Will COVID-19 Threaten Your Social Security Benefits?
As we saw on Grace and Frankie sometimes we are forced to change our retirement plans. Will … [+] COVID-19 threaten your plan to maximize your Social Security Benefits? Pictured Jane Fonda and Lily Tomlin
Getty Images for Netflix
We love that there has been a barrage of questions swirling around Social Security during the COVID-19 pandemic.
You might be asking what will this mean for the future of Social Security retirement benefits? For those who are already retired, how high will the cost of living adjustment be for 2021? Should you change your plan of when to take Social Security because of COVID-19? The financial insecurity is spreading nearly as quickly as the coronavirus.
As I write this, more than 26 million Americans have filed for unemployment. It would not be surprising to see many millions more eventually laid off. The stock markets have taken a beating.
An untold number of people have contracted COVID-19. What will happen over the coming days, weeks, and months is anything but certain.
If you are retired or nearing retirement, you are ly concerned about what this will mean for your valuable Social Security benefits.
If you are sitting at home worrying about the coronavirus, you might also be wondering what this … [+] economic collapse will mean for your social security benefits.
All signs point to a small Social Security cost-of-living (COLA) adjustment for 2021. We won’t know the official Social Security COLA for 2021 until it is announced in October 2020. Retirees received a 1.6% COLA for 2020, which was lower than the SS COLA of 2.
8% obtained in 2019. Throughout the past 11 years, we have seen three years without any COLA to Social Security. The biggest COLA over the past decade was 3.6% in 2012. Way back in 1980, we saw a staggering 14.2% cost of living adjustment to Social Security.
The good news for retirees is that the Social Security Administration (SSA) is required by law to adjust benefits to account for inflation. This helps keep increases in the cost of living from eroding the lifestyles of the 69 million Americans who are currently collecting Social Security benefits.
The COLA adjustment formula is the Consumer Price Index (CPI). Since the price of goods typically rises over time, the payout from Social Security generally rises over time as well. Fortunately for current retirees, if prices were to fall, the payout would stay the same until inflation caught up again.
While we don’t know where the CPI will end in 2020, we have seen some deflationary pressure on certain expenses. With everyone staying at home, the normal state of supply and demand is entirely whack. For example, with everyone working from home, we are buying a lot less gasoline.
PLAINVIEW, NY – APRIL 24: Shelves reserved for Perdue chicken lie empty at a ShopRite supermarket on … [+] April 24, 2020 in Plainview, New York. Grocery stores continue to experience supply chain slowdowns due to the coronavirus pandemic as they struggle to keep up with customer demand. (Photo by Bruce Bennett/Getty Images)
Social Security Automatic Cost-of-Living Adjustments received since 1975 Source SSA
- July 1975 — 8.0%
- July 1976 — 6.4%
- July 1977 — 5.9%
- July 1978 — 6.5%
- July 1979 — 9.9%
- July 1980 — 14.3%
- July 1981 — 11.2%
- July 1982 — 7.4%
- January 1984 — 3.5%
- January 1985 — 3.5%
- January 1986 — 3.1%
- January 1987 — 1.3%
- January 1988 — 4.
- January 1989 — 4.0%
- January 1990 — 4.7%
- January 1991 — 5.4%
- January 1992 — 3.7%
- January 1993 — 3.0%
- January 1994 — 2.6%
- January 1995 — 2.8%
- January 1996 — 2.6%
- January 1997 — 2.9%
- January 1998 — 2.1%
- January 1999 — 1.3%
- January 2000 — 2.
- January 2001 — 3.5%
- January 2002 — 2.6%
- January 2003 — 1.4%
- January 2004 — 2.1%
- January 2005 — 2.7%
- January 2006 — 4.1%
- January 2007 — 3.3%
- January 2008 — 2.3%
- January 2009 — 5.8%
- January 2010 — 0.0%
- January 2011 — 0.0%
- January 2012 — 3.
