Social Security COLA in 2020 & More

From what beneficiaries are paid to what employees may owe in payroll tax, substantial changes are headed for America's top social program.

There's almost no question that Social Security is our nation's most beneficial social resource. Of the nearly sixty-four million beneficiaries netting a monthly payout, over a 3rd are being raised out of impoverishment, with over fifteen million of those people being retired employees.

Substantial changes are headed Social Security's way in 2020

However, Social Security is also a vital program to many. Every year in October, the Social Security Administration releases its "Fact Sheet" that specifies updates on topics from what beneficiaries are paid within the approaching year to what it takes to qualify for a profit.

https://www.ssa.gov/news/press/factsheets/colafacts2020.pdf

The following is a collection of the seven largest changes coming to Social Security in 2020.

1. Beneficiaries will be getting a modest "raise"

Every year, one of the hands-down most anticipated events is the Cost-Of-Living Adjustment (COLA) announcement during the second week of October. COLA is a metric used to determine the inflation that Social Security beneficiaries have been faced with, and represents the "raise" that they're going to receive within the approaching year. However, it’s not really a true raise because COLA is simply designed to keep pace with, not exceed, inflation.

The Social Security's threshold of inflation has been the consumer price index for Urban Wage Earners and Clerical employees (CPI-W) since 1975. To find the COLA, the average CPI-W reading from the third-quarter of the present year (July - September) is compared with the average CPI-W reading from the third quarter of the previous year. If the present year is greater than the previous year, then beneficiaries can receive a raise that will correspond with how much the percentage increased, to the nearest tenth of a percent.

In 2020, beneficiaries will be getting a 1.6% COLA, which is pretty much on course with the typical "raise" received by them over the past decade. This increase in monthly payout equates to around $24 for the typical retired employee and nearly $20 for the typical disabled employee.

2. Social Security's full retirement age will increase, yet again

For the tenth time since Social Security became a law in 1935, the program's full retirement age is going to raise. The complete retirement age (also referred to as "normal retirement age" by the Social Security Administration) refers to the age at which a retired employee will collect 100 percent of their monthly profit, as determined by the year they were born.

In 2020, the complete retirement age is going to increase by as little as two months to sixty-six years and eight months for those born in 1958. This implies that these people have to wait until they're a minimum of sixty-six years and eight months old if they want to receive all of their retired employee monthly benefit. If a worker starts taking their payout at any point between the first age of eligibility at sixty two years old and sixty six years and 7 months, they will face a permanent reduction to their monthly payout. Furthermore, the complete retirement age will be increasing by 2 months in 2021 and once again in 2022, when it will ultimately peak at age sixty-seven for anyone born in 1960 or later.

3. The rich will net a better maximum monthly payout

One of the more fascinating quirks regarding Social Security retired employee benefits is that they are capped at a particular level. In 2019, for example, no retired employee at full retirement age was able to bring in over $2,861 a month. The cap on monthly benefits is a result of a cap also being in place on the quantity of earned income that the payroll tax could possibly impact. (I'll have quite a bit more to mention on this within the following segment.)

In order to get the maximum monthly benefits from your Social Security, an employee would want to hit or surpass the maximum taxable earnings cap for thirty-five years, under the condition that the Social Security Administration (SSA) will take your thirty five highest-earning, inflation-adjusted years under consideration when it comes to calculating your retired employee benefits.

In 2020, it’s possible that well-off retirees could net a lot more every month. According to the SSA, the maximum monthly profit at full retirement age can increase by as little as $150 a month to as much as $3,011. That would be an additional $1,800 a year for life for upper-income earners throughout retirement.

4. Well-off employees will open their wallets a touch wider in 2020

Contrarily, working Americans of upper-income status will have to open their wallets more than ever before starting next year.

Over 88% of the $1 trillion in revenue collected by the program in 2018 was generated by the payroll tax on earned income, which consists of wages and salary, but not the investment income. Right now, all earned income between the amounts of $0.01 and $132,900 is subject to Social Security's 12.4% payroll tax. However, in the next year, the earnings cap is going to rise by $4,800 to $137,700. The earnings tax cap will rise with the National Average Wage Index annually.

Depending on whether or not well-off employees are freelance or employed by some other person (freelance workers are liable for the complete 12.4% payroll tax, whereas employees split their liabilities with their employer), they're going to owe up to $595.20 or $297.60 extra in 2020.

5. Disability income thresholds escalate

Although Social Security was initially designed as a monetary foundation for retired employees, it nowadays provides a monthly profit to 8.4 million disabled employees and roughly 1.6 million spouses and kids of disabled employees.

The SSA updates these monthly earnings thresholds by which those payments would stop for these people. For example, in this past year, a non-blind Social Security disability beneficiary could earn up to $1,220 a month without their monthly benefit from the program stopping. The threshold for those receiving blind Social Security disability income (SSDI) was $2,040.

As we watch the calendar turn to 2020, the SSA update shows that those receiving non-blind SSDI will earn $40 more a month ($1,260/month) without their benefits stopping, while those receiving blind SSDI beneficiaries will make $70 more a month ($2,110/month) before their benefits would be stopped.

6. Withholding thresholds for early filers are raised even higher

It’s true early filers face a variety of disadvantages, but the most important is a permanent reduction in their monthly payout that they receive from the program. However, the retirement earnings test can also be a serious problem for early filers that still work and generate an income.

The retirement earnings test permits the SSA to withhold any or all of your benefits if you have started taking your payout before your full retirement age, are still working, and pass set income thresholds. In the next year, you will be allowed to earn $18,240 ($1,520/month) without having anything withheld if you don't hit your full retirement age, which is up $50 a month from 2019. However, if you surpass $18,240, the SSA will withhold $1 in benefits for each $2 in earned income higher than this threshold.

Meanwhile, if you are going to reach your full retirement age in 2020, you are able to earn $48,600 ($4,050/month) before any withholding would kick in, which is up $140 a month from 2019. Additionally, withholding here is merely $1 in benefits for each $3 in earned income higher than the threshold.

Observe that the retirement earnings test does not apply to you any longer once you hit your full retirement age (no matter when you started taking your payout), and any withheld benefits are returned within the form of the next monthly payout after you have hit your full retirement age.

7. You'll need to start working harder to qualify for a Social Security benefit

Lastly, it’s critical to understand that Social Security is not merely given to you because you were born in the US. In order to qualify for a retired employee benefit, you'll need to earn it through years of labor.

To guarantee you will receive a Social Security retired employee benefit, as well as potential disability and/or survivor's insurance protections, you will need to have earned forty work credits over the span of your lifetime, of which a maximum of 4 is earned annually. The number of work credits you earn is based upon your income throughout a given year. For instance, in 2019, $1,360 in earned income was equal to 1 lifetime work credit, which is $5,440 in earned income for a full year’s worth of credits (4). As a result, the SSA sets a really practical bar for employees to be accepted for a benefit.

In 2020, it's going to be incrementally more difficult to earn these credits. Qualifying for a credit is going to require $1,410 in earned income, or $5,640 for the year to attain all of your credits.

These massive changes are set to take effect in just 2.5 months, so make sure you know what's happening.

*Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.