We had a tax package passed in December that extended the current tax rates, in addition to making other changes to the estate tax, extending certain tax credits, and other changes. One area that saw several changes was the Social Security program.
Social Security benefits are received by nine out of ten individuals age 65 and older, so it's an important piece of the puzzle for many people. (Whether it should be is up for debate)
The Social Security changes for 2011 will give workers a temporary 1 year tax break on the amount they pay into the entitlement program, in addition to several options for retirees being eliminated. Here's a look at how the Social Security program will change this year.
Lower Social Security Taxes: 2% Payroll Tax Holiday
As was mentioned a while back, the Making Work Pay tax credit expired at the end of 2010. The expiring credit, which you can claim on your 2010 taxes, amounted to about $400 for singles and $800 for married couples. Since that credit was expiring, the Obama administration wanted to pass something to replace it to a degree. Because of that they passed the 2% payroll tax holiday.
So how does the 2% cut work? The amount we pay into Social Security will drop this year from 6.2% of your income (up to $106,800 annually) to 4.2 % in 2011 only. The employer portion of that will remain at at 6.2%.
For those who are self-employed, the Social Security tax rate will drop from 12.4 percent to 10.4 percent next year, due to provisions of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which was signed by President Obama on December 17th of 2010.
While this move has been criticized by many because the Social Security pr0gram already is having predictions of running out of money in the near future, others say the program's finances won't be harmed because the trust fund will be reimbursed for the tax cut funds from the general fund of the Treasury. In any event, the program's much publicized problems will still be an issue – even if this tax cut doesn't directly affect the program.
Interest Free Loan Option Removed
In the past retirees were able to start claiming social security payments at the age of 62, and then pay back all the benefits received at age 70, so that they could reclaim social security at the higher delayed claiming rate. In effect this gives those retirees an interest free loan.
New rules only allow beneficiaries to withdraw their application for retirement benefits within the first 12 months of receiving their first payment. They may only withdraw once per lifetime.
According to The Center for Retirement Research at Boston College if enough people were to use this claiming strategy it could cost the system between $5.5 billion and $11 billion. The benefit would go primarily to high-income households who had enough money to take the interest free loan without worries of having to pay it back later.
No Retroactive Benefit Suspensions
In the past retirees were able to temporarily suspend their benefits, and then restart them later – resulting in a bigger social security check based off of the time in which the payment wasn't received. This is still allowed under the new rules, however, social security recipients won't be able to retroactively suspend their benefits, and pay back money already received in exchange for higher payments going forward.
Much like the “no interest free loan” rule, beneficiaries can't pay back money already received. They can only suspend benefits for months when they didn't receive payments or for future payments, the month after the request is made.
No More Paper Checks For Retirees
Social Security recipients will no longer have the option of receiving a paper check if they apply for benefits after May 1st, 2011. Going forward new retirees will only have their choice of having a direct deposit or having their funds loaded onto a debit Mastercard.
Sending out paper checks to retirees every year has quite a large cost associated with it. It costs the federal government over $120 million dollars to send out checks. Making this change going forward will save Social Security $1 billion over the next 10 years, according to the Treasury.
Retirees who are already receiving paper checks can continue receiving them for now. In the end though they will need to switch to direct deposit or the prepaid debit card by March 1, 2013.