Low inflation means the cost-of-living adjustment for Social Security payments will once again be disappointingly small, rising just 0.3 percent in 2017. The amount adds roughly $4 to the average recipient’s benefits, increasing the need for proper 401(k) planning.
The 0.3 percent adjustment will begin with benefits payable to 60 million Social Security beneficiaries in January. Increased payments to 8 million SSI beneficiaries will begin on December 30, 2016.
The average monthly Social Security payment in 2016 is $1,238. When properly combined with 401(k) distribution planning, the overall amount of income can be stretched further, one possible solution to fears of funding shortfalls as lifespans increase.
However, as the Associated Press notes, even the small COLA increase “will probably be wiped out by an expected increase in Medicare Part B premiums, which are usually deducted from Social Security payments.
“By law, rising premiums for most Medicare recipients cannot exceed their Social Security cost-of-living increase,” according to the wire service. “That’s known as the hold harmless provision. However, new enrollees and high-income retirees are not covered by that provision, so they could face higher Medicare premiums, which will be announced later this year.”
The Social Security Act ties the annual COLA to the increase in the Consumer Price Index as determined by the Department of Labor’s Bureau of Labor Statistics.
Some other adjustments that take effect in January of each year are based on the increase in average wages. Based on that increase, the maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $127,200 from $118,500.
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:
New beneficiaries coming onto Social Security’s rolls tend to have, on average, higher benefits than those leaving, so average benefits normally rise from month to month. This gradual rise in average benefits is altered by abrupt increases due to annual cost-of-living adjustments or COLAs. The COLA for December 2016 is 0.3 percent and is first payable in January 2017.
Since 1975, Social Security general benefit increases have been cost-of-living adjustments or COLAs. The 1975-82 COLAs were effective with Social Security benefits payable for June in each of those years; thereafter COLAs have been effective with benefits payable for December.
Prior to 1975, Social Security benefit increases were set by legislation.
he first COLA, for June 1975, was based on the increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the second quarter of 1974 to the first quarter of 1975. The 1976-83 COLAs were based on increases in the CPI-W from the first quarter of the prior year to the corresponding quarter of the current year in which the COLA became effective. After 1983, COLAs have been based on increases in the CPI-W from the third quarter of the prior year to the corresponding quarter of the current year in which the COLA became effective.
Application Of COLA To A Retirement Benefit
General
A COLA increases a person’s Social Security retirement benefit by approximately the product of the COLA and the benefit amount. The exact computation, however, is more complex.
Each Social Security benefit is based on a “primary insurance amount,” or PIA. The PIA in turn is directly related to the primary beneficiary’s earnings through a benefit formula. It is the PIA that is increased by the COLA, with the result truncated to the next lower dime.
Example
If the initial PIA is $1,444.50 and it is increased by a 0.3-percent COLA, the new PIA would be $1,448.80 after truncation to the next lower dime.
Early or delayed retirement affects your benefit amount
If you choose to retire before your normal retirement age, your benefit will be lower than your PIA. On the other hand, if you choose to retire after you attain your normal retirement age, your benefit will be higher than your PIA.
Steps leading from the PIA to the benefit amount
- A factor is applied to the PIA to account for early or delayed retirement, with the result truncated to the next lower dime
- Any offset to the benefit, such as payment of the Medicare Supplementary Medical Insurance (SMI) premium, is subtracted
- Finally, the resulting amount is truncated to the next lower dollar
Summary
When a COLA occurs, we increase the PIA as described above, and we repeat the steps required to calculate the new benefit amount based on the new, higher PIA. Due to the rounding, possible offsets, and final truncation in these steps, the increase in the new monthly benefit amount over the previous amount may differ somewhat from the COLA.
COLA Estimates
Cost-of-living adjustments (COLAs) are based on increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W is determined and published by the Bureau of Labor Statistics, Department of Labor.
The COLA effective for December 2017 will be based on the increase in the third-quarter average CPI-W for 2017 over the average CPI-W for the last base quarter. The last base quarter is the third quarter of 2016, the last year in which a COLA became effective. The average CPI-W for this quarter is 235.057. See the CPI-W data below.
Annual reports by the Board of Trustees for the Social Security Trust Funds show estimates of future COLAs.
SSI COLAs
COLAs for the Supplemental Security Income (SSI) program are generally the same as those for the Social Security program. However, COLAs for SSI have generally been effective for the month following the effective month of Social Security benefit increases. See SSI historical payment standards for more detail.
A blind or disabled child, who is a student regularly attending school, college, or university, or a course of vocational or technical training, can have limited earnings that are not counted against his or her Supplemental Security Income (SSI) benefits. The maximum amount of the income exclusion applicable to a student in 2016 is $1,780 per month but not more than $7,180 in 2016.
Income Exclusion Amounts for 2017
For 2017, the student earned income exclusion amounts increase by 0.3 percent to $1,790 per month but not more than $7,200 in 2017.
Calculation method
Each of the monthly and yearly maximum amounts for 2017 is the corresponding unrounded amount for 2016 increased by the latest COLA. If the amount so calculated is not a multiple of $10, we round it to the nearest multiple of $10.
Calculation details for 2017
The unrounded monthly amount for 2016 is $1781.37. This amount is increased by 0.3 percent to $1786.71, which we then round to $1,790.
The unrounded yearly amount for 2016 is $7180.65. This amount is also increased by 0.3 percent to $7202.19, which we then round to $7,200.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
