2017 OASDI tax and earnings base increases

Social Security beneficiaries will see a very small increase in their monthly checks in 2017—0.3%. This cost-of-living adjustment, or COLA, will produce an estimated average monthly benefit of $1,360 for all retired workers in 2017, $5 a month more than in 2016. The COLA increase will be applied to this coming year’s benefits, beginning with benefits for December 2016, which are payable in January 2017.

The amount of earnings subject to taxation under FICA and SECA, the “wage base,” is also going up in 2017. The 2017 wage base of $127,200 is $8,700 higher than the 2016 amount of $118,500.

The benefit and wage base increases for 2017 were announced October 18 by the Social Security Administration in a press release.

Tax increase appears in FICA tax deducted from individuals’ paychecks

The tax increase will show up in the FICA tax deducted from the paychecks of those individuals earning above the 2016 wage base of $118,500. Although the tax rate for the Old-Age, Survivors and Disability Insurance (OASDI) portion of the tax under the FICA has held steady at 6.2% since 1990, the amount of wages subject to the tax increases each year based on increases in the national average wage.

The $127,200 earnings base for 2017, which applies only to the 6.2% OASDI portion of the Social Security tax, could result in a FICA tax increase of as much as $539.40 for employees (and their employers) whose earnings exceed the 2016 tax and earnings base of $118,500. Self-employed individuals may owe as much as $1,078.80 in additional self-employment (SECA) tax in 2017 since they also must pay the “employer” portion of the taxes. However, they can recoup some of this amount through a deduction on their federal income tax return. There is no limit on the amount of earnings subject to the 1.45% Medicare (hospital insurance) portion of the tax.

About 12 million workers out of a total of approximately 173 million workers who will pay Social Security taxes in 2017 are affected by the higher wage base for 2017, according to the SSA.

No change in tax rates

The employee/employer Social Security tax rate remains at 7.65% for 2017, including 6.2% for the OASDI portion and 1.45% for the hospital insurance portion. For the self-employed, the rate continues to be 15.3%. Note that self-employed persons calculate their net earnings as gross earnings reduced by 7.65%, and they deduct half of their Social Security taxes from their net earnings for federal income tax purposes.

Change in CPI-W drives amount of increase

The cost-of-living increase of 0.3% will begin with Social Security checks that are received in January 2017. (Increased payments to more than 8 million Supplemental Security Income beneficiaries, however, will begin on December 30, 2016.)

The 0.3% increase is based on the rise in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of 2014 through the third quarter of 2016. The CPI-W reflects cost increases for wage earners and thus excludes the impact of cost increases on higher income earning self-employed professionals and business owners.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 1.5% over the last 12 months to an index level of 241.428. The index for all items less food and energy rose 2.2%. The food index declined 0.3%, while the energy index declined 2.9%. The CPI-W increased 1.2% over the last 12 months to an index level of 235.495.

Retired worker’s average monthly benefit becomes $1,360

For Social Security beneficiaries, the average monthly benefit (prior to deduction for the Part B Medicare premium) for all retired workers will rise to $1,360 in 2017, up from the average benefit of $1,355 paid one year earlier. The maximum Supplemental Security Income (SSI) monthly benefit for an individual will rise to $735, up from $733, and the maximum SSI payment to a couple will rise to $1,103, up from $1,100.

Domestic employee and election worker coverage

For 2017, there is no increase in the amount of wages a domestic worker may earn without being subject to FICA taxes. An employer may pay a domestic worker, such as a maid or a nanny, up to $2,000 in 2017 without having to wrestle with federal withholding on wages. The threshold for election workers increases to $1,800.

Those turning 65 in 2017 must wait until 2018 for full benefits

Workers who attain age 65 in 2017 will have to wait until 2018 to retire if they wish to receive their full retirement benefit. A gradual rise in the full retirement age began in 2000 resulting from the 1983 amendments to the Social Security Act, which increased the full retirement age from age 65 to age 67. The only individuals attaining full retirement age in 2017 will be individuals attaining age 66, i.e., individuals born January 2, 1951, through January 1, 1952. For such individuals, the maximum possible monthly benefit is $2,687. Full retirement age will remain at age 66 for the next four years for individuals born January 2, 1943, through January 1, 1955.

Reduced benefits for early retirees

Workers may retire as early as age 62, but they will receive a reduced benefit if they do. The full retirement age of 66, for workers reaching age 62 in 2017 (66 and two months, for those individuals born in 1955), is also based on the 1983 amendments. The practical effect of this change is to slightly decrease the amount of early retirement benefits payable to individuals who reach age 62 in 2017 by increasing the reduction amount in the benefit formulas by 5/12 of 1.0% of an individual’s primary insurance amount (PIA) for each additional month of retirement beyond 36 months. This process is explained more fully in the Unemployment Insurance Reporter with Social Security at ¶12,305 in the “Social Security: Benefits Explained” division. PIAs are explained at ¶12,210 and ¶12,211 in the same division.

