For the 42.4 million retired workers receiving a monthly benefits check, there's probably no social program more important in this country than Social Security. The data suggests this is true as well, with the Social Security Administration finding that 62% of seniors rely on the program to provide at least half of their monthly income. Without Social Security, it's likely that the poverty rate for seniors would be significantly higher.
But this program that seniors have come to count on isn't static, even if it's been a pillar for seniors for more than 75 years. Social Security and the U.S. economy are always evolving, and both working Americans and current beneficiaries should expect some changes in the years ahead. Here are five changes to expect by 2020.
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1. The full retirement age will continue its march higher
There are virtually no guarantees when it comes to Social Security, save for these two facts: The program can't go bankrupt on account of being primarily funded by the payroll tax, and the full retirement age for newly eligible retired workers will be on the rise until 2022.
Your full retirement age, which is determined by your birth year, is the age where the Social Security Administration deems you eligible to receive 100% of your retirement benefit. If you choose to begin receiving benefits at any point between age 62 and a month prior to your full retirement age, you'll accept a permanent reduction in your payout. Likewise, if you wait until at least a month after your full retirement age to enroll for benefits, your monthly payout can actually exceed 100%.
Back in 1983, the Reagan administration passed the last sweeping reforms of Social Security, which included a gradual increase to the full retirement age of two years (from age 65 to 67) over a four-decade stretch in order to account for increased longevity. Beginning in 2017, and ending in 2022, the full retirement age will increase by two months with each passing year (from age 66 to 67). Therefore, by 2020, the full retirement age will have advanced an additional four months from 2018 to 66 years and eight months. This means future retirees will need to wait a bit longer to receive their full payout, otherwise they'll accept a potentially steeper permanent reduction in their monthly stipend in the process.
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2. The purchasing power of Social Security dollars will keep declining
Second, there remains a very good chance that the purchasing power of Social Security dollars will keep declining. According to an analysis from The Senior Citizens League (TSCL), the purchasing power of Social Security dollars plunged 30% since 2000, and there are few reasons to suggest this trend will slow anytime soon.
One of the issues behind this trend is the inflationary tether that determines annual cost-of-living adjustments, or COLA. The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is the current measure used to determine how much of an inflationary "raise" Social Security beneficiaries receive from one year to the next. However, the CPI-W measures the expenditures of working-age Americans, which isn't too helpful to the nearly 69% of beneficiaries who are age 62 or older. As a result, the CPI-W tends to overemphasize spending on apparel, education, transportation, food, and entertainment, while deemphasizing housing and medical care, which are more prominent expenditures for seniors. The result is a smaller annual COLA than the true inflation most seniors are facing.
Making matters worse, 2017 appears to have marked the 34th time in the past 36 years that the healthcare inflation rate has come in higher than Social Security's COLA. Even though healthcare inflation was down notably in 2017, it still outpaced the measly 0.3% raise that beneficiaries received last year.
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3. The wealthy will owe more in payroll tax by 2020
Here's some news that's bound to make around 90% of working Americans a bit happier: The wealthy are very likely going to owe more in tax to Social Security by 2020.
As noted, Social Security's payroll tax is its primary funding mechanism. In 2016, 87.3% of the $957.5 billion collected by the program was the result of a 12.4% tax on earned income from working Americans. In 2018, earned income between $0.01 and $128,400 will be taxed at this 12.4% rate, with a few exceptions. If you're employed by someone else, your employer covers half of your Social Security payroll tax liability. This means most workers are liable for a 6.2% tax on their earned income, up to $128,400, while self-employed persons owe the full 12.4%.
You'll also note the maximum taxable figure of $128,400, as of 2018. This cap means that any earned income above and beyond this amount isn't subject to the 12.4% payroll tax. The reason this cap exists in the first place is because Social Security has a monthly maximum payout at full retirement age ($2,788 in 2018), so it only seems logical to have a cap on how much earned income is taxed as well.
However, this maximum taxable figure tends to increase most years in step with the National Average Wage Index. In other words, as long as the U.S. economy continues to grow, and wages keep rising, the cap on taxable income should experience an inflationary boost, too. By 2020, it wouldn't be surprising to see earned income of up to $132,000 to $133,000 subject to the payroll tax.
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4. Becoming eligible for benefits will get incrementally tougher
Knowledge bomb time: You aren't automatically entitled to Social Security benefits. Believe it or not, most folks have to earn their way to benefits through their work history. In order to qualify for retired worker benefits, you'll need to have earned 40 lifetime work credits by the time you enroll.
Now here's the catch with these lifetime work credits: You can only earn a maximum of four per year. This means you'll need at least 10 years of work history in order to qualify for retired worker benefits, unless an exception applies, such as disability insurance eligibility coming into play. In 2018, a lifetime work credit is earned for each $1,320 in earned income. Thus, $5,280 in earned income will max out your lifetime work credits this year.
But the amount of earned income needed to merit a lifetime work credit tends to increase with inflation over time. Admittedly, earning $5,280 probably isn't a challenge in a full year, even for a part-time worker. Yet, by 2020, the amount you'll need to earn to max out your credits for the year will probably be a bit a higher. Don't be surprised if a credit of coverage equates to $1,350 or $1,360 in earned income by 2020, requiring a worker to earn $5,400 or more to merit their full annual complement of work credits.
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5. More recipients than ever will be subject to taxation on their benefits
Finally, some more bad news. If you're receiving Social Security benefits, your chances of being taxed on a portion of those benefits will probably have increased by the time 2020 rolls around.
In addition to gradually increasing the full retirement age with the Amendments of 1983, lawmakers also introduced the taxation of Social Security benefits. Single taxpayers receiving Social Security benefits with over $25,000 in earned income, and married couples filing jointly with over $32,000 in earned income, would have half of their Social Security benefits subject to federal income tax. In 1993, under the Clinton administration, a second tier was added that allowed up to 85% of Social Security benefits to be federally taxed. The income thresholds for this latter tier are over $34,000 for single filers and $44,000 for couples filing jointly.
When the taxation of benefits was implemented during the Reagan administration, it only impacted around one in 10 households receiving benefits. By 2015, TSCL estimates that 56% of senior households owed some level of federal tax on their Social Security benefits. Why the jump? The income thresholds for the taxation of benefits haven't been adjusted in almost 35 years. This means as COLA has boosted benefit checks and wages have naturally increased with inflation, more and more beneficiaries have become exposed to taxation. By 2020, I'd expect this percentage to rise once again.
