October 19, 2016

The Good News and the Bad News about the 2017 Social Security Increase

Jason J. Fichtner

Former Senior Research Fellow
Summary

A small COLA may push some to rethink their retirement portfolio and find ways to generate additional income, though a small COLA shouldn't necessarily require additional cost-saving actions, if in fact a small COLA reflects smaller increases in cost of living.

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It's a good news, bad news, good news, bad news story. The first good news is that Social Security recipients will receive a cost of living (COLA) increase in 2017, after no increase in 2016. The bad news is that next year's 0.3-percent COLA increase is the smallest in history. This means a retired worker who currently receives the average $1,350 per month benefit will see only $4 more per month from the COLA increase.

As promised, however, there is more good news. The tiny bump in COLA benefits is an indicator of an economy in which prices aren't increasing. This low inflation means Americans' purchasing power stays relatively the same, so dollars go as far as last year.

There is some additional bad news for those working and paying into the Social Security system. The COLA increase also means an increase in the maximum limit on which wage income is subject to Social Security payroll taxes, after no increase in the taxable maximum for 2016. For 2017, the taxable maximum increases from $118,500 to $127,200. For workers subject to the taxable maximum, that $8,700 increase in taxable wage income amounts to a tax increase of $539.40. For self-employed workers who must pay both the employee and employer share, this amounts to a tax increase of $1,078.80 for 2017.

For retirees worried that the COLA increase won't offset increased health-care costs, now is a good time to review and compare Medicare options and ensure that the plan they have meets their needs and is the most cost-effective plan given the medical services and prescriptions drugs required. Medicare suggests six ways to lower your prescription drug costs.

A small COLA may push some to rethink their retirement portfolio and find ways to generate additional income, though a small COLA shouldn't necessarily require additional cost-saving actions, if in fact a small COLA reflects smaller increases in cost of living. That said, it's difficult to give advice to seniors on how to increase income in retirement, especially for those already retired and receiving Social Security benefits. Can some retirees work part-time jobs? Can others shift their retirement portfolio to weigh dividend paying stocks more heavily? Every senior's circumstances are different and, therefore, general one-size-fits-all advice should be matched to individual or family circumstances.

The one bit of advice I can give, and always do, is that a low COLA is a reminder of the importance of deciding when to claim Social Security retirement benefits in the first place. For someone whose full retirement age is 66, waiting to claim benefits until age 70 results in a monthly benefit check that is 32% higher. Conversely, claiming at age 62 results in a benefit check that is 25% less per month. The biggest way to increase your monthly Social Security benefit is to delay claiming. Some people need their Social Security benefit at 62 — they just can't work any longer. But for those who can work longer, or don't need their Social Security income right away, delaying claiming is one of the smartest financial retirement decisions a person can make.