If there is one thing constant about Social Security, it is change. Here is what you need to know about Social Security in 2021.
The Good News:
1) 2021 will bring a significant Cost-of-Living Adjustment for Social Security
Legislation enacted in 1973 provides for Cost-of-Living Adjustments (COLAs) to Social Security and Supplemental Security Income (SSI) benefits in order to keep pace with inflation. In 2021, recipients will receive a 1.3% increase in monthly benefits. Despite the havoc that COVID-19 has caused, the 1.3% increase (which equates to an extra $20/month) is overall considered a success for this year.
Here is some more information on how the 1.3% increase was calculated.
2) The maximum monthly payout at Normal Retirement Age has increased
For 2021, the maximum monthly payout for a retired worker at Normal Retirement Age is $3,148. The Social Security Administration typically computes the Primary Insurance Amount (PIA) by evaluating Average Indexed Monthly Earnings (AIME). This process reflects the change in general wage levels that occurred during the recipient’s years of employment. The indexation ensures that future benefits reflect the general rise in the standard of living that occurred during recipient’s working lifetime.
Normal retirement age for various countries’ retirement systems varies, typically between 65-67 years of age. But in the U.S., full retirement age is currently 66 years and 10 months for those born after 1955. For Americans born in 1960 (or later) the retirement age is 67.
Remember: The way Social Security works is that: If you claim Social Security earlier, you will receive less payout per month —but if you claim after age 70, you’ll receive an 8% bonus for each year that you delayed claiming.
Learn more about Social Security Benefit Amounts here.
3) Social Security Disability Insurance recipients will receive an increase in benefits
Many of the 10 million Americans who qualify for Social Security Disability Insurance (SSDI) will see their benefits increasing in 2021. Furthermore, non-blind SSDI recipients can earn $50 more a month than they could in 2020 (up to $1,310 per month) – while legally-blind SSDI beneficiaries can receive $80 more than they did in 2020 ($2,190 per month) before benefits cease.
Read more about eligibility process for disability benefits here.
4) Exempt amounts under the earnings test will increase
This is good news for those claiming Social Security benefits while still working. In 2020, the Social Security Administration would withhold $1 of benefits for every $2 of earned income over $18,240 for individuals who had not reached their Normal Retirement Age. In 2021, the exempt amount will become $18,960. If, however, you expect to reach your Normal Retirement Age in 2021, then your threshold will be increased to $50,520 for the months prior to your birthday. In other words, the government will withhold $1 for every $3 of earned income above this threshold.
However, all of this is just temporary…Once you hit your Normal Retirement Age, you will begin to receive any funds that had been withheld through a recalculation of the benefit rate to remove the percentage reduction that was applied.
Here is some additional information on how the earnings test works.
The Bad News:
5) The Normal Retirement Age will rise…again.
The Social Security Administration determines your Normal Retirement Age based on the year you were born. For instance, in 2021, the Normal Retirement Age will increase to 66 and 10 months. This increase is part of an ongoing process to raise the Normal Retirement Age to age 67 by 2022 for those of us born in 1960 or later.
6) High-income earners are about to pay more in Social Security taxes
Effective January 1, 2021, high-income earners must pay Social Security taxes on the first $142,800 of income. Salaried workers pay a 6.2% tax (about $8,853), while their employer pays and additional 6.2%. If you are self-employed, this increase is going to hurt twice as bad. Self-employed workers, since they don’t have an employer to share the obligation, are responsible for the entire 12.4% tax.
Here is a brief history of the Contribution and Benefit Base.
7) Qualifying for Social Security will become harder
In order to qualify for Social Security benefits, you must be a U.S. citizen who has earned 40 Social Security credits. Each Social Security credit is legally called a Quarter of Coverage (QC) and QCs the basic unit for determining whether a worker is qualified. A maximum of 4 QC’s can be earned in one year, regardless of your income. The amount of earnings required for a QC in 2021 is $1,470. This is a $60 increase from the amount of earnings required for a QC in 2020 ($1,410).
Here is an explanation of the “Quarter of Coverage” calculations.
Bonus Update:
Looking Ahead to 2034
According to the most recent Social Security and Medicare Boards of Trustees annual report, both trust funds will be depleted as of 2034. The report concludes by tasking lawmakers with enacting legislation to address these financial challenges “sooner rather than later.”
If you want to hedge against this concern and protect yourself against a potential Social Security benefit reduction, check out PlanGap.
PlanGap is offering the first ever financial product (that works like insurance) to protect your Social Security income from broken promises.
Learn more at PlanGap.com
Want to learn more about the difference between Social Security Retirement Benefits, SSI and SSDI? Read our article here.
Kate writes about retirement benefits for retirementinsurance.org. She has a Masters Degree in Social Work (MSW). She has over a decade of experience in assisting elderly and disabled populations navigate governmental and private programs to obtain the monetary assistance they need to lead better lives. As she watched her parents begin their own retirement journeys and navigate similar systems to obtain Social Security, Medicare and other retirement benefits, she gleaned a further personal knowledge about the topic and is eager to share what she has learned with others.