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Notable Changes to Social Security in 2017

| January 18, 2017
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It is important to keep up-to-date with changes to the Social Security system because it will more than likely play a key role in your retirement income planning.  Here are a few notable changes to the system to be aware of as you plan for your future.

More earnings subject to Social Security Tax - A majority of workers pay 6.2% of their earnings into the Social Security system, and their employers pay the other 6.2%, for a total of 12.4% until their salary reaches a certain level.  For 2017, the maximum taxable earnings figure will increase from $118,500 to $127,200.  This means more of your annual paycheck will be subject to Social Security taxes.  Any earnings above $127,200 will not be subject to Social Security taxes and are not used to calculate your estimated benefits in retirement.

Minimal Increase in Payments - Social Security payments will increase a whopping 0.3% in 2017, which equates to average monthly check of $5 more per month.  

Increased Earnings Limit - This is a little known fact that catches many retirees by surprise if they elect to take Social Security benefits early and continue working.  People rejoice when they turn 62 because they know they can collect benefits, albeit at a reduced rate than if they collect benefits at full retirement age.  Then they get a four page document from the Social Security Administration asking them to document their income because they chose to elect benefits early.  The earnings income limit rule will increase from $15,720 in 2016 to $16,920 in 2017.  Social Security beneficiaries who earn more than $16,920 will have $1 in benefits withheld for every $2 in earned income over the limit every year until they reach 65.  For those who will turn 66 in 2017 the earnings limit increases to $44,880, and the payment reduction declines to $1 withheld for every $3 earned in excess of the earnings limit.  Once a beneficiary reaches their full retirement age, they are no longer subject to this earnings limit test and can make as much money as they'd like without having any of their benefits withheld.  I can't stress how imperative it is to know the facts about the earnings limit test before you elect your benefits.  

Know the rules around spousal benefits.  If eligible, the spouse can currently choose to collect a spousal benefit only, commonly known as a "restricted application", or elect their own individual benefits.  When the spouse decided to collect "spousal benefits", their own individual benefits continue to grow at 8% simple interest per year.  

Under the Bipartisan Budget Act of 2015, anyone under the age of 62 by the end of 2015 no longer has the choice of which benefit to elect when they reach full retirement age.  Regardless of their age and when they elect to take benefits, they will be "deemed" to have filed for the highest benefit.  For example, if Sally, currently age 60 at the end of 2015, has an individual benefit of $1,400 at FRA and is eligible for a spousal benefit of $1,200 at FRA, she will be given the higher of the two amounts when she files for her benefits at FRA.  In this example, Sally will be "deemed" as filing for both, and will be required to take her individual benefit of $1,400 vs. taking the $1,200 spousal benefit and letting her individual benefit grow 8% per year until 70.  This is a major development in Social Security planning and needs to be addressed in your overall financial income planning.

For anyone over the age of 62 at the end of 2015, you will be grandfathered under the old rules and will have the ability claim only spousal benefits, if eligible, if you wait until you reach full retirement age.  The key phrase in that sentence is "if you wait until full retirement age".  If you file before FRA, then you will no long be able to take advantage of filing for a spousal benefit only. 

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