Q1. My husband and I rely on Social Security for about half of our monthly income. I heard that the cost-of-living adjustment announcement by the SSA is happening this week. Do you happen to know how the COLA is determined and how much they are raising it?
Q2. Also, on the topic of Social Security, my sister is considering taking her Social Security as early as she can (at age 62) because she has health problems, even though she is still working full time. Does this make sense? Isn’t there some sort of restriction on how much someone can earn through employment once they claim Social Security?
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A1. Each month, more than $81 billion is paid out in benefits by the Social Security Administration (SSA). Of this money, three-quarters winds up in the hands of retired workers, many of whom depend on Social Security as their major source of income. In fact, if there was no Social Security in America, many American seniors would likely be facing a serious poverty crisis.
Luckily, I have good news for you and other Social Security recipients. The Social Security Administration announced Thursday that 63 million beneficiaries, including retirees, disabled workers and their eligible dependents and surviving family members, will receive a 2.8% increase in benefits next year, the largest annual cost-of-living adjustment (COLA) since 2012. Here’s what that means:
• A 2.8% increase would boost the average Social Security benefit by $39 to $1,461 per month next year and increase the maximum benefit for someone who retires at full retirement age by about $73 to $2,861 per month in 2019.
• The 2.8% COLA for 2019 follows a 2% increase in 2018. Previously, Social Security benefits increased a meager 0.3% in 2017. There was no increase in benefits in 2016.
• Many retirees should see a real increase in their net Social Security benefits in 2019, unlike this year, when their 2% COLA was nearly wiped out by a $25 increase in monthly Medicare premiums. Premiums for Medicare Part B, which covers doctors’ fees and outpatient services, are usually deducted directly from monthly Social Security benefits.
How is COLA Calculated?
One of the more interesting things you may not realize about Social Security’s COLA calculation is that only three months are taken into account. The number is arrived at by looking at the consumer price index for the third quarter (July through September) of the previous year compared to the third quarter of this year. If prices rise year over year, then beneficiaries receive a COLA that’s commensurate with the percentage increase. If prices were to fall year over year, which has only happened on three occasions (2010, 2011, and 2016), benefits remain the same from one year to the next. Thankfully, benefits cannot be reduced due to falling prices!
Q2. What is the 2019 earnings limit for someone who claims social security before their full retirement age?
A2. It’s great that there is a COLA increase in Social Security. Every little bit helps! But what if, similar to your sister, you haven’t decided whether to take your benefits early or wait?
• Waiting is better if you can do it: 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.
• If you can’t wait, the earnings limit has increased for 2019: The earnings limit for individuals who claim Social Security benefit before their full retirement age will increase to $17,640 in 2019, up from $17,040 this year. Individuals who are under full retirement age for all of 2019 will lose $1 in benefits for every two dollars earned over $17,640 next year.
• Earnings restrictions apply only to salaries and wages, not investments, pensions or other types of income. However, the restrictions apply to anyone — including retirees, spouses, survivors and dependents — who collects Social Security benefits before their full retirement age while they continue to work.
A higher earnings limit applies in the year a beneficiary reaches full retirement age. In the months preceding his or her 66th birthday, individuals can earn up to $46,920 in 2019, up from $45,360 this year. Individuals would forfeit $1 in benefits for every $3 earned over that limit in 2019.
The earnings restrictions disappear at full retirement age, meaning an individual could earn any amount of money without sacrificing benefits once he or she turns 66. Benefits lost to the earnings cap are restored at full retirement age in the form of higher monthly benefits.
All earnings — even those above next year’s $132,900 maximum wage — are subject to the 1.45% portion of the FICA tax that funds Medicare. 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.
If Social Security is the Majority of Your Income, Planning Should Be at the Forefront of Your Mind!
What if you are depending mostly on Social Security for retirement and you or a loved one becomes incapacitated or needs long-term care? Every adult over the age of 65 or retired needs to have a legal and financial retirement plan in place. If you haven’t already done this, please call the Farr Law Firm for retirement planning, incapacity planning, and long-term care planning as soon as possible — if you haven’t been to see us before, you’re entitled to an initial consultation to address your retirement planning needs:
Fairfax Retirement Planning: 703-691-1888
Fredericksburg Retirement Planning: 540-479-1435
Rockville Retirement Planning: 301-519-8041
DC Retirement Planning: 202-587-2797
About Evan H Farr, CELA, CAP
