Social Security is our nation's most important social program. Each month, nearly 63 million people receive a traditional Social Security benefit check (i.e., not including Supplemental Security Income), of which roughly 70% are retired workers. Of these aged beneficiaries, more than 3 out of 5 are reliant on Social Security for at least half of their income. Without this program and the guaranteed income it provides to eligible beneficiaries, the elderly poverty rate would likely soar.
How will the 2019 Social Security changes impact your wallet?
But it's also a program that's constantly changing. Each and every year, many of the prevailing metrics that guide the Social Security program adjust, whether it be to match the inflation rate, the National Average Wage Index, or some similar measure. In just a few days, four Social Security changes could affect your take-home pay.
1. The most robust cost-of-living adjustment in seven years
Arguably the most exciting aspect of the calendar change is that most Social Security recipients will see their benefit checks rise by 2.8% in 2019. This "raise" is officially known as a cost-of-living adjustment (COLA), and it's been calculated since 1975 by analyzing price changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W.
Here's how it works: The average reading of the CPI-W during the third quarter (July through September) of the previous year acts as the baseline, while the average reading of the CPI-W during the third quarter of the current year acts as the comparison. If this average reading rises year over year, thereby signaling inflation, beneficiaries receive a COLA in the upcoming year that's commensurate with the percentage increase, rounded to the nearest 0.1%. In the rare event that prices fall (known as deflation), then benefits remain static. They cannot decline due to deflation.
In 2018, Social Security's COLA came in at 2.8% thanks to a third-quarter rally in crude oil prices to a four-year high, as well as strong shelter inflation (e.g., higher rental rates). For the average retired worker, this will add about $40 to their monthly benefit check.
However, approximately 2 million people, many of which are low income, aren't going to see an extra dime in benefits in 2019 despite this robust COLA. That's because these folks have been protected by the hold harmless clause for much of this decade. With these roughly 2 million beneficiaries still trying to catch up to the standard Medicare Part B premium of $135.50 in 2019, the entirety of their COLA could go to Part B premium increases.
2. Larger maximum payouts at full retirement age
Although we're only talking about a small percentage of retired workers, those of you who have maxed out what you can be paid by Social Security -- i.e., worked at least 35 years, and earned at least the maximum taxable earnings cap in those years -- could receive a boost in 2019.
According to changes released by the Social Security Administration, the maximum monthly payout at full retirement age will increase from $2,788 in 2018 to $2,861 in 2019. That's up to an extra $876 a year in max payouts at full retirement age for well-to-do workers. Admittedly, wealthier individuals are unlikely to lean on Social Security as a necessarily income source during retirement, but that won't stop these folks from potentially pocketing more income in 2019.
3. Higher earning capacity for early filers prior to the retirement earnings test kicking in
According to data from the Social Security Administration (SSA), approximately 60% of retired workers claim their benefit prior to hitting their full retirement age. Aside from just facing a permanently reduced monthly benefit by claiming early, the retirement earnings test (RET) may also apply to those taking benefits prior to reaching their full retirement age.
In 2018, an aged beneficiary who didn't reach full retirement age was only allowed to earn up to $17,040, or $1,420 a month. For every $2 in earnings above this amount, the RET allows the SSA to withhold $1 in benefits, up to the full amount of payable benefits. For those Social Security recipients who did reach full retirement age at some point in 2018, they were allowed to earn up to $45,360 ($3,780 a month) prior to having the SSA withhold $1 in benefits for every $3 in earnings above this amount.
When the calendar changes in a few days, the retirement earnings test thresholds will be climbing a bit, thereby allowing early claimants the ability to earn a bit more before the SSA would begin withholding some of their benefits. In 2019, those under full retirement age can earn up to $17,640 ($1,470 a month) before any withholding would begin. Meanwhile, beneficiaries set to reach full retirement age next year can earn up to $46,920 ($3,910 a month) without any withholding.
Assuming you make it to your full retirement age, you won't lose your withheld benefits. They're repaid to you in the form of a higher monthly payout. The RET is only applicable to beneficiaries who've yet to hit their full retirement age, and who cross the noted income thresholds.
4. The payroll tax cap climbs for well-to-do workers
Lastly, wealthy working Americans can expect to be impacted by changes made to the Social Security program in 2019.
This year, the maximum taxable earnings cap was $128,400. In plainer English, this means that all earned income between $0.01 and $128,400 is subject to the 12.4% payroll tax that funds a lion's share of Social Security's expenses. More than 9 out of 10 workers earns less than $128,400 a year, meaning these folks are paying into the program on every dollar they earn.
Meanwhile, workers with high incomes are exempted from the payroll tax on any earnings above $128,400. It's been estimated by the SSA that $1.2 trillion in earnings escaped the payroll tax because of this cap in 2016.
As we barrel into 2019, this payroll tax cap will rise to $132,900, or $4,500. It won't have one iota of impact on more than 90% of working Americans, but for higher-income workers it could mean having to pay more in tax. Depending on whether a worker is self-employed (and therefore responsible for the entirety of the 12.4% tax) or employed by someone else (responsibility is split 50-50 between the employer and employee), their payroll tax contribution could rise by as much $558 or $279 over what they paid in 2018.