- January 2013 — 1.7%
- January 2014 — 1.5%
- January 2015 — 1.7%
- January 2016 — 0.0%
- January 2017 — 0.3%
- January 2018 — 2.0%
- January 2019 — 2.8%
- January 2020 — 1.6%
Smiling senior woman swimming in pool wearing floral swim cap underwater view. Will the COVID-19 …
[+] pandemic drown the Social Security trust fund?
Will the Coronavirus Hurt the Future Solvency of Social Security?
As if we didn’t have enough bad news from the COVID-19 pandemic, it appears 2021 will be the first year Social Security pays out benefits in excess of its payroll tax revenue. I must point out that this projection was made before the economy went into lockdown because of the coronavirus.
While estimates have Social Security going broke around 2035 if no changes are enacted, the future is still uncertain. With tens of millions of Americans currently work, there will be less Social Security payroll taxes collected to help pay for benefits.
In plain English, is it hard to see how the COVID-19 pandemic won’t damage the future solvency of Social Security?
Perhaps the silver lining is that our leader may finally wake up and realize that something needs to be changed to make sure this valuable safety net is there for all American workers.
We will have paid Social Security taxes our entire working lives, and we are entitled to the benefits we have accrued.
As a financial planner, I must point out that Social Security alone is not enough for most people to retire comfortably.
Will COVID-19 Change When You Take Social Security?
I have been fielding quite a few questions from people nearing retirement, wondering if they should change when they are planning to take Social Security benefits? For those with a comprehensive retirement plan that plans for optimized SS benefits, COVID-19 shouldn’t really change when you begin receiving Social Security.
For those of you who are finding yourselves forced the workforce due to coronavirus, generally speaking, I would recommend you deplete your unemployment or severance package (assuming you are lucky enough to get one) before claiming Social Security benefits.
While I am empathetic to anyone searching for a new career at the moment, I am also optimistic that this pandemic will pass. With that in mind, I know that most retirees will need every single penny of Social Security Benefits they can get.
While the difference between claiming at 62 and 70 may not seem that big of a deal, it will be huge later on in life.
How is Social Security Taxed By the IRS?
Remember that depending on your total income in retirement; you may owe taxes on your Social Security benefits.
Once your income hits $25,000 (single) or $32,000 (married, filing jointly), 50% of your Social Security benefits will be subject to taxation by the IRS.
For all of you really rich people making $34,001 (single) or $44,001 (married filing jointly), 85% of your Social Security benefits will be taxable. Your actual tax rates will depend on your overall adjusted gross income.
Prior to COVID-19, it was estimated that about 60% of retirees would not owe federal taxes on their Social Security benefits. If a substantial number of people nearing retirement are forced the workforce early, that number could jump, leaving people with less time to fund a secure retirement.
While this is good news from a tax perspective, it is terrible news from an income perspective. I know most of you who are still working (and reading this) will not be able to maintain your current standard of living at the income levels where Social Security is not taxed.
Please take this crisis as an opportunity to work with a fantastic financial planner to make sure you are on track for the retirement you deserve.
Where you live will determine the taxes you owe on Social Security at the State Level.
How is Social Security Taxed at the State Level?
Social Security taxation at the state level will depend on where you live. The good news is that a vast majority of states do not tax Social Security benefits.
In alphabetical order here are the states that do not currently tax Social Security benefits: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Nevada, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina South Dakota, Tennessee, Texas, Virginia, Washington, Wisconsin, Wyoming.
Low inflation is a good thing for consumers, as it means pricing isn’t going up that quickly. On the other hand, lower inflation numbers mean smaller cost of living increases for your Social Security benefits.
While we don’t know exactly what inflation will be for 2020, we do know that retirees continue to feel pressure trying to afford their medical care, medicine, and basics housing and food. COVID-19 is putting further pressure on prices of many items, toilet paper, that people have little choice but to buy.
Hopefully, this pandemic will be short-lived, and the damage to the finances of millions of Americans won’t be irreparably damaged.