Part B premiums stay the same.
4. One piece of bad news for new signups. The highest possible Social Security payment for a 66-year-old worker who signs up for Social Security this year will be $2,639 per month, down $24 from $2,663 in 2015. The reason? Social Security noted that despite no cost-of-living adjustment there was an increase in the national average wage index, one of the statistical guideposts the agency uses to calculate benefits.
5. Service changes. If you haven't created a My Social Security account, do so for two reasons: First, there have been reports of ID theft related to illegal signups for such accounts; second, the agency is making more detailed account data available online such as estimates of monthly payments at various claiming ages. Also, Social Security expanded office hours in some of its field locations in 2015, so if you need face-to-face assistance, check hours of operation at your closest local office.
Bottom line: While Social Security is just one component of smart retirement planning, it pays to stay on top of benefits news and seek out qualified individual advice as you get closer to signing up for benefits.
Nathaniel Sillin directs Visa's financial education programs. To follow Practical Money Skills on Twitter: www.twitter.com/PracticalMoney
This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.
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