How cost-of-living adjustments change Social Security benefits this year

Retiree benefits increase and so do taxes for high-income workers

By Mary Beth Franklin

Jan 5, 2015 @ 2:27 pm EST

Starting this month, more than 58 million Social Security recipients will see a slight increase in their monthly retirement and survivor benefits — up 1.7% from last year — while high-income workers will pay up to $114.75 more in payroll taxes.

The maximum Social Security benefit for someone retiring at the full retirement age of 66 in 2015 is $2,663 per month. That's up $21 from the maximum benefit of $2,642 per month for someone who retired at full retirement age in 2014.

But typical retirees, many of whom claim reduced benefits early, receive a lot less. The Social Security Administration estimates the average Social Security benefit in 2015 will be $1,328 per month, up $22 from last year.

Retirees can claim Social Security benefits as early as age 62, but they are reduced by 25% compared with claiming at full retirement age. And those who claim Social Security before full retirement age while continuing to earn income from a job are also subject to earnings cap restrictions that can temporarily reduce their benefits.

In 2015, Social Security beneficiaries who are younger than full retirement age for the entire year forfeit $1 in benefits for every $2 they earn over $15,720. The annual earnings cap increased $240 from the 2014 limit of $14,480.

A more generous earnings cap applies in the year one reaches full retirement age. Someone turning 66 in 2015 can earn up to $41,880 in the months leading up to his or her 66th birthday without forfeiting any Social Security benefits, up $480 from last year. Those who earn more than $41,880 in the months before their 66th birthday would forfeit $1 in benefits for every $3 earned over that limit.

Some people who retire midyear have already earned more than their yearly earnings limit. That's why SSA has a special rule that applies to earnings for one year, usually the first year of retirement. The special rule allows recipients to receive a full Social Security check for any whole month that SSA considers them “retired,” regardless of their yearly earnings.

If you will be under full retirement age for all of 2015, you are considered retired in any month that your earnings are $1,310 or less (1/12th of the annual limit of $15,780) and you did not perform substantial services in self-employment.

If you reach full retirement age in 2015, you are considered retired in any month that your earnings are $3,490 or less (1/12th of the annual limit of $41,880) and you did not perform substantial services in self-employment.

Social Security defines “substantial services in self-employment" as devoting more than 45 hours a month to a business or between 15 and 45 hours to a business in a highly skilled occupation.

The earnings cap disappears at full retirement age and any Social Security benefits forfeited to the earnings cap are reinstated.

For example, if you claimed benefits at 62, you would receive 75% of your full retirement age amount. But if over the next four years, you forfeited 24 months of benefits due to excess earnings, once you reach 66, your benefits would be increased as if you had first claimed at age 64. You can estimate how earnings could affect your benefit payments by using the Social Security Administration's earnings test calculator.

And, if you continue to work while receiving benefits, SSA will automatically check your record every year to see whether the additional earnings will increase your monthly benefit. If there is an increase, SSA will send you a letter telling you your new benefit amount.

Those who wait until age 70 to claim Social Security benefits can increase their full retirement age benefit by 32% thanks to delayed retirement credits worth 8% per year for every year they postpone collecting benefits beyond their full retirement age up to age 70. The difference between collecting benefits at 62 and 70 is a 76% increase in monthly retirement income.

The 1.7% cost-of-living adjustment also applies to the amount of wages subject to FICA payroll taxes, increasing the taxable wage base from $117,000 in 2014 to $118,500 in 2015. Of the 168 million workers who pay Social Security taxes in 2015, SSA estimates that about 10 million will pay higher taxes — as much as $114.75 more.

Employers and employees each pay 7.65% in FICA taxes to fund Social Security and Medicare. Self-employed individuals pay both portions of the tax for a total tax rate of 15.3%. Social Security accounts for 6.2% on the first $118,500 of earnings in 2015. The 1.45% Medicare portion applies to all earnings, even those about the taxable wage base. In addition, individuals with earned income of $200,000 or more and married couples with earned income of $250,000 or more pay an additional 0.9% in Medicare taxes.

(Questions about Social Security? Find the answers in my ebook.)

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