In 2019, Social Security will change in four major ways. You'll be affected whether you are among the more than 43 million retirees who currently receive benefits or you're one of the folks still paying into the program in order to eventually claim benefits. Let's look at the modifications and what you need to know about them.
1. There will be the biggest cost-of-living increase in 7 years.
Current beneficiaries are going to receive the biggest hike in payments since 2012, thanks to a 2.8% cost-of-living adjustment (COLA), which is supposed to tie benefits to inflation, or increases in broader prices. The net result for beneficiaries receiving the average monthly Social Security benefit will be a $39.64 monthly increase, to $1,461. That works out to a $475.68 yearly increase.
The Social Security Administration (SSA) pegs any COLA to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). COLAs for Social Security payments are based on the CPI-W's performance over the past year. The CPI-W hit 246.35 in the third quarter of 2018 versus 239.66 in the third quarter of 2017, a 2.8% difference. The rise was driven by energy prices (heating oil, gasoline) and housing costs (mortgages, rent).
So while the COLA is good news, the average beneficiary will receive Social Security benefits of just $17,532 in 2019. Most retirees will need retirement savings or to stay in the workforce to some degree, in addition to their Social Security benefits.
Plus, the COLA might not actually work to catch Social Security amounts up with inflation, because the composition of the CPI-W returns an inflation figure below the actual price increase of categories frequently used by senior citizens, such as healthcare. More than one-third of the purchasing power of Social Security benefits has eroded since 2000 because of these discrepancies, according to The Senior Citizens League.
2. Full retirement age will continue to climb.
Although everyone becomes eligible to claim Social Security benefits at age 62, you won't receive the maximum amount you're eligible for unless you wait until your full retirement age (FRA).
For the age cohort born between 1943 and 1954, FRA is 66. For those born in 1955, FRA is 66 years and 2 months. For those born in 1956, it's 66 years and 4 months. For those born in 1957, though, FRA is rising by two months, to 66 years and 6 months, the third straight year it has climbed. FRA varies by your birth year and month until it reaches a maximum of 67 for those born in 1960 and after. (You can find your FRA here.)
It's important to know your FRA. But when determining it, keep in mind that your benefits rise about 8% annually for every year you delay taking them between FRA and age 70. So if your FRA is 66 and you put off taking your benefits until you're 70, you'll be getting Social Security checks that are nearly one-third heftier. After age 70, benefits no longer rise, except for any COLA increases.
3. The maximum monthly payout will be bigger.
Ah, but if FRA is marching ever upward, so is the maximum monthly payout you can receive when you reach it.
The monthly payout you can receive is based on your earnings over your lifetime. The SSA determines your full retirement benefit by looking at your 35 most profitable years, adjusted for inflation. Earnings for years you didn't work within those 35 years will be factored in as 0, dragging your average down.
In 2018, someone who reached their FRA maxed out at $2,788 per month in Social Security benefits. This was the top payout no matter how high your income was. This year, the maximum monthly payout will rise to $2,861 per month. That's $73 more, for a total of $876 every year.
That $2,861 is the maximum, and the amount you receive depends on your earnings. Many people receive considerably less; the average retirement benefit was $1,420.10 in late 2018, according to the SSA.
But you'll have no chance of receiving the maximum payout if you don't wait until your FRA. Only 7% of men and 6% of women wait until that date, however.
4. You will need to earn more to qualify for Social Security.
Most people believe that the road to Social Security is paved by working and earning. It is, but it's also a bit more complicated.
Social Security payments must be earned by an accrual of 40 lifetime work credits. A work credit is a metric the SSA uses, and it's based on your income. In 2018, for each $1,320 of income earned, workers received one work credit. In 2019, workers will need to earn $1,360 for one work credit -- $40 more, or an extra $1,600 for the 40 lifetime work credits required.
Each person can earn a maximum of four credits per year. So last year, if you earned $5,280, you received all four. This year, it will take $5,440 to earn the four work credits, $160 more than in 2018.
The SSA is committed to keeping lifetime work credits achievable, but it's prudent to know about incremental changes like this, since it allows you to optimize your benefits.