Monthly Social Security benefits for more than 66 million Americans will increase by 2% in 2018, the largest increase in retirement and survivor benefits for workers and their families since 2012. The higher payments will begin in January.
The average retirement benefit will increase by $27 per month to $1,404 per month next year. The maximum benefit for someone who retires at full retirement age in 2018 will be $2,788 per month compared to $2,687 per month this year.
The 2018 COLA marks the first significant increase in Social Security benefits in several years following a paltry 0.3% hike this year and no increase in 2016.
For some beneficiaries, their Social Security increase may be partially or completely offset by increases in Medicare premiums next year. The new Medicare premiums for 2018 will be announced later this year.
Individuals who claim any type of Social Security benefit before their full retirement age — including retirement and survivor benefits — are subject to earnings restrictions if they continue to work while receiving benefits. The earnings restrictions, which will increase in 2018, apply only to wages and net self-employment income, not pensions, withdrawals from retirement accounts, interest, dividends or other investments.
In 2018, beneficiaries who are under full retirement age for the entire year would lose $1 in benefits for every $2 earned over $17,040 in 2018 compared to $16,920 in 2017.
There is a higher limit in the year someone turns 66. During the months preceding their birthday, they can earn up to $45,360 per year without losing any benefits in 2018. That compares to $44,880 per year in 2017. If they earned more than the limit, they would forfeit $1 in benefits for every $3 earned over that amount.
The earnings restrictions disappear once a beneficiary reaches full retirement age, meaning they can earn any amount of money without losing any Social Security benefits.
Workers are also affected by the inflation adjustment. Some will pay higher payroll taxes next year as the maximum taxable wage base increases to $128,700 in 2018, up from this year's maximum taxable wages of $127,200 per year. Of the estimated 175 million workers who pay Social Security taxes in 2017, about 12 million employees will pay more payroll taxes next year because of the increase in the taxable maximum.
Employers and employees each pay 7.65% of earnings up to the taxable wage base to fund Social Security and Medicare. Self-employed individuals pay a combined rate of 15.3%. The 1.45% Medicare portion of the payroll tax applies to all wages, even those above the maximum wage base. High-income workers also pay an additional 0.9% on earned income above $200,000 for individuals and $250,000 for married couples filing jointly to fund Medicare.
Annual cost of living adjustments, which have been automatic since 1975, when inflation warrants an increase, are designed to help Social Security beneficiaries maintain their purchasing power. COLAs are based on increases in the Consumer Price Index for Urban Wage Earned (CPI-W) from the third quarter of the prior year to the corresponding quarter of the current year. But senior advocacy groups argue that typical retiree costs, particularly health care, have outstripped Social Security benefit increases.
"It's important to consider that people who have been retired since 2009 have received COLAs that averaged only 1.1% between compared to people who retired a decade earlier when COLAs average 4% between," said Mary Johnson, senior policy analyst for The Senior Citizens League. "That has an enormous impact on the growth in lifetime income retirees can count on for income," Ms. Johnson said.
The increase in Social Security benefits is only part of the COLA story. The size of the inflation adjustment also affects how much seniors pay for their Medicare Part B premiums next year, which are normally deducted from Social Security benefits.
The majority of beneficiaries are protected by a "hold harmless" rule that says the increase in their monthly Medicare Part B premiums, which pays for doctors' visits and outpatient series, cannot exceed the dollar amount increase in their Social Security benefits.
Medicare premiums for 2018 will be announced later this year. The latest Medicare Trustees report predicts Medicare Part B premiums will remain near this year's level of $134 per month. That means many retirees who enrolled in Medicare before 2016 and who pay an average of $109 per month now could see a sizable jump in their premiums next year to $134 per month, offsetting much of the increase in their Social Security benefits for 2018. That will essentially leave most retirees with no increase in Social Security benefits for the third year in a row.
Some beneficiaries do not qualify for protection under the hold-harmless provision, including high-income enrollees and those seniors who are enrolled in Medicare but who do not receive Social Security benefits. Many of them are already paying $134 per month or more for their Medicare Part B premiums. Ironically, their premiums could remain the same in 2018.