The Social Security Administration announced Thursday that benefits and the maximum amount of wages subject to payroll taxes will increase by 1.6% in 2020, more than a full percentage point less than the 2.8% cost-of-living adjustment posted this year. It marks the smallest annual increase in Social Security benefits and payroll taxes since 2017, when the COLA was 0.3%.
The 1.6% COLA will begin with benefits payable to Social Security beneficiaries in January.
A 1.6% COLA in 2020 would boost the average Social Security retirement benefit by about $32 to $1,503 in 2020. That's significantly less than in 2019, when the average Social Security retirement benefit increased by $39, to $1,461 per month.
A 1.6% COLA in 2020 would also increase the maximum retirement benefit, currently $2,861 per month, by about $150 per month to $3,011 for someone who retires at full retirement age in 2020. That compares to the $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 life.
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 third quarter of the previous year. The 1.6% COLA in 2020 follows a 2.8% increase in 2019, a 2.0% hike in 2018 and a meager 0.3% COLA posted in 2017. There was no COLA in 2016.
The 1.6% COLA for 2020 also affects how much beneficiaries can earn from a job without jeopardizing any of their benefits if they claim Social Security before their full retirement age.
In 2020, individuals will be able to earn up to $18,240 per year if they are under full retirement age for the full year without forfeiting any benefits. That's up from $17,460 this year.
If their earnings from a job exceed that cap, they would lose $1 in benefits for every $2 earned over the limit. The earnings cap does not apply to pensions, investments or other forms of unearned income.
In the year someone reaches full retirement, there is a more generous earnings cap. In 2020, beneficiaries would be able to earn up to $48,600 in the months leading up to their birthday. That's up from $46,920 this year. If their earnings exceed that limit, they would forfeit $1 in benefits for every $3 earned over that limit.
The earnings restrictions disappear at full retirement age, which is currently 66 and gradually increasing to 67, depending on the birth year. Any benefits lost to the earnings cap are restored in the form of higher monthly benefits at full retirement age.
The annual COLA also affects how much workers pay in the FICA taxes that 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 $4,800 a year to roughly $137,700 in 2020.
The Medicare portion of the tax is 1.45% on all earnings, even those above the maximum Social Security tax limit. 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 usually 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 later this year.
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
For the first time in a decade, 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.
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.