Social Security is arguably the most important social program in this country. Each and every month, more than three out of five retired workers lean on their benefit checks to provide at least half of their monthly income. In turn, according to the Center for Budget and Policy Priorities, Social Security keeps more than 15 million retired workers (and 22.1 million beneficiaries, on the whole) out of poverty.
Big changes are coming to Social Security
Given its importance to our nation's elderly, the disabled, and the survivors of deceased workers, there's simply no time of the year more important than mid-October. That's when the Social Security Administration (SSA) announces changes to America's most important social program for the upcoming year. Everything from benefits paid to qualifying guidelines have been updated.
With that being said, let's take a closer look at the seven biggest changes to Social Security in 2019.
1. Beneficiaries are netting their biggest COLA in seven years
The highlight of the SSA's mid-October announcement is always the "raise" that existing beneficiaries will receive in the upcoming year. This raise is known as the "cost-of-living adjustment," or COLA, and is determined by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
In 2019, Social Security recipients will be receiving a 2.8% COLA, which is the biggest increase since 2012. Instrumental to this raise has been the rising price of energy goods, such as gasoline and fuel oil. The increased cost of shelter (i.e., rent or housing costs), which comprises the largest weighting of any good or service within the CPI-W, also played a key role in pushing Social Security's COLA to a seven-year high.
Keep in mind that a 2.8% COLA isn't exactly going to make seniors rich or necessarily represent the true inflation they've faced over the past year. An analysis from The Senior Citizens League found that the purchasing power of Social Security dollars has declined by 34% over the past 18 years, primarily because the CPI-W does a poor job of representing the expenses that seniors contend with.
As icing on the cake, lower-income Social Security beneficiaries who are also enrolled in Medicare still are likely playing catch-up with their Medicare Part B premiums. These beneficiaries had been protected by the hold harmless provision earlier in this decade, but this provision has now gobbled up most or all of their COLA in recent years and could do the same in 2019.
2. The rich will owe more in 2019
According to most informal polls, increasing or removing the maximum taxable earnings cap associated with Social Security's 12.4% payroll tax is the favored solution of the American public. Although Congress has been unable to agree on a long-term fix to Social Security's estimated $13.2 trillion cash shortfall between 2034 and 2092, the public will be happy to hear that the wealthy will owe more payroll tax next year.
In 2018, all earned income between $0.01 and $128,400 is subject to Social Security's 12.4% payroll tax. Next year, earned income up to $132,900 will be subject to the payroll tax -- an increase of $4,500. This tax cap is tied to the National Average Wage Index, which rose 3.45%, from $48,642.15 in 2016 to $50,321.89 in 2017. When rounded to the nearest 0.1%, this 3.5% increase was added to the existing $128,400 cap, yielding the new $132,900 figure.
For self-employed well-to-do workers, the new earnings cap represents an increase of up to $558 in added annual tax. For the wealthy who are employed by someone else (employers are responsible for half of their employees' payroll tax liability, up to the cap), it's up to a $279 annual increase.
For the small percentage of workers earning more than $132,900 in 2019, income above this amount will be exempted from Social Security's payroll tax. An estimated $1.2 trillion in earnings escaped taxation in 2016, per the SSA.
3. The maximum monthly payout at full retirement age increased
Want the opportunity to generate a large paycheck from Social Security in retirement? Then you'll probably be thrilled to find out that the SSA increased the maximum monthly payout possible at full retirement age (FRA) in 2019.
This year, a retired worker hitting their full retirement age could receive no more than $2,788 a month, regardless of how much they earned per year during their lifetime. Keep in mind that the SSA determines your full retirement benefit by taking your 35 highest-earning, inflation-adjusted years into account. In 2019, a retired worker at full retirement age can walk away with up to $2,861 a month, an increase of $73 a month, or $876 a year.
However, most folks aren't going to receive anywhere near this amount. That's because a majority of beneficiaries claim their payouts before hitting their full retirement age and therefore accept a permanent reduction to their monthly payout in the process.
4. The full retirement age will rise, yet again
If you plan to be among the minority who wait to receive their full retirement benefit, then understand that the wait will be a bit longer moving forward. The SSA determines your full retirement age by your birth year. If you don't know your FRA, this SSA table makes it easy to find.
For those folks born in 1957 who therefore will be turning 62, the earliest age of eligibility for retired worker benefits, in 2019, the FRA will climb by two months, to 66 years and six months. This marks the third consecutive year that the FRA will rise by two months, with its eventual peak coming at age 67 in 2022 for those born in 1960 or later.
What beneficiaries really need to understand is this: If you claim benefits prior to hitting your full retirement age, you'll be accepting a permanent reduction to your monthly payout. In other words, you're not getting 100% of your benefit. Conversely, if you wait until after your full retirement age to begin taking your payout, you actually can earn more than 100%.
5. Withholding thresholds for early filers have swelled
More good news: The income thresholds for the retirement earnings test are on the rise, once again!
Whether you're aware of this or not, if you enroll for Social Security benefits prior to your FRA and you're still working, the SSA can withhold some or all of your benefits, depending on how much you earn each year. In 2018, early filers who won't hit full retirement age this year can earn up to $17,040 annually ($1,420 a month) without having any benefits withheld. But for each $2 in earnings above this amount, $1 in benefits is withheld. In 2019, this figure is rising to $17,640 a year, or $1,470 a month.
If you will hit your full retirement age in 2018 but have yet to do so, $1 in benefits can be withheld for every $3 in earnings above $45,360 ($3,780 a month). In 2019, this figure is increasing to $46,920 a year, or $3,910 a month.
In other words, early filers who are still working will be penalized a bit less next year.
It's also worth mentioning that withheld Social Security benefits aren't lost. They're returned in the form of a higher monthly payout once you reach your FRA. The retirement earnings test isn't applicable to beneficiaries who've reached their full retirement age.
6. Disability income thresholds will move higher
Although Social Security is predominantly a program designed to create a financial foundation for low- and middle-income workers during retirement, it's also responsible for providing payouts to around 10 million long-term disabled workers and their immediate families. Thus, changes to the income thresholds for the disabled tend to be pretty important.
In the upcoming year, non-blind Social Security Disability (SSD) recipients will be able to earn up to $1,220 a month without having their benefits stopped. That's a $40-a-month increase from 2018. As for the legally blind, they'll be able to earn $2,040 a month from SSD in 2019, up $70 a month from the current year.
7. Qualifying for Social Security just became a bit tougher
Lastly, it's going to be incrementally harder for future generations of beneficiaries to qualify for retirement benefits.
Often referred to as an entitlement program, Social Security is anything but that. In reality, workers have to earn their benefits by accruing 40 lifetime work credits, of which a maximum of four can be earned per year. These credits are handed out based on your earned income. In 2018, $1,320 in income earns a worker a lifetime work credit. Therefore, $5,280 in earnings would max out your work credits for the year. If you do this for 10 years, you'll qualify for a Social Security retirement benefit.
In 2019, it'll take $1,360 in income to earn a work credit, or $5,440 (an extra $160 in income) to max out your four work credits for the year. The SSA certainly makes earning work credits achievable, but the bar is on the rise.
Big changes are coming to Social Security in 2019, but now you're in the know.