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Provides a comprehensive and detailed explanation for the federal old-age, survivor's and disability insurance segments of the Social Security program.
Social Security beneficiaries will see a modest 2.3% increase in their monthly checks in 2008 as a result of inflation. The 2.3% cost -of-living adjustment, or COLA, will produce an estimated average monthly benefit of $1,079 for all retired workers in 2008, $35 a month more than in 2007. However, $2.90, or 8.3%, of that increase will be eaten up by a rise in the standard premium paid by beneficiaries enrolled in Medicare Part B in 2008. The COLA increase will be applied to this coming year's benefits, beginning with benefits for December 2007, which are first payable in January 2008.
The amount of earnings subject to taxation under FICA and SECA, the ``wage base,’’ is also going up in 2008. The 2008 wage base of $102,000 is $4,500 higher than the 2007 amount, and the maximum additional Social Security tax that might be collected on someone earning above the 2007 wage base is $279. In terms of dollars and cents, this is the largest increase ever, and matches the increase for 2002. However, as a percentage, the 4.6% increase is only slightly higher than the average increase of 4.1% during the 19 years that the 6.2% Social Security tax rate has been in effect.
The benefit and wage base increases for 2008 were announced October 17 by the Social Security Administration in a press release,
The tax increase will show up in the FICA tax deducted from the paychecks of those earning above the 2007 wage base of $97,500. 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 tax increases each year based on increases in the national average wage.
The $102,000 earnings base for 2008, 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 $279 for employees (and their employers) whose earnings exceed the 2007 tax and earnings base of $97,500. Self-employed individuals may owe as much as $558 in additional self-employment (SECA) tax in 2008 since they must also 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. These tax increases represent a 4.6% increase over the maximum amounts of the OASDI portion of the FICA tax owed in 2007. This is higher than last year's 3.5% increase, but still close to the average 4.1% increase.
About 12 million workers out of a total of approximately 164 million workers who will pay Social Security taxes in 2008 are affected by the higher wage base for 2008, according to the SSA.
The $102,000 wage base for 2008 is $300 less than the estimated increase published in the 2007 Annual Report of the Board of Trustees of the Federal OASDI Trust Funds issued in April of this year. The 2008 wage base reflects national average wages for 2006, the variable upon which the 2008 wage base formula is based. The 2006 national average wage index of $38,651.41 is 4.6% percent higher than the 2005 national average wage index, and is the second highest increase since 2000; however, the increase in national average wages is just slightly higher than the average increase of 4.1% over the past 22 years. The 4.6% increase is relatively close to the 4.8% increase predicted by the Social Security trustees in their April report.
The lower wage base will mean that Social Security will take in less revenue next year than expected, but it also means that obligations to future retirees will be lower as well.
The employee/employer Social Security tax rate remains at 7.65% for 2008, 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.
Domestic employee and election worker coverage
For 2008 there is a $100 increase in the amount of wages a domestic worker can earn without being subject to FICA taxes. An employer can pay a domestic worker, such as a maid or nanny, up to $1,600 in 2008 without having to wrestle with federal withholding on wages. The threshold for election workers also increases in 2008, to $1,400.
The cost-of-living increase of 2.3% will begin with Social Security checks that are received in January 2008. (Increased payments to more than 7 million Supplemental Security Income beneficiaries, however, will begin on December 28.) This increase is nearly two thirds higher than the 1.4% increase that had been predicted by the trustees in April of this year. A 3.3% cost-of-living increase applied last year.
The increase is largely driven by an increase in food, beverage, shelter and medical costs. Shelter costs (not including energy) contributed to about 46% of the increase, while food/beverage and medical costs contributed 31% and 10%, respectively, to the overall increase. The overall increase was less than last year’s 3.3% cost-of-living adjustment primarily due to the tremendous slow-down in the cost of petroleum-based energy commodities. For the 12 months ending August 2006, there was a 15.1% increase, while for the same 12-month period ending in 2007, there was a 2.5% decline.
The 2.3% 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 2006 through the third quarter of 2007. 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. For wage earners, the impact of reduced energy costs is slightly higher than it is for all urban consumers.
For Social Security beneficiaries, the average monthly benefit (prior to deduction for the Part B Medicare premium) for all retired workers will rise to $1,079, up from the average benefit of $1,044 paid one year earlier. The maximum Supplemental Security Income (SSI) monthly benefit for an individual will rise to $637, up from $623, and the maximum SSI payment to a couple will rise to $956, up from $934.
Workers who attain age 65 in 2008 will have to wait until 2009 to retire if they wish to receive their full retirement benefit. A gradual rise in 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 2008 will be individuals born in 1942 attaining age 65 and 10 months. For such individuals, the maximum possible benefit remains at $2,116, as determined in 2007, which is increased to $2,164 in 2008 on account of the 2.3% cost-of-living adjustment. The maximum benefit payable to someone born in 1943 who still wishes to retire upon reaching age 65 in 2008 is $2,030. This is an increase of $32 per month over what was payable to a worker retiring at age 65 in 2007.
