Some key changes are slated for Social Security in 2020 will impact millions of retirees as well as current workers paying into the system.
Social Security plays a role in providing some portion of income for many retirees. Today, more than 60 million people receive Social Security benefits, including some five million who began receiving benefits last year.
1. Changes announced for 2020
Some current workers will pay more in Social Security payroll tax. In 2020, the maximum amount of earnings subject to Social Security payroll taxes will increase to $137,700 from $132,900. Raising the maximum level will result in a higher amount of income subject to the payroll tax. This means that a worker with wages higher than the maximum will pay an additional $367 next year in payroll taxes.
- Every year, roughly 6 percent of covered workers have earnings above the taxable maximum.
- Nearly 20 percent of current and future covered workers are projected to have earnings above the taxable maximum in at least one year.
2. Current retirees get a raise
The cost of living adjustment (COLA) for 2020 is 1.6%. This means that “average” retirees will see their monthly benefit increase from $1,479 to $1,503, an increase of $288 for the year (on average).
3. Early retirees can earn more next year without a benefits reduction
Retirees receiving Social Security benefits can see that income reduced if they claim Social Security prior to full retirement age and continue to work. At full retirement age, there is no reduction in benefits for earned income. Prior to that, the monthly benefit is reduced.
For 2019, the earnings threshold was $17,640. For 2020 the maximum level increases by $600 to $18,240. For every $2 in earnings above the limit, one dollar in benefits is withheld.
There is a different threshold for those who work during the year in which they reach full retirement age. In this case, for 2020, an individual can earn up to $48,600 before benefits are reduced. One dollar in benefits is withheld for every $3 in earnings above the limit.
Monitor tax planning
Some of the changes could impact an individual’s income or overall financial plan. Retirees who continue to work need to be mindful of their earnings as it relates to their Social Security benefits. Among current workers, freelance or contract workers need to pay particular attention to the new tax thresholds. In general, freelance workers are responsible for paying their own Medicare and Social Security payroll taxes. It’s important to meet with a financial advisor to keep a tax and income planning strategy on track.
For a full list of changes for 2020, visit SSA.gov.
To learn more about Social Security claiming strategies and how benefits can play a role in your overall financial plan, read Putnam’s investor education piece, “Five things you need to know about optimizing Social Security.”
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