2020 Changes to Social Security
The Social Security program is definitely not a static thing. Changes to it occur every year and certainly this year is no exception.
Because approximately 61 million people across our great land collect Social Security benefits, it's important if you are one of them (or soon will be) that you know how these changes affect you. This is especially true if Social Security is your primary source of income. And if you pay Social Security taxes, there are changes affecting you too. So, it is probably safe to say about 99% of us need to know this stuff!
Here are six changes to the Social Security System taking place this year:
A higher salary cap goes into place. You probably know once your earnings reach a certain level, you no longer have to pay FICA taxes, the portion of the Social Security tax that funds retirement benefits. Each year, the cap is increased do stay on pace with inflation. The earnings cap has increased from $132,900 to $137,700 for 2020.
Note that the Medicare portion of the tax (1.45% if an employee or 2.9% if self-employed) has no cap, thus is paid on all your earned income.
Benefits have gone up slightly. Persons drawing social security benefits have gotten a raise so to speak, albeit a modest one. The annual cost-of-living adjustment, or COLA, is tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers and is 1.6% for 2020. This equates to an average monthly increase of about $24 per month. While the 1.6% increase is smaller than 2019's 2.8%, it's still higher than the average increase over the past decade of 1.4%.
There is a higher monthly maximum payout. According to the Social Security Administration (SSA), the maximum monthly benefit at full retirement age increased by $150 a month to $3,011. To receive Social Security's maximum monthly benefit, you need to have reached or surpassed the maximum taxable earnings cap for 35 years. SSA takes your 35 highest-earning, inflation-adjusted years when calculating your benefit.
Disability benefits also increased. Social Security is, of course, designed mainly to provide a basic "safety net" retirement benefit. However, Social Security also provides monthly benefits to almost 8½ million disabled individuals, as well as almost 1.6 million spouses and children of disabled workers. Those receiving this benefit, known as SSDI, got a bump too. Non-blind SSDI recipients received a $40 monthly bump to $1,260. Blind SSDI beneficiaries are benefitting from $70 more extra a month to $2,110.
The retirement age heads on up. Full retirement age increased in 2020 by two months to 66 years and eight months (for persons born in 1958). Anyone born before 1954 or earlier has a full retirement age of 66. But for those born after that, the full retirement age increases in two-month increments, stopping with those born in 1960, who along with those born later have a full retirement age of 67.
A little bit more can be earned by early filers. For those who decide to begin receiving Social Security benefits early (i.e., before full retirement age) but keep working, they are able to earn just a bit more this year without it decreasing their benefits.
If this is you, you are allowed to earn $18,240 ($1,520 a month) without any benefit decrease in 2020. This is up $50 a month from last year. After $18,240, the SSA can withhold $1 in benefits for every $2 in extra earned income.
Someone who reaches full retirement age in 2020 is allowed to earn $48,600 ($4,050 a month) before any decrease, which is an increase of $140 a month from last year. SSA will take $1 in benefits for every $3 in earned income above this threshold.
Finally, here's a planning tip! While not a change as has been the subject of this article, still it seems an appropriate time to point out that the longer you delay starting to receive Social Security benefits (up to age 70), the higher your initial benefit amount will be. If delayed until age 70, it will be 32% higher than at full retirement age, and all future COLA increases will be higher too since they will be based on this initial amount.
Look at it this way; it's like getting an 8% annual rate of return on your money, and financial planners will tell you it's a smart way to insure against longevity risk, or the risk of outliving your money. It also increases the benefit for a surviving spouse. Considering that for a 65-year-old married couple, there is an almost 1 in 5 probability that at least one of them will live to be 95 years old, this move is something to seriously consider.
