October 13, 2020

Maximum Social Security Taxes Will Increase 3.7% While Benefits Will Rise 1.3% In 2021

Maximum Social Security Taxes Will Increase 3.7% While Benefits Will Rise 1.3% In 2021

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The Social Security Administration announced key numbers that affect workers and retirees today—a substantial increase in the taxable wage base for workers and a paltry increase in benefits for retirees. 

First the wage base news. The maximum amount of earnings subject to Social Security tax will rise 3.7% to $142,800, from $137,700 in 2020. That means a significantly bigger tax bill for about 12 million high-earning workers. Why the substantial increase? The increase in the wage base reflects any real wage growth. The maximum Social Security tax per worker will be $17,707.20—or a maximum $8,853.60 withheld from a highly paid employee’s 2021 paycheck. Workers and their employers each pay a 6.2% Social Security tax; the self-employed pay both sides of the tax. (The benefits boost is based on the Consumer Price Index, and a different index measuring wage growth determines annual increases in the wage base.)

For retirees, the key number is the cost-of-living adjustment (COLA): More than 64 million recipients will get a 1.3% boost in 2021, compared to a 1.6% COLA in 2020. That means the average Social Security benefit for a retired worker will rise by $20 a month to $1,543 in 2021 while the average benefit for a retired couple will grow $33 a month to $2,596. 

“Never in the history of the Social Security program have COLAs been so low for so long!” says Mary Johnson, Social Security and Medicare policy analyst with The Senior Citizens League. It’s a disappointing COLA in comparison to 2019’s 2.8% increase. It’s the fifth time since 2010 that there will be an extremely low—or even no—annual inflation adjustment. The COLA was zero in 2010, 2011 and 2016, and just 0.3% in 2017. That puts retirees in a bind, especially since they face outsized medical expenses which are given too little weight in the COLA formula, says Johnson.

Retirees will have to factor in Medicare Part B and Part D premiums—and income-related surcharges—all of which reduce their overall benefits package. These official numbers for 2021 aren’t out yet. The spring 2020 Medicare Trustees’ Report estimated that Part B premiums, which cover doctors’ and outpatient services, were expected to rise from $144.30 in 2020 to $153.30 a month in 2021. But as part of the recent short-term budget bill, Congress capped any Part B increase for 2021 at 25% of what it would be.

Income-related surcharges, which apply to Part B and Part D drug premiums, were indexed for inflation for the first time in 2020 (except for the $500,000 and above income tier), providing some relief. For 2020, they kick in for individuals with $87,000 in income and couples filing jointly with $174,000 in income. The wealthiest senior couples are paying nearly $12,000 a year in Medicare Part B premiums.

The Social Security Administration also announced the earnings limit for workers who are younger than “full” retirement age (age 66 for people born in 1943 through 1954). You can find out what your full retirement age is and see how much your benefit will be reduced if you claim benefits before full retirement age on the Social Security website. Recipients who are under full retirement age will be docked $1 in benefits for every $2 in earnings above $1,580 a month, or $18,960 a year in 2021. A worker who turns 66 and two months in 2021 (the full retirement age for those born in 1955) can earn up to $4,210 a month before his or her birthday, without losing benefits. Above that threshold, the worker will lose $1 in benefits for each $3 earned. Once you reach “full” retirement age, you can earn as much as you like without losing Social Security benefits at all.

If you’re on Medicare, you won’t get your exact 2021 Social Security benefit amount until the official Medicare premium amounts are announced. You can check in December if you have an online Social Security account. You should set up an online Social Security account even if you’re not retirement age to check that your recorded wages are accurate.

And if you’re nearing retirement, research Social Security claiming strategies carefully. Only 4% of retirees claim Social Security at the optimal time, leaving $3.4 trillion on the table. Taking Social Security early because you were laid off during the coronavirus pandemic could be a big mistake, and there are alternatives.

Here’s a look at COLA increases since 2011.

2021: 1.3%

2020: 1.6%

2019: 2.8%

2018: 2%

2017: 0.3%

2016: No increase.

2015: 1.7%

2014: 1.5%

2013: 1.7%

2012: 1.7%

2011: 3.6%

The Social Security released this fact sheet on the 2021 Social Security changes.

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