For most of the past 12 years, it has been my custom to write a year-end column that summarizes the Social Security changes and updates scheduled to take place the following year. Usually, that means I give the planned cost-of-living adjustment amounts, the earnings penalty limitation increases, and other revisions that are based on increases to the government’s inflation measuring stick called the “consumer price index.” But for the second year in a row, the CPI hasn’t budged an inch. So, for the second year in a row, there are no cost-of-living adjustments or other increases that I need to report.
That means that for two years running, there will be no COLA increases for Social Security beneficiaries. This will trigger many letters of complaint to my column along these lines: “What do they mean there was no inflation last year? All they have to do is look at my higher rent payments, my increased grocery bills, and my escalating drug costs to know that there certainly was an increase in the cost of living.” All I can say is that the official mechanism the government uses for measuring inflation didn’t go up. If you want to learn more about this measuring stick, check out the website of the folks who maintain it: the Bureau of Labor Statistics. You’ll find them at www.bls.gov.
Another measuring stick called the “national wage index” is used to set increases to other provisions of the law, which impact Social Security beneficiaries and taxpayers. But average national wages didn’t go up during this measuring period. In fact, they went down. Therefore, there will be no increase in the amount of earnings a Social Security beneficiary under age 66 can make before he or she starts losing benefits.
The earnings penalty threshold will remain at $14,160 in 2011 — the same level it has been at since 2009. What that means is that if you are under age 66 and getting Social Security, but still working, you will lose $1 from your benefits for each $2 you earn over $14,160 next year. In the year you turn 66, you can make up to $37,680 from January of that year up to the month you reach 66. From age 66 on, there is no limit on your earnings.
If you are getting Social Security disability benefits and try to return to work, you get a nine-month “trial work period” — during which time you generally can earn as much money as you want with no impact on your eligibility for disability payments. But after those nine months, if you are making what the law calls “substantial gainful” earnings, you may lose your benefits. That substantial gainful level remains at $1,000 per month in 2011, the same level it was at in 2010.
There are normally a couple of Social Security changes each year that impact people who are still working and paying Social Security taxes. One is the “quarter of coverage” amount. You generally get one-quarter of coverage, or one Social Security credit, for each “x” amount of earnings you have. That “x” remains at $1,120 in 2011. Because no one can get more than four “quarters” or Social Security credits in any one year, that means once you’ve made $4,480 in 2011, you’ve earned your maximum four credits for the year. This really isn’t an issue for most people because they are already “insured” for Social Security benefits.
You generally need only 40 credits to be eligible for Social Security retirement payments — and that translates into 10 years of work. So if you’ve worked for more than 10 years and continue to work, you’re still earning Social Security credits, but they really aren’t doing you much good.
Another annual change usually brought about by increases to average national wage is a ratcheting up of the amount of earnings subject to Social Security tax. But due to wage stagnation, that level remains at $106,800 for the second year in a row. In other words, if you’re working and making that kind of money, you will pay Social Security taxes only until you earn $106,800. After that, you’re off the payroll tax hook, or at least the Social Security part of the payroll tax. As in the past, you will continue to pay Medicare taxes on all of your income.
There is one major potential change to Social Security payroll taxes that has nothing to do with CPIs or COLAs or the wage index — but has everything to do with politics. As I am writing this, Congress and the president are contemplating lowering the Social Security tax rate for one year: from 6.2 percent to 4.2 percent. Assuming the bill passes, you may be scratching your head just as I am. I’m not an economist, and some mighty influential people — who are a lot smarter than me — are making what seem like sound fiscal arguments for including a one-year reduction in the payroll tax as part of a tax cut and economic stimulus package.
But everyone knows Social Security faces long-range funding problems because of the on-going and ever-increasing retirement of the baby boomers generation. And everyone knows there are only two answers to those problems: We will either have to cut Social Security benefits or raise Social Security taxes. Obviously, cutting Social Security payroll taxes now only exacerbates that long-range problem and will force us to make even bigger benefit cuts or even higher Social Security tax increases later on.