These 3 Social Security Changes in 2020 Don't Just Affect Retirees
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Welcome to the Stay Wealthy Podcast. I'm your host, Taylor Schulte. And today, I'm just happy to have my voice back. I've been battling a cold for a few weeks now. And then out of nowhere, I woke up the other day with just no voice whatsoever. So bear with me today as we dive into some of the important changes to Social Security in 2020 that I think you should know about. And I'm going to start with the first one.

Even if you aren't close to claiming social security, there's still a substantial change that likely has impact on you as a working professional. For all the links and resources mentioned in this episode, visit youstaywealthy.com forward slash 55.

So currently, right now in the United States, there are about 69 million Social Security beneficiaries, or about 21% of the population. And these 69 million Americans are going to be witnessing some changes to their Social Security benefits in 2020.

Today, I want to highlight three of these changes that I think are really important. And again, one of these changes actually doesn't just impact Social Security beneficiaries, but it also impacts people that are still in the workforce, even young professionals. So let's dive into these three really important changes that I want to highlight. The first is the change to the cost of living adjustment, which is also known as COLA.

Quick fun fact, cost of living adjustments were only implemented 44 years ago. And we've seen these numbers jump all over the place. We've seen adjustments as high as 14% in the 1980s. And then we've seen it as little as 0% most recently in 2009, 2010, and also in 2015. And as some of you guys might imagine, economists are getting concerned that costs of

of goods and services are rising at a much faster rate than the purchasing power of social security benefits. For example, a recent study showed that over the last 20 years, COLA increased social security benefits by about 50%, which is great. However, COLA

Costs and services that Social Security beneficiaries typically incur, things like prescription drugs, fresh produce, groceries, gas, things like that, those things climbed more than 100% during that same time period.

If you're a listener of the show, you've likely heard me say something along the lines of my guiding philosophy is to focus on the things you can control and cost of living adjustments and the cost of goods and services and groceries and gas. All those things are not in our control, which is why we can't rely on social security for a successful retirement. It's a supplement or some even call it icing on the cake.

A good exercise might even be to remove Social Security from your financial plan entirely and see if you're able to reach your retirement goals without it. And that'll take a lot of the anxiety away from these annual changes that we hear about.

I'm not suggesting that Social Security is going to go away or it's going to disappear, but we are far more in control of our own savings rates, how much we spend, and our investment decisions than Social Security changes and the costs of goods and services. Circling back to these COLA changes, as you might recall, in 2018, the adjustment was 2%.

And in 2019, it jumped up to 2.8%. Well, in 2020, the adjustment's only going to be 1.6%. However, that adjustment is still above the 10-year average, which is 1.4%. And it's also higher than years like 2009, 10, and 15, where it was nothing. So something is certainly better than nothing.

I know I've been doing this podcast for a while. Nobody really likes percentages. So let's put some numbers to all of this to help make some sense out of it. For individuals in 2020, the average social security benefit is going to be about $1,500 per month with these new COLA adjustments. For couples, the average benefit is going to be about $2,500 per month.

And then lastly, disabled workers are going to see their benefits increase to about just a little over $1,200 per month.

If you want to get the exact numbers and you want to see a detailed chart of the estimated monthly benefits in 2020 for other scenarios, scenarios like widowed mothers with children or aged widows and widowers who are alone, I'm going to link to it in the show notes, which you can find by going to youstaywealthy.com.

forward slash 55. And just in case you're a finance nerd like me and you like learning about this stuff, I'm also going to share a link to the history of all these COLA adjustments going back to 1975. So go ahead over there and take a look if any of that interests you. All right. So that's the update on the COLA adjustments for 2020. Again, we're going to see an increase of 1.6%.

The second change I wanted to highlight today is the maximum taxable wage increase. And this is the change that can impact more people than just social security beneficiaries. It can impact somebody in their 20s, 30s, 40s, 50s. It's important because this aspect, it's an aspect of the annual cost of living adjustment announcement that happens every year that potentially affects everybody.

Here's the deal. If you are currently in the workforce, you and your employer each pay a 6.2% social security tax on your earnings. But if you're a high earner, you don't pay social security taxes on all your wages.

there's actually a cap and this cap usually adjusts every year. As you might imagine, it also usually adjusts upwards, which means every year your tax bill usually goes up.

So this year in 2019, a working professional pays social security taxes. Again, that's that 6.2% number I just referenced. They pay social security taxes this year on the first $132,900. Everything over that in 2019 is not taxed for social security.

