2020 ESTIMATED Social Security Inflation Adjustment: 1.5%
The fall season brings us changing leaves, harvest, football - and the inflation adjustment for Social Security benefits and maximum salary subject to Social Security payroll taxes. The final CPI-W data point will be released October 10th but with 2 of the 3 data points known, an early estimate can be calculated. The approximate increase for benefits will be around 1.5%. The Medicare premiums for 2020 have not been released yet but expect an increase. The net benefit hitting your bank accounts is then the increased gross benefit less any Medicare premiums deducted.
The graphic below shows the steps to calculate the inflation adjustment and the recent history of actual increases. The approximation assumes the September CPI-W data point will not increase. If there is a relatively large monthly change in September of +/- 0.30%, the annual increase based on this methodology will range from 1.4% - 1.6%.
Note the inflation index used for Social Security is the non-seasonally adjusted index for wage earners (CPI-W), not the more common seasonally adjusted index for all urban consumers (CPI-U) used in regular inflation reports reported in the media. There is also an experimental inflation index called CPI-E which captures the common basket of goods and services for those age 62+. There are years when these different indices can diverge significantly. Last year the difference was less than 0.10%; this year the CPI-E is about 0.30% higher. The graph below shows these indices over the past ten years (Note: no shaded area for recession!). The common CPI inflation number in the news every month is the red line.
For those working and paying into Social Security (6.2% payroll tax for SS on wages up to $132,900 for 2019), the estimated increase in wages subject to this tax is based on a different index – the ‘national average wage index’. I do not have an estimate based on this index at this time. Recall there is an additional 1.45% payroll tax for Medicare that is applied to all wages (not capped), plus an additional 0.9% on earnings above $200,000 for individuals and $250,000 if married filing jointly (NOT indexed to inflation). Your employer also pays these taxes (or you if self-employed), except the extra 0.90%. For those interested in a deeper dive, see my blog post on Social Security and Medicare Financial Overview.
Watch for the final inflation adjustments after the October 10th CPI-W reading.
Posted by Kirk, a fee-only financial advisor who looks at your complete financial picture through the lens of a multi-disciplined, credentialed professional. www.pvwealthmgt.com