Find out what's happening with the retirement
income program.
Dan Caplinger Author Bio (TMFGalagan) Jan
4, 2020 at 9:07AM
Tens of millions of people rely on Social
Security to make ends meet in retirement. In addition, millions more family
members count on Social Security benefits that they earn because of the death
or disability of a loved one. All told, Social Security is a trillion-dollar
program with huge implications for its participants and the entire U.S.
economy.
But as important as Social Security is for those
who receive benefits, it's not an unchanging program. Each year, Social
Security participants see changes to the program. It's true that most of the
annual adjustments that Social Security makes are small and not particularly
significant. But with so many people counting on the program, it's important to
avoid even minor surprises that could affect your ability to get by
financially. Below, we'll go through the 2020 changes to Social Security that
everyone should know about .
Here are the changes
that Social Security makes every year
Social Security has been one of the most stable
government programs over time, paying out benefits on an interrupted basis for
decades. Yet the rules governing Social Security make several slight changes
annually. Most of these adjustments are intended to help Social Security keep
fulfilling its mission of providing meaningful financial support to its
participants, with regular annual changes to make sure the program keeps up with
the times. These changes include the following:
·
The annual cost-of-living adjustment to each Social Security
recipient's benefits.
·
The average benefit that a Social Security recipient can expect to
receive.
·
The maximum benefit that Social Security will pay in that given
year.
·
The threshold amounts that help determine how much one receives
from Social Security.
·
The maximum amount of worker income that's subject to Social
Security payroll taxation.
·
How much in earnings it takes to get a Social Security credit for
purposes of qualifying for benefits.
·
What the earnings limits are before which some Social Security
recipients will see a portion of their benefits forfeited.
·
The thresholds for how much those receiving Social Security
disability benefits can earn without disqualifying them from future payments.
·
The standard federal payment and related limits to Supplement
Security Income benefits.
·
The full retirement age for those turning 62 in 2020.
Let's see how each of these changes could affect
you and other benefit recipients in 2020.
1. 2020's Social
Security COLA: 1.6%
Social Security benefits are tied to inflation,
making them extremely useful in helping people keep up with rising costs of
living. The Social Security Administration does an annual calculation to
determine how much of a cost-of-living adjustment to make to the previous
year's benefits.
The process starts by looking at a measure of
inflation known as the CPI-W. This index measures the prices that urban wage
earners and clerical workers pay for a common basket of goods and services and
tends to rise over time, but the increases can vary widely. Over the past dozen
years, there've been some years where recipients got no cost-of-living
adjustment at all, while increases have been as much as 5.8% in 2008 -- the
biggest boost since the early 1980s.
In 2020, the cost-of-living increase will be 1.6%. The
average CPI-W figure for the three months from July to September was 250.251,
compared to an average CPI-W of 246.352 for the same three months in 2017.
Divide those two numbers and you get 1.0158269, which rounds to the 1.6% figure
above.
Not everyone's Social Security check will go up
by the full 1.6% amount, however. If you're on Medicare, then you have your
required premiums withheld from your check. With a $9.10 per month rise in
Medicare Part B medical premiums taking effect in 2020, many seniors will see
their net pay go up by less than 1.6%.
2. Average benefits
for Social Security recipients: Up $20 to $46 per month
Admit it: You're curious about what most people
get from Social Security. Each year, the SSA satisfies your curiosity by
publishing average figures for Social Security benefits. Because of the
cost-of-living adjustment, the average amount typically goes up each year.
However, what's interesting is how much the typical monthly payout varies
depending on which type of benefit you're entitled to receive.
|
Type of benefit
|
Average Benefit Amount for January 2020
|
Change due to Cost-of-Living Adjustment
|
|
Retired
workers
|
$1,503
|
+$24
|
|
Aged
couple, both receiving benefits
|
$2,531
|
+$40
|
|
Widowed
mother + 2 children
|
$2,934
|
+$46
|
|
Surviving
spouse alone
|
$1,422
|
+$22
|
|
Disabled
workers
|
$1,258
|
+$20
|
|
Disabled
worker + spouse and 1 or more children
|
$2,176
|
+$35
|
Data
source: SSA
One thing to keep in mind about these average
payouts is that there are many different ways to get the same amount of money
from Social Security. Because the program uses average monthly earnings over a
career of as long as 35 years, someone with a longer career but lower earnings
can end up getting the same benefit as someone who didn't work as long but who
typically earned more each year.
