Social Security Changes for 2020

While you may not be able to fund your retirement solely from the Social Security program, it may prove to be a vital source of your income when you stop working. Annually in October, the Social Security Administration (SSA) publicizes not only what is takes to qualify for a benefit but also what will be paid to a beneficiary. Therefore, whether you are entering the workforce, nearing retirement age, or continuing to work in retirement, here are the important changes for 2020 that are good to know.

Qualifying for Social Security Benefits

Social Security benefits are earned through years of work, not given by the government. To qualify for a retired worker benefit, you must have earned 40 lifetime work credits. The maximum number of credits per year is limited to four and contingent on earned income. In 2020, qualifying for a work credit will require earned income of $1,410 for each credit, or $5,640 for the year to max out credits. 

Higher Payroll Taxes for High Income Earners

Employers and employees contribute to the Federal Insurance Contributions Act (FICA). The Social Security portion is 6.2 percent of earnings up to the applicable taxable amount, and the Medicare portion is $1.45 percent on all earnings. For 2020, the combined tax rate is 7.65 percent for employees and 15.3 percent for the self-employed. The maximum taxable earnings subject to the FICA tax has increased to $137,700, up $4,800 from 2019. Therefore, those workers who earn $137,700 or more in 2020 will pay $10,534.05 in FICA taxes, and the self-employed will pay twice as much, up to $21,068.10. 

Full Retirement Increasing to Age 67

In order to collect 100 percent of your monthly benefit in retirement, you must reach the full retirement age as defined by the SSA. Workers born between 1943 and 1954 have a full retirement age of 66. For those workers born between 1955 and 1959, full retirement age is between 66 and 67. If you were born in 1960 or later, the full retirement age is now 67. The earliest age to start receiving Social Security retirement benefits remains at age 62. However, claiming Social Security benefits before full retirement age will result in benefits that are permanently reduced; whereas choosing to delay Social Security beyond retirement age will equate to a permanently higher benefit. 

As a result of an increase to the Consumer Price Index, Social Security beneficiaries will receive a 1.6 percent cost of living adjustment (COLA) in 2020. Additionally, the maximum Social Security benefit that a beneficiary at full retirement age can receive per month as of 2020 is $3,011, which is up $150 from 2019. 

Continuing to Work in Retirement

Beneficiaries who have claimed Social Security before full retirement age and continue working are subject to the retirement earnings test (RET). In 2020, such beneficiaries are allowed to earn up to $18,240/yr. ($1,520/mo.) without any withholding. For those beneficiaries who surpass the threshold, the SSA can withhold $1 in benefits for every $2 in earned income. Conversely, the income threshold for a beneficiary who reaches full retirement age in 2020 is $48,600/yr. ($4,050/mo.). Plus, $1 in benefits will be withheld for every $3 earned above this limit. Once a beneficiary reaches full retirement age, the RET no longer applies and any withheld benefits are returned in the form of a higher monthly payout. There is no single best age to start collecting Social Security benefits; the decision is ultimately yours. If you need the benefit, claiming Social Security nearer to age 62 may be the best option. Whereas, if you live long enough, waiting until full retirement age to claim benefits will prove more profitable.