As of July, more than 61 million people were receiving Social Security benefits on a monthly basis, and 42 million of those recipients (68%) were retired workers. According to recently released data from the Social Security Administration, a whopping 62% of these retirees, including half of all married couples and 71% of unmarried elderly individuals, relies on their monthly stipend to account for at least half of their income.
Therefore, as goes Social Security, so goes the financial foundation of tens of millions of Americans each year.
The program itself isn't on the strongest footing. The 2017 report from the Social Security Board of Trustees projects that by 2022 it'll begin paying out more in annual benefits than it's generating in revenue from payroll taxes, interest income, and the taxation of benefits. By 2034, the nearly $3 trillion in one-time asset reserves is expected to be completely exhausted. Should Congress sit on its laurels, the trustees' report opines that an across the board cut in benefits of up to 23% may be needed to sustain payouts through 2091. It's not exactly the rosiest forecast for a social program that millions of seniors lean on.
The most important Social Security date is approaching
But there are even more pressing concerns for retirees. Namely, what sort of cost-of-living adjustment (COLA) can they expect for the upcoming year? In roughly two weeks (usually in the third week of October), the SSA will release its annual changes to Social Security, and the headline number that those aforementioned 42 million retired workers will be eyeing is their upcoming COLA.
COLA is nothing more than the "raise" that seniors receive most years that's supposed to (the key phrase there being "supposed to") keep up with the inflation they're dealing with on various expenditures. The Consumer Price Index for Urban Wage Earners and Clerical Workers is the inflationary tether tied to Social Security's hip. An average reading is taken from the third quarter of the previous year (July through September) and then compared to the average reading of the third quarter of the current year. If prices for the broad basket of goods and services examined goes up year over year, beneficiaries get a "raise" commensurate with the percentage increase, rounded to the nearest 0.1%. If prices go down, as they have in three of the past eight years, benefits remain the same from one year to the next.
In the months leading up to the third quarter, things were not looking too hopeful for seniors. Inflationary measures had slowly been falling, suggesting that while Social Security recipients were in line for a raise, it would once again be relatively small. However, hurricanes Harvey and Irma appear to have changed that thesis. Both hurricanes led to refinery shutdowns and oil production hiccups that have boosted energy prices (e.g., gasoline), which in turn has lifted the inflation rate. It's unclear by how much higher prices at the pump will help seniors, but it's not impossible that COLA next year could come in around 2%. A 2% COLA would put an extra $27.40 into the pockets of the average retired worker each month.
Nonetheless, seniors should hold their cheering for another time. Even at a 2% COLA, it's likely that they'll lose purchasing power to a higher medical care inflation rate and housing or rental inflation.
Workers can expect some changes, too
Of course, the annual announcement from the SSA regarding changes for the upcoming year also affects the American workforce.
To begin with, the maximum taxable earnings cap is tethered to the National Average Wage Index, which tends to move higher during periods of economic growth. This taxable earnings cap, which stood at $127,200 in 2017, is the cutoff point for Social Security's 12.4% payroll tax. Earned income between $0.01 and $127,200 is taxable by the SSA, while any income above and beyond this figure is not. Next year, the taxable earnings cap will probably be higher, meaning the roughly one in 10 well-to-do individuals making more than $127,200 will be paying more into the program.
It would also not be a surprise to see the earned income needed to acquire lifetime work credits rise along with a healthy U.S. economy. Despite popular belief, you aren't just handed the right to claim Social Security when you're born. You need to earn 40 lifetime work credits to qualify for retirement benefits later in life. You can earn a maximum of four credits per year, with each credit equating to $1,300 in earned income in 2017. In other words, if you make $5,200 this year, you'll have maxed out your lifetime credit potential for 2017. In 2018, it's very possible the amount you'll need to earn to receive a lifetime work credit will increase.
The annual Social Security changes announcement is always a big deal, so make sure to circle those calendars and set reminders so you can be prepared when we turn the page on 2017.
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