No Cost of Living Change for Social Security Benefits for 2016

October 20, 2015 | By: Matt Robinson

sociaRecently, the Social Security Administration announced that there will be no cost of living increase for monthly Social Security income. Normally, when the cost of living goes up, Social Security recipients see an automatic increase in how much they receive each month. However, thanks to the fact that the government’s measure of inflation for this purpose shows now inflation, there won’t be a cost of living increase for 2016.

What Counts as Inflation for Cost of Living Purposes?

Part of the reason that Social Security income will remain the same in 2016 has to do with the way the government measures inflation. First of all, there are several different measurements used, some of which pay attention to certain prices while discarding others.

The measurement used to determine whether or not there will be a cost of living increase for Social Security is the Consumer Price Index for Urban Wage Earners and Clerical Workers. One of the main reasons that this measure of inflation is down is due to the decline in oil prices recently.

However, this measure of inflation — along with other measures that are used to make other determinations of policy — is sometimes ridiculed by analysts and others. This is due in large part to the fact that the basket used often doesn’t account for the realities of life. For many of the 65 million people who receive Social Security income and Supplementary Social Security income, their costs are related to medical care, housing, and food. These are costs that might account for a larger portion of the monthly budget than the items that appear to be showing a lower cost.

Indeed, Medicare premium changes haven’t been announced yet, so that could be problematic for some of the Social Security recipients. While most of the beneficiaries are protected under a “hold harmless” part of the law, about 30% of those relying on Social Security income could be subject to a higher Medicare Part B premium — without the help of a cost of living increase to help them deal with it.

What About Earnings Subject to the Social Security Tax?

Because there will be no cost of living increase, there also won’t be a change in the maximum amount of earnings that are subject to the Social Security tax. As with many other tax situations, the Social Security tax amount is adjusted each year. However, the Social Security tax isn’t levied according to the bracket. Instead, it’s a set percentage of income up to a certain amount.

With the Social Security tax, you’re only taxed on the first $118,500 that you make. If you make less than that amount, then you are taxed on all of your earnings. If you make more than the maximum, the rest of the money isn’t taxed for Social Security purposes. For those who are employed, your boss will pay half your tax. Self-employed folks have to pay the entire amount of their Social Security taxes.

In years when there is a cost of living increase, the maximum amount of earnings subject to the Social Security tax usually rises. However, for 2016, it’s expected to stay the same to keep in line with the lack of an increase.