The Social Security program is undergoing yet another round of annual adjustments and changes for 2020. Going to talk about the biggest changes to SS benefits for 2020 and beyond here.
1. COLA increase. The cost-of-living increase is meant to keep up with national inflation and for 2020 benefits will increase for everyone by 1.6%. Now that's not a lot; the average benefit for retired workers will only go up $24/month, and just $20 on average per month for disabled workers. But $24*12 months is $288 more in payouts on average for 2020, so it's definitely not nothing. Unfortunately national inflation projections for 2020 are ~2.5%. So it would be nice if the govt could tie the COLA increase to the actual real inflation, but that's for a different discussion I suppose.
2. Retirement age goes up by 2 months. The full retirement age will increase from 66 years and 6 months in 2019 to 66 years and 8 months for persons born in 1958 onward. And this will continue to increase by 2 months in 2021 and 2022 until it caps out at an even 67 years for anyone born in 1960 or later. Something to keep in mind if you are on that retirement age bubble; definitely worth holding out a few more months if so to guarantee full benefit payouts when you retire.
3. Maximum monthly payouts are increasing by $150/month. This is big news for those that earned well during their best 35 years of working. The max is going up from $2861/month to $3011/month, or potentially an additional $1800/year if you maxed out in taxable earnings in your best 35 years of employment.
4. Payroll tax earnings cap increases by $4800. To combat raising the maximum payouts on higher earners, SSA is raising the tax window on payroll taxes on earned income. It was 12.4% payroll tax on earned income up to $132,900 but in 2020 that cap will raise to $137,700. If an employer paid you, you will only have to pay half of that, but for self-employed workers, they will foot the entire 12.4% payroll tax. The increase could be as much as $595.20 for self employed workers, or $297.60 more for everyone else.
5. Disability benefits increasing. For non-blind SSDI recipients, starting in 2020 you can now get up to $40 more per month, going from a max of $1220 without benefits ceasing to $1260/month. And for blind SSDI recipents the increase is $70 more per month, going from $2040 to $2110/month, before benefits would be stopped.
6. Withholding thresholds for early filers have changed. This one is a bit confusing so I am going to quote The Motley Fool verbatim here:
The retirement earnings test allows the SSA to withhold some or all of your benefits if you've begun taking your payout prior to your full retirement age, are still working, and you surpass set income thresholds. In 2020, you're allowed to earn $18,240 ($1,520 a month) without any withholding if you won't hit your full retirement age. This is up $50 a month from 2019. But if you surpass $18,240, the SSA can withhold $1 in benefits for every $2 in earned income above this threshold.
Meanwhile, if you will reach your full retirement age in 2020, you're allowed to earn $48,600 ($4,050 a month) before any withholding would kick in. That's up $140 a month from 2019. Plus, withholding here is only $1 in benefits for every $3 in earned income above the threshold.
Take note that the retirement earnings test no longer applies when you hit your full retirement age (no matter when you began taking your payout), and that any withheld benefits are returned in the form of a higher monthly payout after hitting your full retirement age.
7. Lifetime work credits are increasing. This is not great news, but at least the increase is fairly modest. Basically SSA says you have to have 40 lifetime work credits to fully qualify for SS retirement benefits, of which a max of 4 can be earned per year. This has not changed, but the earned income threshold has. In 2019, it was $1360 in earned income to one lifetime credit, but starting in 2020 that increases to $1410, an additional $50 per credit. So instead of 4 credits equaling $5,440, you'll have to earn $5,6400 to fully qualify.
So those are all the biggest changes coming to Social Security, beginning in 2020. It's a mixed bag - benefits will increase slightly with inflation, retirement age continues to rise, max payouts for high earners are offset by more payroll taxes, withholding goes up for early filers but is offset by higher penalties if you go over and last but not least you have to earn a bit more throughout your life to get all these max benefits.
Really the best news from all this is disability benefits going up. There doesn't seem to be a con to that pro.