Social Security benefits for about 60 million retired and disabled workers and their dependents will increase slightly in 2017, but for many beneficiaries, the minuscule 0.3% cost-of-living adjustment will be wiped out by higher Medicare premiums.

The 0.3% adjustment is the smallest annual increase since automatic COLAs began in 1975 (although there were three years — 2010, 2011 and 2016 — when there was no COLA). For the average retired worker, it means a $5 increase in monthly benefits in 2017. The maximum Social Security benefit for a high-income earner retiring at 66 this year will increase by $48 to $2,687 per month.

Most Medicare enrollees who have their premiums deducted from their monthly Social Security benefits will pay about $109 per month in 2017, up about $4 per month from last year. But new enrollees in Medicare, as well as those who pay their Medicare Part B premiums directly, will pay the standard Part B premium of $134 per month this year. Higher-income retirees will pay even more.

If your modified adjusted gross income in 2015, including tax-free interest, exceeded $85,000 if you are single or $170,000 if you are married, you will pay a Medicare premium surcharge in 2017, with monthly costs ranging from $187.50 to $428.60 per person.

Retirees are not the only ones being asked to pay more because of their income.

Higher-income workers will pay more FICA taxes, as the taxable wage base increases to $127,200 in 2017, up $8,700 from the $118,500 limit that had been in place since 2015. Of the estimated 173 million workers who will pay Social Security taxes in 2017, about 12 million will pay more because of the increase in the taxable maximum, according to the Social Security Administration.

Employers and employees each pay 7.65% of wages up to the taxable limit, meaning each could pay up to $665.55 more ($8,700 x 0.0765) in Social Security payroll taxes per employee in 2017. Self-employed workers pay double the rate — 15.3% — as they are responsible for both the employer and employee share of the payroll tax. That means their payroll taxes could increase by up to $1,331 ($8,700 x 0.153) in 2017. The 1.45% Medicare portion of the FICA payroll tax is imposed on all wages, including those above the $127,200 threshold.

Social Security recipients who collect benefits before their full retirement age will be able to earn more in 2017 without losing benefits due to excess earnings. In 2017, beneficiaries who are under full retirement age for the entire year can earn up to $16,920 without losing any Social Security benefits, up $1,200 from last year. If they earn more than that, they will forfeit $1 in benefits for every $2 earned over that limit.

The earnings limit only applies to wages from a job or self-employment, and not to pensions, investments or other “unearned” income. But the earnings cap affects anyone who collects Social Security before full retirement age, including retirees, spouses, ex-spouses and survivors. Any benefits lost to the earnings cap are restored at full retirement age in the form of larger monthly benefits.

A higher limit applies in the year an individual reaches full retirement age in the months leading up to his or her 66th birthday. They can earn up to $44,880 in 2017 without losing any Social Security benefits, up from $41,880 in 2016. If they earn more than that, they will forfeit $1 in benefits for every $3 earned over that limit.

There is no limit on earnings beginning the month an individual attains full retirement age, which is currently 66 for anyone born from 1943 through 1954. But that, too, is changing.

Beginning in 2017, the first wave of Americans subject to a higher full retirement age will turn 62, making them eligible for reduced Social Security benefits. Because the full retirement age for someone born in 1955 is 66 and 2 months, the reduction for collecting benefits at the earliest possible age of 62 is slightly higher than someone whose full retirement age is 66.

Individuals who turn 62 this year can collect 74.2% of their full retirement age benefit, compared to 75% for someone whose full retirement age is 66. A spousal benefit is worth just 34.6% of a worker’s primary insurance amount if claimed at age 62, compared to 35% for someone whose full retirement age is 66.

The full retirement age will gradually increase by two months per year until it reaches 67 for those born in 1960 and later.

Article Created by: Investment News