Every October, the Social Security Administration (SSA) announces its annual changes to the Social Security program for the coming year.️️️️️️️️️️️️️️️️️️Below is our analysis of the Social Security changes announced in October 2020 and coming into effect on January 1, 2021, according to the SSA’s Annual Fact Sheet. Keep them in mind when you update your Social Security information.
Key learning points
- Social Security recipients received a 1.3% increase for 2021, compared to the 1.6% increase that beneficiaries received in 2020.
- The maximum income subject to Social Security tax has also increased – from $137,700 per year to $142,800.
- Other changes for 2021 included an increase in the amount that working Social Security recipients can earn before their benefits are cut and a slight increase in disability benefits.
- Social security tax rates will remain the same for 2021: 6.2% for employees and 12.4% for the self-employed.
- It now takes $1,470 to earn a single Social Security credit, $60 more than in 2020.
1. Beneficiaries received a 1.3% increase
By 2021, nearly 70 million Social Security recipients will see a cost of living (COLA) adjustment of 1.3% in their monthly benefits.️️️️️️️️️️️️️️️️️️The adjustment helps benefits keep pace with inflation and is based on the Consumer Price Index for Urban Wage Earners and White-collar Employees (CPI-W) as calculated by the Bureau of Labor Statistics (BLS). If the CPI-W rises more than 0.1% year-over-year between the third quarter of the previous year and the third quarter of the current year, Social Security will increase benefits by the same amount.️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️
The 1.3% increase for 2021 is comparable to the COLA of the previous year (2020) 1.6%. In 2019, COLA was 2.8%, the largest increase since 2012.️️️️️️️️️️️️️️️️️️For the average Social Security recipient, the 1.3% increase is just $20 per month at an average monthly payout of $1,543 versus $1,523 in 2020.️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️
2. Maximum Taxable Income Increased to $142,800
In 2020, employees were required to pay 6.2% Social Security tax (with their employer matching that payment) on income up to $137,700. Any income above that amount was not subject to the tax. In 2021, the tax rate will remain the same at 6.2% (12.4% for the self-employed), but the income ceiling has been raised to $142,800.️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️
The flip side is that as the taxable maximum income increases, so does the maximum amount of income used by the SSA to calculate retirement benefits. In 2020, the maximum monthly Social Security benefit for an employee who retired at full retirement age was $3,011. In 2021, the maximum benefit will increase by $137 per month to $3,148.️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️
Social Security recipients can receive a 32% higher payment each month if they claim benefits at age 70 rather than their normal full retirement age.
3. Full retirement age continues to rise
The absolute earliest you can claim Social Security retirement benefits is age 62. However, if you claim before full (or normal) retirement age, the payout will be permanently reduced. For those who turned 62 in 2020, the full retirement age was 66 and eight months.️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️
Under current law, the retirement age for social security purposes is increased by two months each year until it reaches 67. If you turn 62 in 2021, your full retirement age will be 66 and 10 months. Unless the law changes, anyone born in 1960 or later will not reach full retirement age until age 67.️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️
If you delay collecting Social Security after full retirement age, you could collect more than your full or normal payout. If you delay claiming until you are 70, you will receive an annual benefit that is up to 32% higher than if you were receiving benefits in full retirement. After the age of 70, there is no longer any reason to postpone it.️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️
4. Recipient Income Limits Increased
If you work while receiving Social Security benefits, some or all of your benefits may be withheld temporarily, depending on how much you earn. For 2021, however, those income limits have been raised slightly.
Before you reach full retirement age, you can earn up to $18,960 in 2021. After that, $1 will be deducted from your payment for every $2 over the limit. The 2021 annual cap represents an increase of $720 from the 2020 cap of $18,240.️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️
If you reach full retirement age in 2021, you could earn $50,520, $1,920 more than the annual limit of $48,600 in 2020. For every $3 you earn over the 2021 limit, your Social Security benefits will be reduced by $1. but that only applies to money earned in the months prior to reaching full retirement age. If you reach full retirement age, no benefit will be withheld if you continue to work.️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️
5. Increased Social Security Benefits
Social Security Disability Insurance (SSDI) is an insurance program in which employees can obtain coverage for benefits by paying Social Security taxes through their paychecks. The program provides income for those who are unable to work due to a disability to make up for a portion of their lost income. Payments have increased slightly in 2020 for the nearly 10 million Americans who receive disability benefits.️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️
Disabled workers will receive an average of $1,277 per month in 2021, up from $1,261 in 2020. However, a disabled worker, a spouse with one or more children, will be paid an average of $2,224 per month, which is an increase of $29 from 2020.️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️
6. Threshold for earning credit goes up
If you were born in 1929 or later, you must earn at least 40 credits (maximum four per year) during your working life to qualify for Social Security benefits. The amount required to earn a single credit increases slightly each year. For 2021, it will cost $1,470 in income per credit, $60 more than in 2020. The number of credits needed for disability depends on your age when you become disabled.️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️
Looking ahead to 2035
According to the most recent annual report from the Social Security and Medicare Boards of Trustees, both trust funds will be depleted by 2035. If these predictions hold up, beneficiaries will receive about three-quarters (75%) of their planned benefits from 2035 until at least 2093. The report concludes, instructing lawmakers to enact legislation to address these financial challenges “sooner than later.” to deal with.️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️️