If someone born in 1943 waits until they reach their full retirement age of 66 in 2008, their maximum benefit will be $2,185 plus the 2008 COLA, which will be announced in October 2008. Full retirement age will remain at age 66 for the next 12 years for individuals born in 1943 through 1954. The $2,185 maximum is an increase of $69 per month over what was payable to a worker retiring at the full retirement age of 65 and ten months in 2006.
Workers may retire as early as age 62, but they receive a reduced benefit if they do. In 2008, workers whose birth date is January 2, 1946---January 1, 1947, inclusive, will not be entitled to a full retirement benefit unless they delay retirement until age 66. Their retirement benefit will be higher at that time, but workers with average lifetime earnings will have to live until their mid-seventies to recover the benefits they lost by waiting until full retirement age. The full retirement age of 66 for workers reaching age 62 in 2007 is based on the 1983 amendment that gradually increases full retirement to age 67 over a 22-year period. The practical effect of this change is to slightly decrease the amount of early retirement benefits payable to individuals who reach age 62 in 2008 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.
For an aged couple, both receiving benefits, the average monthly Social Security benefit becomes $1,761 (up from the average benefit of $1,713 paid when last year's increase took effect in December 2006). For a widowed mother and two children, the average monthly benefit becomes $2,243 (up from $2,167). For an aged widow or widower living alone, the average monthly benefit becomes $1,041 (up from $1,008) and for a disabled worker with a spouse and one or more children, the average monthly benefit becomes $1,690 (up from $1,646). The average monthly benefit for all disabled workers becomes $1,004 (up from $979). All of these benefit amounts assume steady earnings since age 22 and no earnings prior to that point.
A significant increase (4.60%) in the national average wage index used in the wage indexing formula will change the ``bend point’’ parameters used in the primary insurance amount (PIA) calculations from which the actual monthly benefit amount is ultimately determined. The bend points used in the computations of the PIA for workers who first become eligible to receive a benefit in 2008, or who die in 2008 before becoming eligible, will be $711 and $4,288, respectively. The 2008 eligibility year PIA formula, which is based on the worker's average indexed monthly earnings (AIME) throughout the worker's career, thus will be 90% of the first $711 of AIME, plus 32% of AIME over $711 through $4,288, plus 15% of any AIME in excess of $4,288. The maximum PIA obtainable under this formula for a worker who reaches age 62 in 2007 is $2,320.30, which translates to a maximum possible monthly benefit of $1,682 for most workers at age 62, reflecting an approximate actuarial reduction of 25% for early retirement at age 62.
The maximum family benefit in cases involving workers who first attain age 62, become disabled or die in 2008 will be computed as 150% of the first $909 of the worker's PIA, plus 272% of the worker's PIA over $909 through $1,312, plus 134% of the worker's PIA over $1,312 through $1,711, plus 175% of the PIA in excess of $1,711.
The amount of monthly earnings in 2008 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 $940, an increase of $40 from 2007. A higher threshold of $1,570 will apply to blind beneficiaries in 2008. 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 2008, 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 $670, an increase of $30 over the 2007 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 doesn't pay expenses in order to work, the person may earn up to $1,359 per month in 2008 before the person's SSI federal cash benefits stop. The limit was $1,331 in 2007. 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 $940 or more in 2008, then the person 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.
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 66 for workers attaining age 65 in 2008; age 65 and ten months for workers attaining age 65 in 2007, but age 65 for those born prior to 1938) 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 $13,560 in 2008, or $1,130 per month, without having their benefits reduced. This is an inflation adjusted increase of $600 over the 2007 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 worker reaches full retirement age. Thus, workers who reach age 65 and ten months in 2008 may earn up to $36,120 in the months preceding the attainment of full retirement age, without having their benefits reduced. This is a moderate increase over the 2007 annual limit of $34,440. 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.
The Department of Health and Human Services has announced that for 2008, the standard Medicare Part B premium will be $96.40, an increase of 3.1% or $2.90 over the amount payable in 2007. A relatively small number of Medicare Part B enrollees with higher income, approximately five percent, will pay a higher premium based on their income. The actual amount depends upon the extent to which an individual beneficiary's income exceeds $82,000 (or a married couple's income exceeds $164,000). The maximum premium could be as much as $238.40. The Medicare Part A deductible, which is a beneficiary's only cost for the first 60 days of inpatient hospital care, will increase by $32, to $1,024. The skilled nursing facility daily co-insurance payment, which is payable after 20 days of care, will increase by $4.00 to $128 per day. The Part D (prescription drug) premium is expected to average about $25 for beneficiaries who stay in their current plans, an increase of $1 over last year, according to the U.S. Department of Health and Human Services.
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 2008 and its explanations of how the adjustments are calculated will appear in the Federal Register by the end of October.
©2008, CCH. All Rights Reserved.
