Social Security Taxes and Benefits: Changes for 2021

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Social Security Taxes and Benefits: Changes for 2021

by | Nov 18, 2020 | 0 comments

Recently, the Social Security Administration announced changes in the taxable wage base and benefits for retirees. What does this mean for you? Let’s take a closer look.

 

Wage Base

The maximum amount of earnings subject to Social Security tax rose significantly, from $137,700 in 2020 to $142,800. This is an increase of 3.7 percent and means a bigger tax bill for high-age earners, raising the maximum amount of Social Security tax paid per worker in 2021 to $17,707.20.

Cost of Living Adjustment

For retirees, the key change is in the cost of living adjustment or COLA. In 2021, this adjustment is only 1.3 percent. For comparison, this was 1.6 percent in 2020. This means the average Social Security benefit will only increase by about $20 a month and retired couples will receive a $33 a month increase. Here’s a quick rundown of the history of COLA since 2011:

  • 2021: 1.3%

  • 2020: 1.6%

  • 2019: 2.8%

  • 2018: 2%

  • 2017: 0.3%

  • 2016: 0

  • 2015: 1.7%

  • 2014: 1.5%

  • 2013: 1.7%

  • 2012: 1.7%

  • 2011: 3.6%

The COLA in 2021 is disappointing, but perhaps not surprising. While the increase in 2019 was 2.8 percent, it was zero in 2010, 2011, and 2016. This means there was no annual inflation adjustment, making it difficult for some seniors to make ends meet.

One criticism is that the COLA doesn’t make medical expenses a large enough factor in the formula. Retirees and to factor in Medicare premiums and fees. In 2020, Medicare Part B, covering outpatient services and doctors’ appointments, were $144.30 a month. In 2021, this is expected to rise 2.7 percent, taking this monthly amount to $148.20.

On the other hand, surcharges that apply to Medicare Part B and D were adjusted by inflation for the first time in 2020, which provided retirees some relief. In 2020, these surcharges kick in for individuals making more than $87,000 a year in retirement income and couples making $174,000.

Earnings for Early Retirement

Earnings limits for workers claiming benefits before full retirement age were also released. Currently, retirement age is 66. For earning above $1,580 a month or $18,960 a year, recipients under 66 are docked $1 in benefits for every $2 of earnings. A retiree who turns 66 and two months in 2021, though, can earn up to $4,210 a month before their birthday without any penalty. Above this amount, these workers lose $1 for each $3 earned.

People on Medicare won’t get their entire 2021 Social Security amount until the Medicare premiums are determined, usually sometime in December.

Your Social Security Account

If you haven’t already, you can set up an online Social Security account to check your recorded wages. When you’re nearing retirement, you can also apply for benefits this way. Research claiming strategies carefully to be sure you’re claiming at the optimal time. A lot of retirees don’t, and more than $3 trillion has been left on the table. Taking Social Security benefits early may be tempting, especially in 2020, but it might not be the best decision for your long term financial health.

 

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete.

Any opinions are those of Thomas B. Fleishel and not necessarily those of Raymond James.

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