It looks like Social Security benefits will increase by about 1.6% in 2020, more than a full percentage point less than the 2.8% cost-of-living adjustment this year, according to preliminary estimates by The Senior Citizens League, a nonpartisan advocacy group representing more than 1 million retirees.
The Social Security Administration will issue its official COLA announcement for 2020 on Oct. 10 following the release of the Consumer Price Index data for September 2019. Social Security benefits increase automatically if the CPI-W, which measures price inflation for urban workers, increases in the third quarter (July, August and September) of the current year over the corresponding third quarter of the previous year.
"The government's consumer price index data for August indicates that COLA recipients can expect to get a benefit boost of about 1.6% in 2020," said Mary Johnson, TSCL's Social Security policy analyst. "That would raise an average retiree benefit by about $23.40 per month, a big drop from the $40.90 that people with that level of benefits received this year."
A 1.6% COLA in 2020 would be the smallest annual hike in the last three years, following a 2.8% increase in 2019 and a 2.0% hike in 2018. Still, it is significantly larger than the meager 0.3% COLA posted in 2017. There was no COLA in 2016.
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Over the past decade, COLAs have averaged 1.4%, less than half of the 3% that they averaged during the previous decade, from 2000 to 2009.
Because COLAs compound over time, the loss of income resulting from low COLAs will continue to grow deeper as beneficiaries age.
"This has not gone unnoticed by those who depend on these annual adjustments," Ms. Johnson said.
A 1.6% COLA in 2020 would also increase the maximum retirement benefit, currently $2,861 per month, by about $46 per month to $2,907 for someone who retires at full retirement age in 2020. That compares to a $73-per-month increase in the maximum retirement benefit in 2019 over the previous year.
The average and maximum Social Security benefits do not include delayed retirement credits. Social Security recipients who delay claiming benefits beyond full retirement age earn an additional 8% per year for every year they postpone benefits up to age 70. Those who retire before full retirement age receive reduced benefits for the rest of their lives.
The annual COLA also affects how much workers pay in FICA taxes, which fund Social Security benefits. Employers and employees each pay 7.65% of wages to support Social Security and Medicare. Self-employed individuals pay both the employer and employee share for a combined tax rate of 15.3%.
In 2019, the 6.2% portion of the payroll tax that funds Social Security applies to the first $132,900 of gross earnings. A 1.6% COLA would boost the maximum taxable wages by about $213 to about $133,113 a year in 2020.
The Medicare portion of the tax is 1.45% on all earnings, even those about the maximum Social Security tax limit. Plus, individuals with earned income of more than $200,000 ($250,000 for married couples filing jointly) pay an additional 0.9% in Medicare taxes.
Many retirees should see a slight increase in their net Social Security benefits in 2020 even after factoring in Medicare Part B premiums. Medicare Part B premiums, which cover doctors' fees and outpatient services, are deducted directly from Social Security benefits.
The latest Medicare Trustees' report projects that basic Medicare Part B premiums will increase by about $8.80 a month to $144.30 per month in 2020. The official announcement about Medicare premiums for 2020 will be issued in the fall. High-income retirees pay more for the same Medicare coverage.
Currently, individuals with modified adjusted gross income of $85,000 or more and married couples whose joint income exceeds $170,000 pay a high-income surcharge on both their Medicare Part B premiums and Part D prescription drug plans. Surcharges, officially known as an income-related monthly adjustment amount, or IRMAA, are based on the last available income tax return, so 2020 premiums will be based on 2018 income.
Medicare beneficiaries subject to IRMAA surcharges receive notifications, usually in November, regarding their Medicare costs for the following year
In 2019, high-income Medicare beneficiaries pay premiums ranging from $189.60 to $460.50 per month per person, depending on income, compared to the standard Medicare Part B premiums of $135.50 per month.
A new top tier surcharge was added in 2019 for individuals with incomes of $500,000 or more in 2017 and married couples whose joint income topped $750,000 in 2017. For the first time, income tiers that determine those high-income premiums will be indexed to inflation in 2020, except for the newest top tier that was added this year.