On Tuesday, October 13, 2020, the Social Security Administration released important facts and figures for 2021 - including cost-of-living adjustments (COLA) for retirees and tax changes for the currently employed.
The Good? Benefits Are Increasing
Those receiving Social Security benefits will see a 1.3 percent COLA increase in 2021. This change will impact around 70 million Americans - including 8 million SSI beneficiaries.1
For the average retiree receiving Social Security benefits in January 2021, this will translate to a roughly $20 increase in monthly benefits - $1,543 up from $1,523. For couples both receiving benefits, the average will increase to $2,596 from $2,563.1
Of note, this year’s COLA increase is lower than the previous two years - although, of course, a cost-of-living adjustment is never guaranteed in the first place. In 2009, 2010 and 2016, COLA bottomed out at zero percent. And in 2016, the COLA was a mere 0.3 percent - substantially lower than the 2.8 percent increase we saw in 2018.2
The Bad? Taxes Are Increasing Too (For Higher Earners)
For those still working, the amount of earnings subject to Social Security tax has increased 3.7% from $137,700 in 2020 to $142,800 in 2021.3 This is nearly a 3-fold increase as compared to the benefit cost of living increase. Up to that amount, employees and their employers will each continue to pay 6.2% of applicable earnings toward the 7.65% combined Social Security and Medicare rate.1 For earnings above that amount, neither the employee nor the employer are required to pay anything for Social Security. The Medicare rate of 1.45% has no upper limit and is charged on every dollar made, no matter how high.
Why does this happen? The logic is this: for earnings above this limit, the employee receives no credit toward their future benefits, so in return, Social Security does not charge anything. There are some proposals in Congress and among the current candidates that are in favor of some amount of Social Security payments for higher earners. This would phase the tax out for earnings above the limit as today but start again at some higher amount (such as $400,000) thereby creating a Social Security "tax free zone" between today's limit and a chosen amount.
Self-employed individuals are responsible for paying both the employee and the employer the rates, totaling 15.3% for Social Security and Medicare.1
The Need To Know? Earning Limits For Retirees
For those under the Social Security Administration’s determined full retirement age who are receiving a paycheck while receiving Social Security benefits should be aware of 2021’s earning limit changes.
Currently, full retirement age is considered to be 66, if you were born between 1943 and 1954. Below is a chart provided by the SSA in regards to full retirement age:3
Year of Birth
|Full Retirement Age|
||66 & 2 months
66 & 4 months
||66 & 6 months
||66 & 8 months
||66 & 10 months
|1960 & later
Those receiving benefits who have not yet reached full retirement age will be docked $1 in benefits for every $2 earned above $18,960 (or $1,580 per month) in 2021. This is an increase of $720 from 2020's $18,240 per year limit.
It’s important to note that this limit increases somewhat substantially for those who will be reaching full retirement age that year. For 2020, that income limit is $48,600 per year, or $4,050 per month. In 2021, retirees will see that limit increase to $50,520 per year, or $4,210 per month. Applicable income earned above this amount will be withheld at a rate of $1 dollar for every $3 earned above the limit.
Beginning in the month you reach full retirement age, you will no longer be subject to earning limits. Each year you wait beyond full retirement age will increase your benefit by 8% until you are 70.
Keeping track of changes in tax rates and future income is an important part of having a well-established retirement plan. If you’re wondering how these changes will affect your own financial standings, reach out to your financial advisor for more information.
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