By Ilana Polyak
3 Social Security Changes Coming in 2021
Taxpayers will pay a 6.2% Social Security tax and a 1.45% tax for Medicare
on the first $142,800 they earn this year.
By any measure, 2020 was an extraordinaryyearthankstothe coronavirus pandemic, a sputtering economy and other news. Bythese standards, the changes to SocialSecurity are far less dramatic and won’tcause major disturbances.
Still, it’s important to be aware ofthem. For the average wage earner,Social Security makes up some 40% oftheir pre-retirement come.
1. What the higher benefits will
Social Security benefits will rise by 1.3% in2021. For the average Social Security recipient, that equals an additional $20 a month,taking their checks from $1,523 to $1,543.
While any increase is certainlywelcome, it may not go that far, noteSocial Security experts. The SocialSecurity COLA increase is based on theConsumer Price Index for Urban WageEarners and Clerical Workers, known asCPI-W from the fourth quarter of 2019to the third quarter of 2020.
That index includes some categoriesof the goods and services that wentup significantly more than 1.3%. Takefood, for example. The Bureau of LaborStatistics reports that food pricesincreased 3.6% from November 2019 tothis November; utilities went up 4.4%during that time period. Energy prices,however, declined nearly 10%.
“Energy was down and that skewedeverything,” says Elaine Floyd, authorof “Savvy Social Security Planning forBoomers,” and director of retirementand life planning at Horsesmouth,which helps advisors’ business building.
“But seniors don’t spend that much
on things like transportation. In general,
Another category that rises higher
than inflation is health care, and retirees
are big consumers of that. Medicare
Part B, the portion of the health insur-
ance plan for retirees that covers outpa-
tient care, medical equipment and other
medical services, will rise by 6%, from
$144.60 to $153.30 a month.
“Over the long term Medicare willconsume a bigger and bigger portionof a person’s Social Security check,”says CFP Mark Orr of RetirementWealth Advisors in Alpharetta, Georgia,and author of “Social Security IncomePlanning: Baby Boomer’s 2020 Guide toMaximize Your Retirement Benefits.”
2. More earnings will be subject to
Social Security taxation.
For 2021, taxpayers will pay a 6.2%
Social Security tax and a 1.45% tax forMedicare (known together as FICA) onthe first $142,800 they earn, up from
$137,700 in 2020.
There will be no FICA tax owed onany earnings above $142,800. (The yearly increase in earnings is based on thenational average wage index.)
“Wages tend to go up faster than infla-
tion, so the earnings threshold usually
goes up more than the COLA increases,”
President Joe Biden has proposed taxing
incomes over $400,000 for Social Security
and Medicare as a way to bring in addi-
tional funds and shore up both systems.
The SSA says that both Social Security
and Medicare face long-term financial
shortfalls and estimates that trust funds
of both will be depleted within a decade.
If passed, Biden’s proposal would create a “donut hole,” between $142,800and $400,000 where no FICA tax wouldapply. “Over time, that donut hole willclose as more income is taxed,” saysFloyd. “But that will take decades.”
3. The earnings limit will be higher.
In 2021, beneficiaries who are collectingSocial Security prior to reaching their fullretirement age and continue to work willhave any income they earn over $18,960taxed, an increase of $720 from 2020.
One benefit dollar of every $2 theyearn above that limit will be withheld.
In the year that beneficiaries reach their
full retirement age (FRA), however, the
earnings limit goes up to $50,520 (from
$48,600). Plus, only $1 out of every $3
above that amount will be withheld.
According to the SSA, from the month
individuals reach their FRA, their earnings
no longer reduce their benefits, no matter
how much they earn. “We will recalculate
your benefit amount to give you credit for
the months we reduced or withheld ben-
efits due to your excess earnings,” it states.
Once beneficiaries reach full retirement age, their checks will be recalculated to include the withheld amounts.They should receive more per monththan they had been getting.