You probably didn’t give the Social Security program much thought when you were 25, but now that you’re creeping closer to retirement age, you’re wondering exactly how the program works.
The Social Security program provides retirees with a source of reliable monthly retirement income. The specific amount that you’ll receive in retirement depends on a few different factors, including how much you earn through your career and at what age you start collecting your benefits.
Now that changes are coming to Social Security in 2020, you also need to consider a few new factors poised to influence your retirement benefits.
The Full Retirement Age is Changing
The Social Security Administration uses your birth year to set your full retirement age – that is, how long you must work to receive 100% of your retirement benefits. Electing to retire before your full retirement age forces you to accept only a portion of your full payout. This permanent reduction can cost you thousands every year.
On the other hand, if you work beyond your full retirement age, up to age 70, you can secure more than 100% of your retirement benefits.
The changes coming in 2020 will increase the full retirement age for all Americans born in 1960 or later. If you fall into this category, you can expect your official retirement age to climb to 67 instead of 65. In other words, you need to work two years longer than your slightly older friends in order to collect your maximum security benefits for the remainder of your life.
This may or may not affect you, as more Americans are working past sixty-five anyway.
A Cost of Living Adjustment (COLA) is applied to Social Security benefits each year in response to inflation. The lower the rate of inflation in the broader economy, the less your benefit payment will increase.
In 2020, the government’s COLA will boost payouts by 1.6% to match the rising cost of living across the country. This may add up to $50 per month to your payout, depending on the amount of your base benefits.
Benefits Increase, But So Do Taxes
Good news! The maximum Social Security Benefits payout will increase in 2020. This number increases slightly each year with the maximum monthly payout cap imposed by the Social Security Administration. Not even celebrities and high net worth individuals can collect more than the maximum, regardless of how many millions they earned through their careers.
According to the SSA COLA webpage, “the earnings limit for workers who are younger than “full” retirement age (age 66 for people born in 1943 through 1954) will increase to $18,240. (We deduct $1 from benefits for each $2 earned over $18,240.)”
“The earnings limit for people turning 66 in 2020 will increase to $48,600. (We deduct $1 from benefits for each $3 earned over $48,600 until the month the worker turns age 66.)”
“There is no limit on earnings for workers who are “full” retirement age or older for the entire year.”
However, this isn’t a one-way road. In order for more benefits to be granted, taxes need to be collected. Employees pay a 6.2% tax on their earned income and employers pay an equal payroll tax, while self-employed individuals must pay the full 12.4% themselves, up to a certain amount of earned income.
The maximum taxable income in 2020 will be $137,700.
The Bottom Line
Though the evolution of Social Security is impossible to predict, change is inevitable. We won’t know those changes for sure until they happen, but you can expect these basic trends to continue. Without making adjustments to reflect the shifting demographics, life expectancy, and economy of our country, the Social Security program is at risk of becoming unsustainable.