Benefits increase for 2013. Ideas for reform are numerous.
Provided by Renita M. Owens, CPA, PFS
Social Security benefits have increased 1.7% this year. This doesn’t come close to the 3.6% boost retirees got for 2012, but it does mark the second straight annual cost-of-living adjustment. (After a hefty 5.8% COLA for 2009, there were no COLAs for 2010 or 2011).1,2
So for 2013, the average monthly Social Security payment going to a single retiree is $1,261 ($21 larger than last year). The average retired couple gets $2,048 per month in 2013 (a $34 monthly increase). A single retiree claiming benefits at the full retirement age of 66 this year could get a maximum monthly Social Security payment of $2,533.2
Of course, COLAs have also occurred to Medicare premiums and the payroll tax ceiling for employees.
However, Medicare premiums are eating into that COLA. The good news for 2013 is that Part B premiums didn’t rise as much as some analysts expected. Medicare’s trustees, for example, anticipated a $9 monthly increase in these premiums. Instead, the increase was slightly more than $5. Part B premiums are now $104.90 per month, as opposed to $99.90 in 2012. (The annual Part B deductible is $7 greater for 2013 at $147, and the Part A deductible is $28 greater at $1,184.)2,3
So how much does the rise in Part B premiums reduce the 2013 Social Security COLA? If you receive S2,000 a month in Social Security benefits, your effective COLA for 2013 is 1.45% ($29 a month more). If you get $1,000 of Social Security benefits each month, your net COLA is actually 1.2% ($12 a month more).3
Few Social Security recipients have annual ordinary incomes in excess of $85,000 (single filers) or $170,000 (joint filers). Unfortunately, those that do will see their total Part B monthly premiums rise anywhere from $147-336 a month thanks to surcharges (and that isn’t counting surcharges paid on Part D prescription drug plans).3
Social Security’s retirement earnings test amounts have also risen. If you receive Social Security benefits and you will be younger than full retirement age at the end of 2013, $1 of your benefits will be withheld for every $2 that you earn above $15,120 (the 2012 limit was $14,640).4
If you receive Social Security benefits and reach full retirement age during 2013, $1 of your benefits will be withheld for every $3 that you earn above $40,080 – but that restriction applies only to earnings in the months prior to attaining full retirement age. (The applicable 2012 threshold was $38,880.) There is no limit on earnings starting the month an individual attains full retirement age.4
As always, part of your Social Security benefits may be taxed. This may happen if you exceed the program’s “combined income” threshold. (Combined income = adjusted gross income + non-taxable interest + 50% of Social Security benefits.)5
If you are a single filer with a combined income between $25,000-34,000, you may have to pay federal income tax on up to 50% of your Social Security benefits this year. That also goes for joint filers with combined incomes of $32,000-44,000.5
If you are a single filer with a combined income of more than $34,000, you may have to pay federal income tax on up to 85% of your 2013 Social Security benefits. Likewise for joint filers whose combined incomes top $44,000. 5
Those married and filing separately will “probably” have their Social Security benefits taxed in 2013, according to the program’s website.5
The Social Security wage base is 3.3% higher for 2013. In 2012, the federal government levied payroll tax on the first $110,100 of employee income. In 2013, individual wages up until $113,700 are subject to the tax. The payroll tax for employees is also back to 6.2% this year. So an individual worker could pay as much as $7,049.40 in Social Security taxes in 2013 as opposed to a maximum of $4,624.20 in 2012.2,4
How will the sequester cuts affect Social Security? Basically, they won’t. There will be no reduction in Social Security, Supplemental Security Income, Veterans Affairs or SNAP benefits under such circumstances. However, the Social Security Administration may suffer budget cuts that result in reduced hours (or closed doors) at its offices and an even longer wait to process disability claims. The sequester cuts will not affect Medicare or Medicaid benefits either, though Medicare payments to doctors face a 2% cut.6
