7 Changes to Social Security in 2020
From: www.fool.com
From what beneficiaries will be paid to what workers could owe in payroll tax, big changes are on the way for America’s top social program.
There’s little question that Social Security is our nation’s most valuable social resource. Of the nearly 64 million beneficiaries netting a monthly payout, over a third are being lifted out of poverty, with more than 15 million of these folks being retired workers.
Big changes are headed Social Security’s way in 2020
However, Social Security is also a dynamic program. Each and every October the Social Security Administration releases its “Fact Sheet” that provides updates on everything from what beneficiaries will be paid in the upcoming year to what it takes to qualify for a benefit.
The following is a roundup of the seven biggest changes to Social Security in 2020.
1. Beneficiaries are getting a modest “raise”
Without question, the most anticipated event every year is the cost-of-living adjustment (COLA) announcement during the second week of October. COLA is a measurement of the inflation that Social Security beneficiaries have faced, and represents the “raise” that they’ll receive in the upcoming year. Of course, it’s not really a raise in the truest sense of the word given that COLA is merely designed to keep pace with, not outpace, inflation.
Since 1975, Social Security’s inflationary tether has been the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). To determine COLA, the average CPI-W reading from the third-quarter of the current year (July through September) is compared with the average CPI-W reading from the third quarter of the previous year. If the current year is higher than the previous year, then beneficiaries will receive a raise that’s commensurate with the percentage increase, and rounded to the nearest tenth of a percent.
In 2020, beneficiaries will be receiving a 1.6% COLA, which is more or less par for the course with the average “raise” received over the past decade. This increase in monthly payout equates to about $24 for the average retired worker and nearly $20 for the average disabled worker.
2. Social Security’s full retirement age increases, once more
For only the 10th time since Social Security was signed into law in 1935, the program’s full retirement age is set to increase. The full retirement age (also known as “normal retirement age” by the Social Security Administration) refers to the age at which a retired worker can collect 100% of their monthly benefit, as determined by their birth year.
In 2020, the full retirement age will increase by two months to 66 years and eight months for persons born in 1958. This means these individuals will have to wait until they are at least 66 years and eight months old if they want 100% of their retired worker monthly benefit. If they begin taking their payout at any point between age 62, the first age of eligibility for retired worker benefits, and 66 years and seven months, they’ll face a permanent reduction to their monthly payout.
Further, the full retirement age will increase by two months in 2021 and again in 2022, ultimately peaking in 2022 at age 67 for anyone born in 1960 or later.
3. The wealthy can net a higher maximum monthly payout
One of the more interesting quirks about Social Security retired worker benefits is that they’re capped at a certain level. In 2019, for instance, no retired worker at full retirement age could take home more than $2,861 a month. This cap on monthly benefits exists because a cap is also in place on the amount of earned income that the payroll tax can impact .(I’ll have more to say on this in the following point.)
In order to hit Social Security’s maximum monthly benefit, a worker would need to have hit or surpassed the aforementioned maximum taxable earnings cap for 35 years, given that the Social Security Administration (SSA) takes your 35 highest-earning, inflation-adjusted years into account when calculating your retired worker benefit.
In 2020, well-to-do retirees could net quite a bit more each month. According to the SSA, the maximum monthly benefit at full retirement age will increase by $150 a month to $3,011. That’s an extra $1,800 a year for lifetime upper-income earners during retirement.
