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Social Security Changes for 2011

By Bruce D. Schobel
Vice President and Actuary, New York Life Insurance Co.

Every October, the Social Security Administration announces certain changes in program amounts that occur automatically (i.e., without legislation being necessary). The most widely publicized of these changes is the annual cost-of-living adjustment (COLA) affecting Social Security benefits. Other changes are important to people of working age as well as to beneficiaries. On October 15, 2010, the government announced that, for the second consecutive year, no Social Security COLA will be effective in December. The absence of a COLA has other consequences, too.

Benefit Increase
Since 1984, Social Security's cost-of-living benefit increases have been based on the 3rd-quarter-to-3rd-quarter change in the average Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W, which is computed by the U.S. Labor Department's Bureau of Labor Statistics, last rose year-to-year from the 3rd quarter of 2007 through the 3rd quarter of 2008; accordingly, Social Security benefits rose effective December 2008 by 5.8 percent. But since the 3rd quarter of 2008, the average quarterly CPI-W has remained lower than it was then, even though it has risen and fallen from month to month. Thus, no benefit increase can occur. There was no COLA effective for December 2009, and even though the CPI-W has risen since the 3rd quarter of that year, there will be no COLA effective for December 2010, either, because the CPI-W has not risen from its last “base quarter” in 2008.

Maximum Taxable Amount and Tax Rates Other automatic Social Security changes, which are usually announced simultaneously with the benefit increase, are based on changes in the national average wage, which the Social Security Administration computes from W-2 data. One very important change that affects workers is the increase in the maximum amount of earnings subject to the Social Security payroll tax. The maximum taxable amount last increased from $102,000 for 2008 to $106,800 for 2009. But in the absence of a COLA, the maximum taxable amount does not rise, and accordingly, it has not risen since 2009 and will not rise for 2011, either. The Social Security tax rate is not automatically adjusted and is set by law at 6.2 percent, payable by employees and employers, each. (The self-employed pay both halves of this tax.)

Retirement Earnings Test
Another wage-indexed Social Security program amount is the exempt amount under the retirement earnings test for beneficiaries who have not reached their normal retirement age. (Social Security's normal retirement age is 65 for workers born before 1938 and rises gradually to 67 for workers born after 1959.) The annual exempt amount for beneficiaries who will not reach their normal retirement age during the year last rose from $13,560 for 2008 to $14,160 for 2009, and there it remains, due to the absence of a COLA. For beneficiaries who reach normal retirement age in 2011, the exempt amount is $37,680 for earnings in the months before reaching normal retirement age. That amount is also frozen. Since January 2000, workers who have reached their normal retirement age under Social Security can earn unlimited amounts without causing any reduction in their Social Security benefits.

Coverage Credits
Interestingly, the amount of earnings needed to receive one coverage credit for the year is a wage-indexed amount that does not require a COLA to increase. The amount was $1120 in 2010 and would have risen in 2011 if the national average wage had risen from 2008 to 2009 (the last year for which data are available). In fact, the national average wage declined, for the first time in more than 60 years! Thus, the coverage-credit amount should have declined (to $1110), but the law does not allow that to happen. Accordingly, it will remain $1120 for 2011. Workers who earn at least $4480 in Social Security-covered employment (or self-employment) during 2011 will receive the maximum four coverage credits for the year. (These coverage credits used to be known as "quarters of coverage"; since 1978, they have been granted on the basis of annual earnings, making the old name inappropriate.)

Last updated date 11/01/2010

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Social Security Changes for 2011

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