Although Social Security currently sends benefit checks to more than 63 million people each month, the program is first and foremost designed to provide a financial foundation for our nation's retired workers. Nearly 45 million retired workers (70% of all beneficiaries) receive a benefit check monthly, with better than 3 out of 5 of these seniors counting on their payout to account for at least half of their income.
Given the relative importance of Social Security, it should come as little surprise that the second week of October holds special significance to these tens of millions of Americans. That's because the second week of October is when the Social Security Administration (SSA) announces changes to the program for the upcoming year that could directly impact what beneficiaries are paid on a monthly basis. Of course, these changes can impact nonretirees who aren't receiving a Social Security benefit as well.
Here are five Social Security changes for 2020 that could impact your monthly take-home income.
1. COLA may put more in beneficiaries' pockets
The most important figure in the October announcement from the Social Security Administration is the cost-of-living adjustment (COLA). COLA is simply a means of the SSA quantifying how much inflation its beneficiaries dealt with in the current year, and how much benefits will rise in the upcoming year to account for this inflation.
Social Security's COLA is measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The average monthly CPI-W reading from the third quarter of the current year (July through September) is compared to the average monthly CPI-W reading from the third quarter of the previous year. If the average figure has risen from the previous year, then beneficiaries receive a "raise" that's commensurate with the percentage increase year over year, rounded to the nearest 0.1%.
Since we don't know what the reading for July through September will be, 2020's COLA remains undetermined at this point. However, most forecasts have called for a COLA of perhaps 1.7% to 1.8% next year, which would lead to an increase pay for the average retired worker of about $25 a month, based on the average payout of $1,471 a month, as of June 2019.
2. Withholding thresholds should rise for early filers
Since a majority of Social Security recipients file for benefits before reaching their full retirement age, this message is for you!
Early claimants who have yet to reach their full retirement age but are currently (or expected to begin) taking benefits will be subject to the retirement earnings test. The retirement earnings test allows early filers to earn up to a certain amount of money before the SSA is allowed to withhold a portion, or all, of their benefit. For those beneficiaries who won't reach their full retirement age in 2019, $1 in benefits can be withheld for every $2 in earnings above $17,640 ($1,470 a month). Meanwhile, those folks who will reach their full retirement age in 2019 but have yet to do so are allowed to earn $46,920 before the SSA begins withholding $1 in benefits for every $3 in earnings above this threshold.
The income thresholds where withholding begins usually rise modestly in years where COLA is positive. With that looking likely for 2020, it would not be a surprise to see these withholding thresholds rise a bit, thereby allowing early claimants to earn more before being "penalized."
One last note: These withheld benefits aren't lost for good. You do get them back in the form of a higher monthly payout once you reach your full retirement age.
3. The maximum monthly payout may adjust upwards
If you're currently claiming a retired worker benefit and have made quite a bit of money on an annual basis over your working career, there's a pretty good chance that you'll be able to net more in monthly payouts in 2020.
Among the many rules Social Security implements is a cap on the maximum monthly payout at full retirement age. In 2019, no individual at their full retirement age can take home more than $2,861 per month, even if they made millions of dollars each year throughout their working career. This $2,861 figure rose $73 a month from 2018.
While I wouldn't expect such a large jump in 2020, in terms of the percentage increase in 2019 compared to 2018, it would not be surprising in the least if well-to-do beneficiaries who'd reached the maximum taxable earnings cap in each of their 35 accounted years of work received a bit more than $2,861 a month next year.
4. Disability income thresholds could tick higher
Even though 7 out of 10 program recipients are retired workers, just over 10 million people each month also receive a payout from Social Security Disability Insurance (SSDI), of which nearly 8.5 million are disabled workers, and the remainder spouses or children of these disabled workers.
In order to qualify for an SSDI benefit, beneficiaries must meet the stringent requirements of a long-term disability, as defined by the SSA. In addition, they also aren't allowed to earn more than a defined amount of income per month if they're receiving an SSDI benefit. In 2019, a disabled beneficiary is allowed to earn up to $1,220 a month before their benefits would be stopped. Meanwhile, beneficiaries who are legally blind are allowed to earn up to $2,040 a month before benefits cease. These two figures rose $40 a month and $70 a month, respectively, from 2018.
Assuming the average CPI-W reading does rise on a year-over-year basis from the previous year, which is looking likely, these SSDI income thresholds for the disabled and legally blind should bump up modestly in 2020.
5. The wealthy should be prepared to open their wallets
Lastly, Social Security's changes for 2020 won't just affect those receiving a benefit from the program. Wealthy workers can also expect to open up their wallets and pay more into the program as long as inflation rises on a year-over-year basis, as measured by the CPI-W.
Although Social Security has three sources of funding, the payroll tax on earned income provides the bulk of the program's income ($885 billion out of $1 trillion in 2018). This 12.4% payroll tax is affixed on earned income between $0.01 and $132,900 in 2019, with this upper limit known as the payroll tax earnings cap. It adjusts annually in step with the National Average Wage Index, with the one exception being in years where deflation occurs (i.e., the CPI-W falls year over year). However, this has only happened three times since 1975 (in 2010, 2011, and 2016).
With COLA likely being positive in 2020, this should mean an increase in the payroll tax cap for next year. Since most workers don't make $132,900 or more a year, this won't have an impact on a majority of the labor force. However, for more well-to-do workers who are earning above $132,900, you can almost certainly expect to pay a bit more into the program in 2020, with the cap rising to perhaps $135,000 to $136,000, based purely on a guess from Yours Truly.
Suffice it to say, changes in Social Security in 2020 could mean variability to your take-home pay next year.