Whether you're collecting Social Security or not, changes to the program this year could have a serious effect on your overall earnings. Here are three factors that might affect your ultimate take-home pay.
1. A relatively generous cost-of-living adjustment
In recent years, seniors have bemoaned that the fact that their annual cost-of-living adjustments, or COLAs, have been overwhelmingly stingy. That's why this year's 2.8% COLA is a welcome breath of fresh air. Prior to 2019's COLA, the average Social Security beneficiary received $1,422 a month. When we apply that 2.8% raise, the average monthly benefit climbs to $1,461. All told, that's an additional $468 a year to work with, and while it's certainly not a life-changing amount, it's helpful to those living on a fixed income.
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2. A higher earnings cap for tax purposes
Social Security is funded by payroll taxes, and Americans today pay 12.4% of their earnings into the program. Salaried workers are responsible for paying half that amount, leaving their employers to pick up the other half. Self-employed workers, meanwhile, pay the entire 12.4% (though half is deductible on their taxes).
That 12.4% Social Security tax, however, is capped at a certain earnings level that changes from year to year. In 2018, it was $128,400, but this year, that threshold has increased to $132,900. This means that higher earners will need to pay Social Security taxes on an extra $4,500 of income. For salaried workers, that translates into an additional $279 in taxes for the year, but for those who are self-employed, it means losing an additional $558.
3. A higher earnings test limit
If you're working while collecting Social Security but haven't yet reached full retirement age, you're subject to what's known as the earnings test. In 2018, you were allowed to earn up to $17,040 a year without having benefits withheld, but once your earnings exceeded that threshold, you'd lose $1 for every $2 in earnings above $17,040. And if you reached full retirement age in 2018 but worked up until that point while collecting benefits, you were allowed to earn up to $45,360 before having benefits withheld, and you'd then lose $1 for every $3 in earnings.
This year, the earnings test limit is going up, which means you can earn a bit more money without having your benefits withheld. Specifically, you can earn up to $17,640 a year before losing benefits, but once your earnings exceed that level, you lose $1 for every $2 in earnings. And if you're going to reach full retirement age at any point in 2019, you can earn up to $46,920 without having benefits withheld. From there, you'll lose $1 for every $3 in earnings.
Keep in mind that the benefits you have withheld under the earnings test aren't lost permanently. Rather, they're added back into to your monthly payments once you reach full retirement age.
Though Social Security is a long-standing program, its nuances can change from year to year. Be sure to stay current on the ways Social Security evolves so that you're not caught off guard by changes that impact your income, for better or for worse.
