4 changes that could affect Social Security in 2020

Robert Powell | Special to USA TODAY

Show Caption Hide Caption Social Security funding, explained With a rapidly growing aging population, securing Social Security funds is now more crucial than ever. But how did we get here in the first place?

If you’re one of almost 69 million Americans who receive Social Security or Supplemental Security Income benefits, you’ll notice a small change in your monthly check this year.

More than 63 million beneficiaries will receive a 1.6% cost-of-living adjustment this month. The 8 million SSI beneficiaries received their COLA on Dec. 31.

Put another way: The average monthly benefit for all retired workers will rise from $1,479 to $1,503 this month. And the average monthly benefit for couples who both receive benefits will rise from $2,491 to $2,531.

That’s one of many changes beneficiaries and would-be beneficiaries can expect in 2020.

Here are some others:

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Earnings subject to Social Security tax

The maximum amount of earnings subject to the Social Security tax will increase from $132,900 in 2019 to $137,700 in 2020. To be fair, this increase affects just 11.8 million of the 171 million workers who are covered under Social Security. But that increase, according to David Freitag, a financial planning consultant with MassMutual, could be a bit of a surprise for the 7% of workers who will have to pay about $298 more of their wages into Social Security in 2020 than in 2019.

By way of background, workers must pay 6.2% of their earnings up to the taxable maximum amount into Social Security. And they must pay 1.45% of all their earnings into Medicare. Your employer matches, up to the taxable maximum, these percentages for a total of 15.3%. Self-employed workers, meanwhile, must pay 15.3% of their earnings in federal payroll taxes, otherwise known as FICA – the Federal Insurance Contributions Act tax.

The only bit of good news about this increase? You and your employer won’t have to pay a Social Security tax on earnings above the taxable maximum amount.

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How work affects your benefits

If you’re working, receiving Social Security benefits, and you’re younger than full retirement age, your earnings may reduce your benefit amount. (Full retirement age is the age at which you first become entitled to full or unreduced retirement benefits through Social Security.)

In 2020, for instance, the Social Security Administration will deduct $1 from benefits for each $2 earned over $18,240.

The earnings limit for people turning 66 in 2020, however, will increase to $48,600 and the SSA will deduct $1 from benefits for each $3 earned over $48,600 until the month the worker turns age 66. FRA is 66 for people born between 1943 and 1954. Beginning with 1955, two months are added for every birth year until the full retirement age reaches 67 for people born in 1960 or later.

One positive here: There’s no limit on earnings for workers who are FRA or older for the entire year.

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Social Security and taxes

Slightly more than half of Americans (56%) pay taxes on their Social Security benefits, according to the SSA. And that percentage is likely to increase given that the income tax thresholds for Social Security aren’t – by law - adjusted for inflation, according to Joseph Stenken, an advanced markets product consultant at Ameritas and author of "Social Security & Medicare Facts."

For an individual whose combined income is between $25,000 and $34,000, up to 50% of their Social Security benefits may be taxable. For income in excess of $34,000, up to 85% of benefits may be taxable.

And for those who file a joint return and whose combined income is between $32,000 and $44,000, up to 50% of benefits may be taxable. For income in excess of $44,000 up to 85% of benefits may be taxable.

“These thresholds have not been adjusted by Congress since 1993, over 25 years ago,” Stenken says. “More and more beneficiaries are going to be subject to income tax on their benefits.”

Adds Freitag: “The fact that Social Security income tax thresholds have not changed is really a ‘covert tax’ that is operating under the radar and can often be a big surprise to beneficiaries who are collecting benefits.”.

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The SECURE Act

The SECURE Act, a bipartisan retirement bill that President Donald Trump signed into law late last year, will also affect current and future beneficiaries in at least a couple of ways, says Stenken.

First, those who turn 70½ after 2019 may delay taking required minimum distributions or RMDs from their retirement accounts until they are 72. An RMD is, generally, the minimum amount that a retirement plan account owner must withdraw annually.

And this could be a mixed bag for non-spouse designated beneficiaries. Such a beneficiary is defined as a living person for whom a life expectancy can be calculated and who isn't the spouse of the retirement account owner.

Under the old law, non-spouse designated beneficiaries could take distributions over their lifetime. But now, for many retirement account owners who pass away in 2020 and beyond, beneficiaries will have only 10 years to empty the account.

Robert Powell is the editor of TheStreet’s Retirement Daily www.retirement.thestreet.com and contributes regularly to USA TODAY. Got questions about money? Email Bob at rpowell@allthingsretirement.com.