Who’s Ready for Big Social Security Changes in 2021?

The pocketbooks of working Americans and retirees could be directly affected by these changes.

Sean Williams

Sean Williams(TMFUltraLong)

The New Year may bring with it big changes. Promising late-stage coronavirus disease 2019 (COVID-19) vaccine results may soon end the pandemic. Meanwhile, President-elect Joe Biden’s inauguration on Jan. 20, 2021, will usher in a new era for politics on Capitol Hill.

But some of the biggest changes in the upcoming year are to be found in the Social Security program. Whether you’re receiving benefits or are working toward your eventual retirement, it’s possible that these changes will affect what you’ll take home in 2021 or beyond.A person holding a Social Security card between their thumb and index finger.


Beneficiaries are getting a raise (albeit a small one)

As recently as May, the outlook was bleak for the U.S. economy and the 46 million-plus retired workers who count on a monthly benefit check from Social Security. The coronavirus pandemic was wreaking havoc on the U.S. economy and the average prices for goods and services were falling. 

Federal stimulus and an easing of state-level restrictions during the late spring and summer months allowed the U.S. economy to regain its footing somewhat. This allowed the prices of goods and services in important spending categories (e.g., shelter, medical care services, and food) to head meaningfully higher. As a result, Social Security beneficiaries will net a 1.3% cost-of-living adjustment (COLA) in 2021.

Before you break open the bubbly, keep in mind that this 1.3% COLA ties for the second-smallest positive COLA on record since 1975. In fact, the past 11 years have been pretty brutal for Social Security recipients, with an average COLA of only 1.4% over that span. These persistently low COLAs have eroded the purchasing power of Social Security dollars over the last two decades.The tip of a pen pointing toward Social Security taxable wages on a W-2 tax form.


The well-to-do are going to pay more

Social Security has three sources of funding: the 12.4% payroll tax on earned income, interest income earned on its asset reserves, and the taxation of benefits. The payroll tax is, by far, the most important revenue generator, accounting for $944.5 billion of the $1.06 trillion collected in 2019.

This year, earned income (wages and salary, but not investment income) between $0.01 and $137,700 is subject to Social Security payroll tax. Meanwhile, any earned income above $137,700 is exempted from the payroll tax.

Next year, the upper bound of this taxable threshold, known as the maximum taxable earnings cap, is rising by $5,100 to $142,800. Since 94% of working Americans earn less than the maximum taxable earnings cap each year, this increase won’t affect them. But the other 6% could owe up to $632.40 extra in payroll tax in 2021.A person filling out a Social Security benefits application form.


The full retirement age is on the rise

Back in 1983, the Reagan administration passed the last sweeping bipartisan overhaul of the Social Security program. The Amendments of 1983 introduced the taxation of benefits, gradually increased payroll taxation, and set out a four-decade gradual increase of the full retirement age — i.e., the age a retired worker is eligible to collect 100% of their monthly payout, as determined by their birth year.

In 2021, the full retirement age will increase by two months to 66 years and 10 months for persons born in 1959. This will be the fifth consecutive year the full retirement age has increased by two months, but it marks only the 11th time since the Social Security Act was signed into law in August 1935 that the full retirement age has been changed.

Your full retirement age is like a line in the sand. If you begin taking your retirement benefits prior to reaching this line, your monthly payout is permanently reduced by up to 30%. By contrast, waiting to take your payout until after this line can pump up your monthly benefit.A senior using a table saw to cut through a wood plank.


Early filers who are also working may be able to keep more of their income

Not all seniors receiving a Social Security retirement benefit leave the workforce. The idea of pocketing a wage or salary plus a monthly Social Security payout probably sounds fantastic, but the Social Security Administration (SSA) may penalize early filers (those who take their payout before reaching full retirement age) if they earn too much.

For instance, early filers who won’t reach their full retirement age in 2020 are only allowed to earn $18,240 for the year ($1,520 a month) before the SSA begins withholding some or all of their benefits. For every $2 in earnings above this threshold, $1 in benefits is withheld. Benefit withholding also applies to seniors who will hit full retirement age in a given year, but have yet to do so.

In 2021, early filers who won’t reach their full retirement age can earn up to $18,960 ($1,580 a month) before withholding kicks in. This should allow early filers to earn a bit more should they choose to continue working.A happy senior couple sailing on a lake.


The rich get richer

The last big change is that we’ll see the wealthiest Social Security beneficiaries padding their pocketbooks.

Just as there’s a cap on the amount of earned income that’s subject to the payroll tax, there’s also a cap on monthly benefits paid at full retirement age. Whether you’ve averaged $200,000 annually over 35 years or $10 million over the same time frame, payouts are capped at $3,011 per month at full retirement age in 2020. Next year, the rich can get even richer, with the maximum monthly benefit at full retirement age increasing to $3,148.

If you’re wondering how you can achieve such a bountiful monthly benefit during retirement, know that you’ll need to work a least 35 years, hit or surpass the maximum taxable earnings cap in each of those 35 years, and wait until your full retirement age before taking your retirement benefit.

The $17,166 Social Security bonus most retirees completely overlook

If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $17,166 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we’re all after. Simply click here to discover how to learn more about these strategies.The Motley Fool has a disclosure policy.

Published by lmgllc6

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