In 2020, this cap is going to jump. It's jumping up to $137,700. So an increase of about $5,000, that cap is going to jump about $5,000. So if we multiply that 6.2%, again, that's that social security tax. If we multiply that by this new cap of $137,700, that

That's a little over $8,500 that you're going to be paying in Social Security taxes in 2020. And it's going to represent about a $300 tax increase. Now, if you're self-employed, you might already know this, but you have to pay both sides of the tax. So you have to pay 6.2% as the employee and

and you have to pay 6.2% as the employer. So if you earn $137,700 or more in 2020 as a self-employed individual, you're going to pay just over $17,000 in social security taxes. And this is going to represent about a $600 tax increase from 2019.

So again, this change could impact everybody. It depends on your earnings. If you're a high earner, you're going to be capped at that new level, but it still means that there's a tax increase for you. All right. The third thing, the third change that I want to highlight for social security benefits in 2020 is known as the earnings limit.

If you take Social Security benefits before your full retirement age and you earn income above this earnings limit, your Social Security paycheck is going to be reduced by

So as a reminder, your full retirement age is based on your date of birth. And if you don't know what it is, if you don't know what your full retirement age is, I've made it really simple for you. And I've linked to a free calculator that you can use in the show notes. Just go to youstaywealthy.com forward slash 50%.

55. And you can use this free calculator to figure out what your full retirement age is. Because again, if you're taking benefits before your full retirement age and you earn income above this earnings limit that I'm going to talk about, then your social security paycheck is going to be reduced.

Like the other adjustments we've talked about today, the earnings limit generally increases every single year. So in 2018, it was just over $17,000. In 2019, it went up to $17,640. And in 2020, it's going up again. It's going to go up to $18,240. So here's the deal. If you're below that full retirement age...

and you're taking Social Security benefits, and you make more than $18,240 in 2020, some of your Social Security benefits are going to be withheld. Specifically, for every $2 you earn over that limit,

$1 is going to be withheld from your benefits. If you make $18,240 or less, you're fine. Your benefits will be untouched. But if you make anything more than that, for every $2 you earn over that limit, $1 is going to be withheld.

There's actually another earnings limit that doesn't get a lot of attention. And that limit applies only in the calendar year in which you attain full retirement age. So again, use that calculator, identify what your full retirement age is, and then

And if you're taking benefits during that year, it allows you to earn much more in that short time period. So this earnings limit actually has a limit of $48,600 in 2020. And for this one, again, this applies to the year in which you attain full retirement age.

For this one, every $3 you earn over that limit, $1 is going to be withheld from your benefits until the month of full retirement age. So if you attain full retirement age in June, you have up until June to reach that earnings limit of $48,600.

Once again, I know this stuff can get a little bit confusing. So I've linked to an earnings test calculator in the show notes. If you want to go ahead and punch in your date of birth, and this is through the Social Security Administration website, by the way, this is not my calculator. So you can punch in your date of birth, your estimated earnings, and you can see where you stand all this. So go check out the show notes, punch those things in, and you can do the earnings test yourself.

One of the common questions I get is, well, what counts as income for these earnings limit? And the short answer to keep it simple is it needs to be employment income. So W-2 employment income or net earnings if you're self-employed.

Income like pension payments, some annuity payments, IRA distributions, dividends, interest, and capital gains, those things don't count towards this limit. It's really, again, just that simple income, that W-2 income or the net earnings from self-employment income.

Okay, before we wrap up today's show, you might be wondering about Medicare Part B and Part D premiums, as well as income-related surcharges. Here's all you really need to know. The numbers are not out yet, but there are some estimates. So I thought I would just share the estimates with you today. When the numbers do come out, I'll be sure to share those. For Medicare Part B premiums, again, those are the premiums that cover doctors and outpatient services.

those are expected to rise from $135 and change to $144 and change per month. As far as income related surcharges, those typically kick in or those do kick in right now for individuals with $85,000 in income and for couples filing jointly with $170,000 in income.

Again, these new numbers are not out yet, but for 2020, it's estimated that those thresholds are going to increase to $86,000 and $172,000 respectively.

So once again, those are estimates. When the real numbers come out, I'll be sure to share them on the podcast with everybody. I hope this was helpful to you. Thank you as always for listening. Again, if you're on an iPhone, it would be really, really helpful if you just hit pause really quick and left a review, a written review in the Apple Podcasts app. It'll help other people find this show. For all the links and resources mentioned in this episode, head over to youstaywealthy.com forward slash 55.

Hey, it's me again. I just wanted to say thank you one more time for listening and remind you to please, please, please leave a quick review. If you're on an iPhone, leave a quick review on iTunes. If you're enjoying the show, I'm getting great feedback from listeners just like you. And I really want to keep the momentum going. So if you have a chance on your iPhone, leave a quick review on the Apple podcast app. And thank you so much in advance for all of your help and support.

This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.