Maximum amount of
earnings subject to Social Security payroll tax: Up $4,800
Social Security gets funded primarily from the
payroll taxes that current workers pay. Employees have 6.2% of their pay
withheld from their paychecks to go toward Social Security, and employers pay a
matching 6.2% amount out of their own pockets. Those who're self-employed end
up having to pay the full 12.4% amount themselves.
However, there's a maximum amount on which this
tax gets imposed. This figure, called the Social Security wage base, usually
rises with inflation each year.
For
2019, the Social Security wage base is $137,700. That's
$4,800 greater than it was in 2019, and as you can see below, the wage base has
been on the rise for some time:
|
Year
|
Social Security Wage Base
|
|
2011
|
$106,800
|
|
2012
|
$110,100
|
|
2013
|
$113,700
|
|
2014
|
$117,000
|
|
2015
|
$118,500
|
|
2016
|
$118,500
|
|
2017
|
$127,200
|
|
2018
|
$128,400
|
|
2019
|
$132,900
|
|
2020
|
$137,700
|
Data
source: SSA.
Some have advocated removing the limit entirely
to give Social Security more funding. At least for now, though, there're no
concrete plans to do so, and this number's very unlikely to change throughout
2020.
Social Security's
"bend points" for determining benefit payouts: Up $34 and $202
There's some complicated math that goes into
figuring out how much every Social Security recipient is entitled to get from
the program. However, the general idea is pretty simple. First, take the
average monthly earnings someone brought in over a 35-year career, adjusted for
inflation. Then, run that average through a formula to come up with the base
benefit. Finally, make any further adjustments based on the type of benefit and
age at which the recipient claims Social Security.
The key aspect of translating average earnings
into a base benefit, better known as the primary insurance amount, is using the
benefit formula with the appropriate bend points. Up to the first bend point,
Social Security recipients have 90% of their average income replaced by Social
Security. Between the first and second bend point, 32% of income is replaced.
Anything above the second bend point translates into a 15% income replacement
rate.
For 2020 , the bend points are $960 and
$5,785. Those numbers are higher by $34 and $202 respectively from 2019,
meaning that most people with the same average monthly earnings who become
eligible for Social Security in 2020 will make slightly more than those who
become eligible in 2019.
The maximum Social
Security benefit amount: Up $20
What many people find to be surprising is that
there's a maximum amount of Social Security that you can receive. However,
that's a natural consequence of how the maximum amount of earnings subject to
tax interacts with the bend-point calculation for figuring out what your
benefit payment will be. If you earn the maximum amount of earnings for the
maximum 35 years of your career, it'll make the calculation for determining
benefits yield a figure that no one will ever surpass.
However,
the maximum will be different depending on
the age of the person. The table below gives the details:
|
Age When Claiming Social Security
|
Maximum Benefit Amount
|
Change from 2019
|
|
62
|
$2,265
|
+$56
|
|
65
|
$2,857
|
+$100
|
|
66
|
$3,011
|
+$150
|
|
70
|
$3,790
|
+$20
|
Data
source: SSA.
There are two reasons for these age-based
differences. First, the bend points for determining the benefit amount change
every year for those turning 62, so bend points for a current 70-year-old are
different than those for a current 62-year-old.
More importantly, someone claiming benefits at
62 has to accept a reduction in their monthly payout to account for the fact
that they didn't wait until reaching full retirement age. That reduction is
less for someone who claims at 65, and those who wait until 70 get additional
credits for their retirement benefits that give them a much-higher monthly
check.
What it takes to earn
Social Security credits in 2020: Up $50
In order to qualify for Social Security, you
have to earn a certain number of credits over your lifetime. For regular retirement benefits, you'll need 40
credits. And because you can only earn a maximum of four credits each year,
it'll take most people 10 years to accumulate the credits they need in order to
collect Social Security checks when they retire.
So how do you earn credits? It takes a certain
amount of income from wages, salaries, or other work sources to get a credit,
and that amount changes each year. In 2020, you'll earn a credit for every
$1,410 in earned income you have, up to a maximum of $5,640. At that point,
you'll have the four-credit maximum for 2020. The $1,410 per credit number is
$50 higher than it was in 2019, but increases of that magnitude are pretty
typical.
The full retirement
age for those who turn 62 in 2020: Up 2 months
The age at which Social Security recipients were
initially allowed to claim full retirement benefits was 65. Over time, though,
that full retirement age has risen, and the higher the full retirement age is,
the longer you have to wait in order to get
the same level of benefits.