Increases for other beneficiaries

For an aged couple, both receiving benefits, the average monthly Social Security benefit becomes $2,260 (up from the average benefit of $2,254 paid when last year’s increase took effect in December 2015). For a widowed mother and two children, the average monthly benefit becomes $2,695 (up from $2,686). For an aged widow or widower living alone, the average monthly benefit becomes $1,300 (up from $1,296) and for a disabled worker with a spouse and one or more children, the average monthly benefit becomes $1,996 (up from $1,990). The average monthly benefit for all disabled workers becomes $1,171 (up from $1,167). All of these benefit amounts assume steady earnings since age 22 and no earnings prior to that point.

Benefit computation formula changes

The bend points used in the computations of the PIA for workers who first become eligible to receive a benefit in 2017, or who die in 2017 before becoming eligible, will be $885 and $5,336, respectively. The 2017 eligibility year PIA formula, which is based on the worker’s average indexed monthly earnings (AIME) throughout his or her career, thus will be 90% of the first $885 of AIME, plus 32% of AIME over $885 through $5,336, plus 15% of any AIME in excess of $5,336.

Maximum family benefit increases

The maximum family benefit in cases involving workers who first attain age 62, become disabled or die in 2017 will be computed as 150% of the first $1,131 of the worker’s PIA, plus 272% of the worker’s PIA over $1,131 through $1,633, plus 134% of the worker’s PIA over $1,633 through $2,130, plus 175% of the PIA in excess of $2,130.

Disability thresholds

The amount of monthly earnings in 2017 that will give rise to a presumption that a disability beneficiary is no longer disabled, that is, the amount that is deemed sufficient to demonstrate an ability to engage in “substantial gainful activity” is $1,170, an increase of $40 from 2016. A higher threshold of $1,950 will apply to blind beneficiaries in 2017. Disability beneficiaries may work for as many as nine months during any 60-month period without affecting their right to receive benefits. This is known as “trial work.” In 2017, a disabled beneficiary who works will not be treated as having engaged in trial work for any month in which his or her earnings are no more than $840, an increase of $30 over the 2016 limit.

There is no trial work period for Supplemental Security Income (SSI) disability beneficiaries. However, if an SSI beneficiary is working, has only earnings, and does not pay expenses in order to work, he or she may earn up to $1,555 per month in 2017 before SSI federal cash benefits stop. In 2016, an individual could earn up to $1,551. This amount is based on an exclusion of the first $85 of monthly earned income (assuming the person has no other income) plus a monthly deduction of $1 for every $2 earned thereafter. SSI beneficiaries in states that provide a supplement to the federal SSI benefit can earn even more before cash payments stop. However, if an individual has earnings of $1,170 or more in 2017, then the individual would be considered to be engaging in “substantial gainful activity” and would probably not be eligible for SSI disability benefits unless he or she is blind. Note that the SSI student exclusion is $7,200 per year in 2017.

Miscellaneous additional changes

The amount of earnings required for a quarter of Social Security coverage in 2017 increases to $1,300, up from $1,260 in 2016.

The national average wage index for 2015 (most recent available) is $48,098.63. The index is 3.48% higher than that of 2014.

The “old-law” contribution and benefit base increases from $88,200 in 2016 to $94,500 in 2017.

The fees for services performed by a representative payee remain at $41 and $78 in 2017.

Retirement test amounts rise

The amounts that Social Security beneficiaries can earn without having their retirement benefits reduced also will go up next year.

Although the Senior Citizens’ Freedom to Work Act of 2000 eliminated the annual earnings test as of January 2000 for workers between full retirement age (age 66 in 2017 for workers who attained age 65 in 2016) and age 69, workers under the full retirement age of 66 who are receiving benefits remain subject to the test and can earn up to $16,920 in 2017, or $1,410 per month, without having their benefits reduced. This is an inflation-adjusted increase of $100 over the 2016 annual limit. One dollar in benefits is withheld for every $2 in earnings above the limit.

A modified test applies to a worker in the year that he or she reaches full retirement age. Thus, workers who reach age 66 in 2017 may earn up to $44,880 in the months preceding the attainment of full retirement age without having their benefits reduced. This is an increase of $3,000 over the 2016 annual limit of $41,880. One dollar in benefits is withheld for every $3 in earnings above the limit. Once an individual reaches full retirement age, benefits are no longer subject to any retirement test. Beneficiaries age 70 and older have not been subject to benefit reductions based on earnings since 1983.

Medicare deductibles, premiums in 2017

As we go to press, the Department of Health and Human Services has not yet announced the standard Medicare Part B premium for 2017. However, if the premium does increase, about 70% of all Social Security beneficiaries would be held harmless, or not responsible, for the increase in Part B premiums by Act §1839(a) (42 USC §1395r).

Individuals who would not be held harmless are lower income beneficiaries whose premiums are paid by Medicare, higher income beneficiaries who pay income-related Part B premiums, and new enrollees.

Official notice to appear in Federal Register

The Social Security Administration’s official publication of the formula adjustments, cost-of-living increases, and tax and wage bases that will affect Social Security benefit computations in 2017, as well as its explanations of how the adjustments are calculated, will appear in the Federal Register shortly.

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