Social Security remains an important source of income for many retirees. For investors preparing for or in retirement, two key changes to the program were announced this year.
Those collecting benefits will receive a 2.8% cost-of-living adjustment (COLA) beginning with the January payment. Also, for individuals planning to claim retirement benefits, the age to receive full retirement benefits increased. For those who turned 62 in 2018, the full retirement age is 66 and four months. For those who turn 62 in 2019, the full retirement age will increase to 66 and six months.
The role of Social Security in retirement planning
For millions of Americans, Social Security plays a significant role as a source of income in retirement. Today, some 67 million people receive benefits. The average monthly benefit is $1,400. Social Security benefits represent more than half of retirement income for 50% of couples and 71% of individuals.
What is new for 2019?
The Social Security Administration recently released changes in taxable income and earning levels. The maximum taxable earnings for Social Security (OASDI only) increased to $132,900 in 2019 from $128,400 in 2018.
The administration also announced an increase to the limits on the amount that beneficiaries may earn, and retain their benefits, during the period prior to full retirement age and once reaching full retirement age.
Social Security trust funds under pressure
The Social Security program remains under pressure from changing demographics — an aging population claiming benefits is outpacing the receipts from the current workforce. According to the most recent report from the Trustees, the trust fund is expected to run out of reserves by the early 2030s.
Last year, the House leadership stated they were considering potential reforms to entitlement spending including Social Security and Medicare. Policy changes to Social Security, which would require bipartisan support, remain unlikely, particularly since the installation of the new Congress that ushered in a Democrat-controlled House.
Given Social Security’s current financial trajectory, those born in 1960 and later should consider the risk of reduced benefits in the future when planning for income in retirement.
Understanding Social Security is critical for retirement income planning and maximizing your benefits. An advisor can help investors determine the optimal time to claim benefits and monitor potential changes in the system. For more information about strategies to claim Social Security, read Putnam’s investor education article “Optimizing Social Security: Five things you need to know.”