Those
who are turning 62 in 2020 were born in 1958. As you can see in the table
below, the full retirement age for those born in 1958 is two months older than
it was for those born in 1957, who turned 62 in 2019. Notice that the ages are
different for retirement and spousal benefits than the age for survivor
benefits.
|
If You Were Born In...
|
... Then Your Full Retirement Age for Retirement or Spousal
Benefits Is
|
And Your Full Retirement Age for Survivor Benefits Is
|
|
1943 to 1954
|
66
|
66
|
|
1955
|
66 and 2 months
|
66
|
|
1956
|
66 and 4 months
|
66
|
|
1957
|
66 and 6 months
|
66 and 2 months
|
|
1958
|
66 and 8 months
|
66 and 4 months
|
|
1959
|
66 and 10 months
|
66 and 6 months
|
|
1960
|
67
|
66 and 8 months
|
|
1961
|
67
|
66 and 10 months
|
|
1962 or later
|
67
|
67
|
Data
source: SSA.
Practically speaking, a higher full retirement
age results in larger reductions for claiming Social Security early, and
smaller credits for delaying Social Security. However, those near retirement
age now will have to deal with steady increases in the full retirement age for
the next several years before it finally levels out at age 67.
Earnings test for
early retiree Social Security recipients: Up $600 and $1,680
The other reason why full retirement age is so
important is that if you claim Social Security before full retirement age, then
some or all of your benefits are subject to forfeiture if your earnings from
work are above certain income limits. Once you reach full retirement age, these
rules go away, and you can earn as much as you want and keep all of your Social
Security as well.
There are two sets of earnings limits that apply to
early retirees, but they apply in different situations. If you'll be younger
than full retirement age throughout 2020, then you can earn a maximum of
$18,240 during the year before you start having to give up Social Security
benefits. Above that limit, you'll lose $1 in annual benefits for every $2 of
earnings. So if you earned $19,640 -- $1,400 over the limit -- you'd have to
give up $700 of your annual Social Security. The $18,240 figure is $600 higher
than the corresponding number was in 2019.
Those who will reach full retirement age during
2019 have a much more generous earnings test. You can earn up to $48,600
without any penalty, and it takes $3 in earnings above that limit to lose $1 of
benefits. Moreover, earnings after you hit full retirement age
don't count, which can be especially advantageous for those who hit that mark
early in the year. The $48,600 number is $1,680 greater than it was last year.
Income limits for most
Social Security disability benefit recipients: Up $30 to $70
Social Security disability benefits can
come in handy if something happens to you during your career. These benefits
are intended to kick in when you become disabled for at least a year or more
and are no longer able to work. Benefits typically continue until you're able
to work again on a regular basis.
In determining eligibility for disability
benefits, Social Security accounts for the fact that recipients might be able
to do a minimum amount of work. The SSA looks at what it calls
"substantial gainful activity" -- a set maximum amount of earnings
per month. Go above that number, and you won't be able to get benefits. Stay
below it, and you'll have the potential to keep getting disability checks.
For 2020, the substantial gainful activity limit
for most people is $1,260 per month for those who aren't blind, up $40 from
last year. Blind recipients have a higher limit of $2,110 per month, which is
$70 higher than it was in 2019. Finally, SSA allows disability benefits during
a trial work period as long as earnings haven't exceeded a certain amount in
nine of the past 60 months. For 2019, that limit is $910 per month, $30 higher
than in 2019.
Supplemental Security
Income's requirements to qualify: Up $12 or $18
Finally, beyond regular Social Security, the SSA
provides additional benefits to low-income retirees in need. The Supplemental Security Income program gives
individuals up to $783 per month in 2020, or couples up to $1,175 per month.
Those numbers are $12 and $18 higher than they were in 2019.
To qualify, individuals must also have no more
than $2,000 in assets, excluding your home, vehicle, personal effects, and
certain other items like life insurance policies or burial funds. The limit for
couples is $3,000.
However, most recipients don't get the full
amounts listed above. That's because the standard SSI payments are reduced by
what's known as countable income, which includes most income but excludes a
certain base of income from work, need-based benefits, and several other
sources. For instance, if countable income comes in at $300, then an individual
would get $783 minus $300 or $483 per month in 2019. Even though the amounts
are relatively small, they can be crucial for the low-income recipients who get
them.
Get the most you can
from Social Security in 2020
Whether you're already getting benefits or will
receive them in the near future, it's vital to know about Social Security and how it'll work in
2020. By knowing about the changes, you'll be able to anticipate what Social
Security will pay you and what you'll need to find to supplement your income
from other sources.
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