For the first time since 2009, Social Security beneficiaries will get bigger checks next year. Social Security payments for more than 60 million Americans will increase 3.6 percent in 2012, the Social Security Administration announced today.
This change is expected to result in the typical retiree getting about $43 more per month. The estimated average Social Security benefit payable in January 2012 is $1,229 monthly, up from $1,186 before the cost-of-living adjustment was factored in. The maximum possible benefit for someone who retires at full retirement age will also increase from $2,366 monthly in 2011 to $2,513 in 2012 .
Higher taxes. The maximum amount of earnings subject to Social Security tax will increase to $110,100 in 2012 from $106,800 in 2011. About 10 million high earners are expected to pay higher Social Security taxes as a result of the increase in the taxable maximum. The 2011 temporary reduction in worker Social Security taxes from 6.2 percent of earnings to 4.2 percent created by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 is also scheduled to end this year. Both workers and employers will pay 6.2 percent of their earnings up to the taxable maximum into the Social Security trust fund in 2012 under current law. Self-employed workers must pay 12.4 percent of their income to the Social Security program next year.
Higher earnings limits. Social Security recipients who work will be able to earn slightly more money without penalty in 2012. The earnings limit for Social Security beneficiaries who are younger than their full retirement age (age 66 for people born in 1943 through 1954) will be $14,640 in 2012, up from $14,160 in 2011. If they earn more than that, 50 cents of every benefit dollar will be temporarily withheld from their checks. In the year retirees reach their full retirement age, the earnings limit will jump to $38,880, above which Social Security checks are reduced by about 33 cents for each dollar earned. Once beneficiaries turn their full retirement age there is no Social Security reduction for continuing to work.
Social Security annual increases in payments are tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers. Automatic cost-of-living adjustments began in 1975 and have ranged from 14.3 percent in 1980 to 0 percent in both 2010 and 2011. Retirees last received a cost-of-living increase of 5.8 percent in 2009 shortly after gas prices spiked in 2008. Seniors did not receive another cost-of-living increase until 2012 because, in order to get an increase, this measure of inflation needed to climb above where it was in the third quarter of 2008.
However, this cost-of-living adjustment may not end up in the pockets of retirees. The Social Security increase may be partially or completely offset by increases in Medicare Part B premiums, which are often deducted from Social Security checks. Medicare Part B premiums, which have not yet been announced for 2012, are prohibited by law from increasing faster than Social Security payments for existing beneficiaries. However, now that retirees will be getting larger Social Security checks, Medicare premiums will be allowed to increase as well.