What about Social Security’s projected long-range shortfall? Social Security projects that it can tap its surplus of roughly $2.7 trillion to pay 100% of scheduled retirement benefits through 2032. Yet in 2010, it began paying out more than it took in, a condition that may last for decades thanks to the aging of the baby boomer demographic. Because of this reality, Social Security’s trustees have forecast a $623 billion deficit for 2033, expanding to $1 trillion by 2045 and almost $7 trillion by 2086.7
How does America fix that? The simple fix many legislators have suggested is to hike the full retirement age to 70 from 67. If that happened now, the Congressional Budget Office says the program could keep about 13% more money each year. Of course, the social and economic effects of this could be devastating for many retirees.8
The White House fiscal commission has proposed raising the FICA cap – that is, the payroll tax cap would gradually increase between now and 2050 so that 90% of wages earned in America would be subject to Social Security tax by the middle of the century. (This is how it used to be.) Under this plan, the taxable maximum would be $190,000 by 2020.9
Another fix that has been proposed is indexing Social Security COLAs to price growth instead of average wage growth – that is, to “chained” CPI rather than the Consumer Price Index. Rep. Paul Ryan (R-WI) mentioned the idea in his controversial “Path to Prosperity” plan (the so-called “Ryan roadmap”) late in the 2000s. The Business Roundtable, a coalition of 210 CEOs of major American companies, has also pitched the idea. Detractors note that linking COLAs to chained CPI means lower COLAs and a marked reduction in Social Security benefits especially affecting women.10
The conservative Heritage Foundation recently advanced the idea of cutting Social Security benefits for the richest 9% of retirees, offering a $10,000 tax exemption for seniors who work past Social Security’s full retirement age, and protecting all Social Security income from taxation.11
Other pundits want to see retirement planning left solely to individuals. They cite what Chile did in the early 1980s: it replaced its federal pension program with a system of privately managed personal retirement investment accounts, allowing participants to set their own contribution levels, risk tolerance and retirement date. The effort yielded better than a 9.2% compounded annual return across its first 30 years.12
Several fixes were suggested in a 2010 report issued by the U.S. Senate Special Committee on Aging, including: 1) a 3% cut in benefits, 2) raising the payroll tax to 7.3%, 3) hiking the full retirement age to 68 or older, 4) increasing the Social Security averaging period that determines SSI, 5) reducing the typical yearly COLA by 1% or .5%, 6) reducing spousal benefits, 7) investing some of Social Security’s trust funds in equities, 8) directing some estate tax revenues into Social Security’s trust fund.13
Perhaps a fix lies somewhere within these proposals; unmodified or altered, alone or in combination.
How much retirement income do you have these days? With Social Security’s future still a question mark, you may be thinking about where your retirement income will come from in the years ahead. A chat with the financial professional you know and trust may lead to some ideas.
Renita Owens may be reached at 864.233.4163 or firstname.lastname@example.org.
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1 – www.ssa.gov/pressoffice/pr/2013cola-pr.html [10/16/12]
2 – www.forbes.com/sites/janetnovack/2012/10/16/social-security-benefits-to-rise-1-7-workers-face-up-to-2425-payroll-tax-hike/ [10/16/12]
3 – www.reuters.com/article/2012/11/16/column-miller-medicare-idUSL1E8MGBM420121116 [11/16/12]
4 – www.ssa.gov/pressoffice/factsheets/colafacts2013.htm [10/16/12]
5 – www.ssa.gov/planners/taxes.htm [1/14/13]
6 – www.aarp.org/politics-society/government-elections/info-02-2013/how-the-sequester-could-affect-social-security-and-medicare.html [2/19/13]
7 – www.csmonitor.com/Business/Latest-News-Wires/2012/0813/Social-Security-Surplus-dwindling-huge-shortfall-looms [8/13/12]
8 – www.bankrate.com/financing/retirement/social-security-fix-it-now/ [12/3/12]
9 – money.cnn.com/2011/10/19/pf/taxes/social_security_tax/ [10/19/11]
10 – www.bankrate.com/financing/retirement/bipolar-fixes-for-social-security/ [1/18/13]
11 – www.savingthedream.org/how-it-affects-you/retirees/ [10/21/11]
12 –www.investors.com/NewsAndAnalysis/Article/586464/201109291833/Cains-Chilean-Model.htm [10/12/11]
13 – money.usnews.com/money/blogs/planning-to-retire/2010/05/18/12-ways-to-fix-social-security [5/18/10]