The Social Security Cola Increase May Reduce Benefits Sooner

The news that retirees would have the largest increase in their Social Security benefits since 1981 brought smiles to their faces.

But it was also a stark reminder that the programme is expensive and that benefits could be cut if it isn't changed in the next few years.

Along with the news that benefits were going up last week, there was also news that taxes were going up for many Americans.

The percentage of a worker's income that is subject to Social Security taxation will nearly 9% higher the following year.

Even before the cost-of-living increase was announced, it was known that Social Security's trust fund would run out of money by 2035 if nothing was changed.

The cost-of-living increase for Social Security is the biggest since 1981. Changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers determine COLAs.

Social Security is a "pay as you go" system, which means that the revenues collected today fund today’s benefits.

About 90% of benefits are paid for by payroll taxes of 12.4%. Employees and employers each pay half of that, and self-employed workers pay the full amount.

The maximum amount of wages that have to be taxed for Social Security is based on the national average wage index and changes every year.