As happens in the second week of each October, on October 11th the Social Security Administration (SSA) announced next year’s program changes which will go into effect on January 1, 2019 for the roughly 67 million Social Security beneficiaries in the United States1, an estimated 48 million of which are older adults collecting retirement benefits.2

Here are some of the changes you should know about.

There will be a COLA (cost of living adjustment) of 2.8% for 2019.

Meant to counteract the effects of inflation and the erosion of buying power, the 2.8% is larger than the 2.0% increase in 2017, and the largest increase since 2012. For the average Social Security recipient, this will amount to around $39 per month, raising the average monthly payout to $1,461 in 2019.1

The small boost to benefit checks is long overdue for most retirees, who have seen little or no COLA adjustment for most of the past 10 years. And for the first time in many years—because Medicare Part B premiums only went up by $1.50 for 2019—most seniors will actually see slightly bigger checks. (Medicare premiums are usually deducted from Social Security checks.) 2

Yet the new payment amounts provide only modest help in preserving retirees’ buying power, which continues to lose ground to inflation, according to The Senior Citizen’s League (TSCL), a nonpartisan advocacy organization in Alexandria, Virginia.2

The SSA uses the CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers) to calculate inflation.1 But older Americans typically buy a more costly set of goods and services [than urban wage and clerical workers do], says Mary Johnson, policy analyst with TSCL. 2

In a study using a CPI that tracks purchases by the elderly, Johnson found that the average Social Security benefit has lost 34% of its buying power over the past 19 years. “Since 2000, cost-of-living adjustments have increased Social Security benefits by a total of 46%,” Johnson writes in the report, “while typical senior expenses grew more than twice as fast.” 2

Interestingly, the new tax legislation, “Tax Cuts and Jobs Act,” passed by Republicans in December of 2017 changed the consumer price index used by the IRS, a change which will most likely increase people’s taxes over time. The new tax law changed the inflation index from CPI-U (Consumer Price Index for All Urban Consumers) to the C-CPI-U (Chained Consumer Price Index for All Urban Consumers.) The cost of living calculated using the CPI-U has risen by 45.7% since 2000 compared to the C-CPI-U which has risen only 39.7%.”3

COLA (cost of living adjustments) now viewable online.

Beginning in December of 2018, retirees are able to view their Social Security adjustment notices online in the message center of their “my Social Security” account. The notices are personalized and contain the benefit amount retirees will receive for the next calendar year. (Online notices won’t be provided to people with foreign mailing addresses or high-income retirees who pay higher Medicare premiums.)

Printed COLA notices will also be mailed in 2019, but there will be a paper statement opt-out feature in the future.4

The taxable earnings cap raises to $132,900.

Whereas in 2018 employees were required to pay a 6.2% Social Security payroll tax—via FICA (Federal Insurance Contributions Act) deduction—on income up to $128,400, the tax cap amount starting in 2019 will be $132,900. (NOTE: Employers must match this.) 1

But as the payroll tax has increased, the SSA is also raising the amount of earnings used to calculate benefits. In 2019, the maximum monthly benefit available at full retirement age will be $2,861, up from $2,788 per month in 2018. 1

Full retirement age continues to go up.

The earliest anyone can claim Social Security is age 62, resulting in a permanent benefit reduction to around 70% of what they would have received by waiting until their full retirement age (FRA), a bigger reduction than in the past.4 And the full retirement age is increasing. For those who turned 62 in 2018, the FRA was 66 and four months. In 2019, it will be 66 and six months, with increases in two-month increments until the FRA hits age 67. 2 However, if one delays taking Social Security benefits, they are guaranteed an 8% annual increase in their benefit amount plus any COLAs from full retirement age up to age 70. 1

Earnings limits have increased for retirees.

If someone continues working after filing early for Social Security, part of their benefits will be temporarily withheld until they reach full retirement age. However, the amount of income they can earn has been increased from $17,040 to $17,640 in 2019. Early Social Security recipients younger than full retirement age will have one dollar deducted from every two dollars until they reach full retirement age.

A different deduction formula applies in the year someone reaches full retirement age. That year, someone can earn $46,920—up from 2018’s $45,360 annual limit—and for the months leading up to the full retirement age, with only one dollar for every three dollars earned temporarily deducted if they’ve already filed.

Once someone reaches full retirement age there is no penalty or deduction for working and collecting Social Security benefits. The benefit is recalculated to give credit for continued earnings and any benefits that were withheld in the past.4

Keep in mind, though, that even after full retirement age, Social Security payments might be taxed in retirement. If the sum of the adjusted gross income, nontaxable interest and half of the Social Security benefit exceeds $25,000 ($32,000 for couples), federal income tax could be due on part of the Social Security benefit. If these income sources exceed $34,000 ($44,000 for couples), up to 85% of Social Security payments may be taxable. There are also several states that tax Social Security benefits.5

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Social Security information is invaluable to your clients who are getting ready to make retirement decisions that will impact them for the rest of their lives. Stay up to date on retirement issues by partnering with Shurwest. Call 800.440.1088.

 

 

This article is for informational purposes only.  Each client’s individual needs differ and should be considered before making any specific recommendations.  The information provided is not written or intended as specific tax or legal advice.  Shurwest Financial, its employees and representatives are not authorized to give tax or legal advice.  You, your clients and prospective clients are encouraged to seek advice from a qualified tax professional or legal counsel.

Sources:
1 “6 Social Security Changes to Expect in 2019.” Investopedia.com. https://www.investopedia.com/retirement/social-security-changes/#ixzz5YjOdbpbJ (accessed December 4, 2018).
2 “How Social Security Will Change in 2019.” Consumerreports.org. https://www.consumerreports.org/retirement-planning/how-social-security-will-change-this-year/ (accessed December 4, 2018).
3 “What You Need to Know About ‘Chained CPI’.” Bloomberg.com. https://www.bloomberg.com/news/articles/2017-11-20/why-chained-cpi-has-links-to-u-s-tax-debate-quicktake-q-a (accessed December 4, 2018).
4 “Social Security Changes Coming in 2019.” USNews.com. https://money.usnews.com/money/retirement/articles/social-security-changes-coming-next-year (accessed December 4, 2018).
5 “How to Minimize Social Security Taxes.” USNews.com. https://money.usnews.com/money/retirement/social-security/articles/how-to-minimize-social-security-taxes (accessed December 4, 2018).