Tax Attic for 10-18-18

This past week, the Social Security Administration made an announcement that will give sixty-seven million people a larger benefit check in 2019.  The good news is gross benefit checks for all will increase by 2.8%. The bad news is net benefit checks will fall a little short of that figure because Medicare B benefit costs will increase from $134 per month up to $135.50.  According to the SSA, in 2018 the average recipient received a gross benefit of $1,422.  $1422 – $134 left an average net check of $1288.  The gross amount in 2019 will go up by 2.8% to $1461. Medicare B will also increase to $135.50.  The new average monthly net benefit will be $1461 – $135.50 leaving a 2019 net benefit of $1325.50.  That is a monthly increase of $37.50 or $450 yearly for 2019. I don’t know too many people who wouldn’t gladly take a pay raise of $450.

The question I have is how did the Social Security Administration determine that the gross benefit check should increase by 2.8%? Allow me to explain the answer to that question.  It all starts with the Department of Labor’s Bureau of Labor Statistics (BLS). The BLS looks at the particular Consumer Price Index that tracks the Urban Wage Earners and Clerical Workers CPI from the 3rd quarter of 2017 to the 3rd quarter of 2018. I’m thinking that only God knows how the Urban Wage Earners and Clerical Workers CPI was chosen to tie in to the the Social Security Administration’s benefit. I guess the SSA had to use some measurement and that one was as good as any.  Regardless of how the CPI is determined, today, sixty-seven million recipients are affected by the calculation.  The largest increase ever was back in 1980 when the CPI went up by 14.3%.  Of course, that was in the President Jimmy Carter days when inflation was raging; the prices of everything seemed to be doubling every six months; and even 14.3% really seemed to be a little short of staying even.  There have been three years of 0% inflation according to the BLS. 2010, 2011, and 2016 had zero percent overall inflation.  Granted, we may have spent more money for some things, such as avocados, but we spent less for other things, such as fries at Wendy’s, so the net ins and outs remained the same.  It’s all very interesting.

Let’s talk for a little about the mechanics of the social security benefit process. The “mechanics” created a term called “full retirement age”.  The importance of attaining full retirement age (FRA) before beginning to draw is that the taxpayer will then receive the full calculated social security retirement benefit.  FRA has been set on a sliding scale over the years and currently is set at age 67 for taxpayers born after 1959.  For those born between 1943 and 1954, FRA is set at age 66.  Taxpayers born before 1938 had a FRA of 65.  If the taxpayer starts receiving a benefit prior to attaining FRA, the benefit will be reduced by up to 30% for taxpayers born after 1959 who begin drawing at the earliest possible age of 62.  The closer to FRA before beginning to draw, the lesser the reduction.  That means, in effect, by delaying to draw, the higher will be the taxpayer’s benefit. In addition, for every month the taxpayer starts to draw past the FRA, the benefit will increase by 2/3% per month or 8% per year. Once the taxpayer reaches age 70, there are no more delayed-drawing increases. However, increasing the benefit by a guaranteed 8% a year is a great deal.  Next week, I will discuss a few more aspects of the social security system.  This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent.

He owns Action Tax Service on Northland Dr in Rockford.

Contact Jerry at www.actiontaxservice.com.