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.
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.
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 0.03 percent - substantially lower than the 2.8 percent increase we saw in 2018.
The Bad? Taxes Are Increasing Too (For Some)
For those still working, the amount of earnings subject to Social Security tax has increased by 3.7 percent from $137,700 in 2020 to a maximum of $142,800 in 2021. Employees and their employers will each continue to pay 6.2 percent of applicable earnings toward the 7.65 percent combined Social Security and Medicare rate. The 3.7 percent increase in applicable income is only in reference to the Social Security portion of the combined tax rate. Self-employed individuals will still be responsible for paying the full 15.3 percent of the Social Security and Medicare tax rate.
For reference, the maximum Social Security tax in 2021 for a high-earning employee would be $8,853.60 - or $17,707.20 total, including both the employee and employer’s contribution. This is compared to 2020’s maximum of $8,537.40, or $17,074.80 total.
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 SS benefits should be aware of 2021’s earning limit changes.
Currently, the 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 regard to full retirement age:
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 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 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 for every $3 earned above the limit.
You will no longer be subject to earning limits beginning the month you reach full retirement age.
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.
Recent Insights from Black Walnut Wealth Management
- 7 Cybersecurity Tips to Keep in Mind While Shopping This Cyber Monday
- 5 Clever Financial Gift Ideas for Grandchildren
- Investing for Retirement Income: Straw, Sticks, or Bricks?
- A Guide to Dividing Your Estate Unequally
- As the Coronavirus Continues, Avoid These Five Retirement Mistakes
- 2020 Q3 – Quarterly Update
- What is Fiduciary Investment Advice, and Why Does It Matter
- 4 Common Money Mistakes for Pre-Retirees
- Cares Act has Waived RMD Distributions for 2020
- 5 Steps to Managing an Inheritance for High-Net-Worth Individuals