Social Security Benefits to Increase 3.6% for 2012; Higher Cap on Taxable Earnings

Cost-of-living adjustment is first since 2009

By Stephen Miller, CEBS Oct 20, 2011

Monthly Social Security and Supplemental Security Income (SSI) benefits for more than 60 million Americans will increase 3.6 percent in 2012, the Social Security Administration announced on Oct. 19, 2011.

The 3.6 percent cost-of-living adjustment (COLA) will begin with benefits that nearly 55 million Social Security beneficiaries receive in January 2012. Increased payments to more than 8 million SSI beneficiaries will begin on Dec. 30, 2011.

The purpose of the COLA is to ensure that the purchasing power of Social Security and SSI benefits is not eroded by inflation. The COLA is based on the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), as determined by the U.S. Bureau of Labor Statistics. The 3.6 percent COLA for 2012 was based on the increase in the CPI-W from the third quarter of 2008 through the third quarter of 2011.

Social Security Tax Rates

Social Security and Medicare taxes, also known as FICA (Federal Insurance Contributions Act) taxes, must be withheld from employees' wages.

The FICA tax rates in 2012 will remain at the same level as in 2011: 7.65 percent for employees and 15.3 percent for the self-employed. However, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act reduced the Social Security payroll tax by 2 percentage points for wages, salaries and self-employed income paid in calendar year 2011, applied to the portion of the tax paid by the worker and the self-employed individual. An Obama administration proposal to carry the temporary payroll tax cut forward into 2012 requires congressional approval.

The 7.65 percent tax rate is the combined rate for Social Security and Medicare. The Social Security portion—Old-Age, Survivors and Disability Insurance (OASDI)—is 6.20 percent on earnings up to the applicable taxable maximum amount (see below). The Medicare Part A hospital insurance (HI) portion is 1.45 percent on all earnings.

Higher Max on Earnings Subject to Tax

Based on the average wage increase in 2011, in 2012 the maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $110,100 from $106,800. Of the estimated 161 million workers who will pay Social Security taxes in 2012, about 10 million will pay higher taxes as a result of the increase in the taxable maximum, according to the Social Security Administration (SSA).

Earnings Limit

The earnings limit for workers who are younger than full retirement age (age 66 for people born in 1943 through 1954) will be $14,640 (SSA deducts $1 from benefits for each $2 earned over $14,640). The earnings limit for workers turning 66 in 2012 will be $38,880 (SSA deducts $1 from benefits for each $3 earned over $38,880 until the month the worker turns age 66). There is no limit on earnings for workers who are full retirement age or older for the entire year.



FICA Tax Rate:







*For 2011 wages, salaries and self-employed income, the OASDI payroll tax was reduced by 2 percentage points, applied to the portion of the tax paid by employees and the self-employed.

Maximum Taxable Earnings:

Social Security (OASDI only).



Medicare (HI only).

No limit

No limit

Social Security Credits:

Earnings needed to earn one Social Security credit.



Retirement Earnings Test Exempt Amounts

Under full retirement age.



Starting the year in which the individual reaches full retirement age.



Source: Social Security Administration.

Additional Social Security payment and withholding changes are detailed in an SSA fact sheet.

Medicare Premiums

Monthly premiums for Medicare Part B, which covers doctors’ visits and outpatient procedures, will increase by $3.50 to $99.90 in 2012, the government announced on Oct. 27, 2011.

Premiums for Medicare Part A, which pays for inpatient hospital, skilled nursing facility, and some home health care,will increase $1 per month, and the deductible will increase by $24. About 99 percent of Medicare beneficiaries do not pay a premium for Medicare Part A since they or their spouses have at least 40 quarters of Medicare-covered employment.

On average, premiums for Medicare Advantage, the privately run alternative to the traditional program, will be 4 percent lower in 2012 than in 2011, and plans project enrollment to increase by 10 percent.

Stephen Miller, CEBS, is an online editor/manager for SHRM.

Other 2012 Benefit Changes

For 2012 adjustments affecting dollar limits for defined contribution and defined benefit retirement plans, see the SHRM Online article For 2012, IRS Raises Retirement Plan Contribution Limits."

For 2012 adjustments affecting health savings accounts (HSAs) and high-deductible health plans, see the SHRM Online article "For 2012, Higher Limits for HSA Contributions, Out-of-Pocket Expenses for High Deductible Plans."

Quick Links:

SHRM Online Benefits Discipline

SHRM Online Retirement Plans Resource Page

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