OpenPlacement Blog

Understanding Social Security & Medicare (Major Changes in 2012)

Social Security marked its 76th anniversary on August 14, 2011. The Social Security program was established to provide the base of financial protection for working people and their families when earnings are lost due to retirement, disability, or death. In addition to the worker’s benefit, Social Security benefits may be paid to the spouses and children of workers. Benefits are an earned right, and they maintain their value with automatic annual cost-of-living increases.

Social Security is the largest source of income for the majority of people age 65 and over. More than nine out of ten people age 65 and older receive Social Security benefits. For 35% of these people, Social Security is 90% or more of their income, and for 66%, it is more than half of their income. Social Security was not intended to be the only source of income when earnings are lost due to retirement, disability, or death. The program is designed to encourage people to build additional financial protection through pensions, savings, investments, life insurance, and other sources.

Nearly all Americans participate in Social Security and Medicare. There are about 157 million working people paying taxes, matched by their employers, to support these programs. Currently, there are 2.9 workers for each Social Security beneficiary. By 2030, there will be 2.1 workers for each beneficiary. About 54 million people receive benefits with retired workers and their dependents making up 69% of this number. Disabled workers and their dependents comprise 19%, and survivor benefits account for 12%. Millions more will receive benefits in the coming years with an estimated 90 million people receiving benefits by 2035. For disability benefits, almost 1 in 4 of today’s 20-year-olds will become disabled before reaching age 67. Statistics also show that for a 20-year-old today, 1 in 8 will die before reaching age 67.

Medicare began in 1965 and is the primary health insurance for about 46 million people age 65 and over and many disabled people. About one-fourth of these beneficiaries can receive assistance that pays for their entire Part B (Medical Insurance) premium, and about one-third of them can receive assistance for their Part D (outpatient prescription drug) premium.

Major Changes in 2012:

Social Security

- The maximum earnings on which you pay Social Security taxes increases from $106,800 to $110,100. There is no earnings limit for the Medicare tax.

- The Social Security tax rate for employees only decreased from 6.2% to 4.2% in 2011 by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The Middle Class Tax Relief and Job Creation Act of 2012 has extended the 4.2% employee Social Security tax rate for 2012. Employers will continue to pay 6.2%. For the self-employed, the Social Security tax rate is 10.4% in 2012.

- After two years with no increase, the annual cost-of-living adjustment (COLA) in benefits for December 2011 payable in January 2012 is 3.6%.

- The full retirement age (FRA) is 66 in 2012. The FRA for people reaching age 62 in 2012 is 66. Reduced benefits are payable at age 62.

- If you reach FRA in 2012, the Delayed Retirement Credit (DRC) is 8% for each full year up to age 70 that you do not receive your benefits at FRA or later.

- The earnings limit for beneficiaries under FRA is $14,640.

- If you attain FRA in 2012, the earnings limit is $38,880 for the period before the month you attain FRA. There is no limit at FRA or later.

- In 2012, the maximum monthly benefit for retirees at FRA is $2,513.

- Average monthly benefits are:

  • Retired workers - $1,229

  • Retired couples - $1,994

  • Disabled workers - $1,111

  • Young widow and two eligible children - $2,543

  • Aged widow (no children) - $1,184


- The Part A deductible rises from $1,132 to $1,156. After 60 days in a hospital, you pay $289 per day for 30 days and then $578 per day for up to 60 “lifetime reserve’’ days.

- The Part B monthly premium decreases from $115.40 to $99.90 in 2012. For most Medicare beneficiaries that were paying $96.40 (2008 premium) due to no COLA increase for the past two years, the new premium is an increase of $3.50. Beneficiaries with high incomes pay additional income-related Part B premiums.

- The Part B deductible decreases from $162 to $140.

- The Part D prescription drug plan deductible increases from $310 to $320.

- The average Part D monthly premium is about $30. Beginning in 2011, high-income beneficiaries are charged an adjustment to their Part D premium.