The Social Security Administration announced a 1.7% cost-of-living adjustment for 2013. That adjustment will also cause an increase in the maximum amount of earnings subject to Social Security tax.
A retiree receiving $2,000 a month in Social Security benefits this year will receive $2,034 a month, starting in January. This boost is based on the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers from the third quarter of 2011 through the third quarter of 2012.
Cost of Living Adjustments have fluctuated widely in recent years: a 5.8% increase for 2009, for example, was followed by no increases in 2010 or 2011, then a 3.6% COLA for 2012.
Just as Social Security benefits will creep up for retirees next year, so will Social Security taxes for current workers. In 2012, Social Security tax is imposed on earnings up to $110,100. Next year, the ceiling will be $113,700. The Social Security tax reduction of two percentage points on the portion of the tax paid by workers is set to expire at the end of 2012, unless Congress extends it once more.
For planning purposes, advisors might note that $1 in benefits will be withheld for every $2 in earnings above $15,120 in 2013, before full retirement age. (Full retirement age is 66 for people now gaining eligibility for Social Security retirement benefits.) During the year in which an individual reaches full retirement age, $1 dollar in benefits will be withheld for every $3 in earnings above $3,340 a month, for the months prior to reaching age 66. Those earnings limits might impact clients who are still working in their early 60s.
The average Social Security benefit for all retired workers will be $1,260 a month, after the 2013 COLA, or just over $15,000 a year. Many financial planning clients will receive larger benefits: for someone who has had a substantial income for many years, the maximum Social Security benefit for a worker retiring at full retirement age will be $2,533 a month, about $30,400 a year.
Considering that the 10-year Treasury now yields around 1.7%, a client would need a to hold almost $1.8 million worth of those Treasuries to receive a similar amount of cash flow. Advisors might want to point this out to clients when discussing asset allocation in retirement.
Moreover, seniors are now entitled to an 8%-per-year delayed retirement credit, from age 66 to age 70. By waiting four years, a client now entitled to $30,000 a year from Social Security could receive around $40,000 a year, plus Cost of Living Adjustments, for the rest of his or life.