What's Happening to Social Security Next Year?

Treasury checks
Treasury checks

If you're receiving Social Security benefits, your check will rise by 1.7% in 2013, thanks to that program's most recent annual cost-of-living adjustment. The average monthly benefit check to a retiree will increase from around $1,240 to $1,261 -- an increase of $21 per month, or $0.70 per day.

If, on the other hand, you're still working and paying into Social Security, your taxes are going up next year. For all workers who pay into the system, the temporary 2% payroll tax holiday is expected to expire, so Social Security taxes will eat an additional 2% of much, if not all, of your income. The amount of income that the payroll tax reaches is rising, as well -- to $113,700 from $110,100.

Higher Taxes, Lower Real Benefits

That 1.7% benefit increase is based on the official CPI-W inflation number, the version of the Consumer Price Index that measures inflation on "urban wage earners and clerical workers." While it's a decent proxy for the costs those working folks face, it doesn't completely cover the increases in health care costs that seniors typically see. Not only that, but once Medicare and supplemental insurance programs adjust their premiums later this year, even that modest increase could partially or completely vanish to cover those premium hikes.

Or in other words, if you're relying on Social Security, your benefits are falling behind your cost increases in very real terms, even if the check you receive winds up a tiny bit larger. And unfortunately, even the increase in the tax rate people pay will do little toward stopping the pending collapse of Social Security's Trust Fund.

That's because the money from the 2% payroll tax rollback that would have otherwise gone "missing" was made up through transfers from the Treasury's General Fund. So all that the end of the 2% rollback means is that the Treasury's other debt won't grow quite as fast.

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What Can You Do About It?

If you're completely dependent on Social Security, there's little you can do aside from tightening your belt by looking for more aggressive ways to cut your costs. If you're not yet retired, though, or if you've retired recently enough so that you're still able to work, drawing a paycheck can help make up that real gap in several ways.

For one thing, Social Security takes your 35 highest earning years into account when determining your benefits. Add another year or two worth of earnings, especially if they replace years when you earned little or nothing, and your benefits will increase accordingly. For another, the later you wait before tapping Social Security -- up until age 70 -- the larger your benefit check will be. And finally, you can invest some of your paycheck now in order to have a larger buffer to cover your retirement expenses later.

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And of course, there's also the very real fact that every year you delay retiring is one fewer year that both Social Security and your personal portfolio need to support you in retirement. Being able to work to cover that program's gaps in real payments will very likely be a critical part of your future income plan. That's especially true if, like most of us, your nest egg hasn't reached the point where you're able to retire comfortably no matter what happens to Social Security.

Regardless of how you choose to prepare yourself for both the short- and long-term pain from Social Security, making the right financial decisions today makes a world of difference in your golden years. Don't make the same mistakes as the masses who mistakenly believe that their Social Security check will be all they need. Learn more by reading "The Shocking Can't-Miss Truth about Your Retirement" free report.

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