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Every October, the Social Security Administration (SSA) announces its annual changes to the Social Security program for the coming year. Below is our analysis of the Social Security changes that were announced in October 2020 to take effect on Jan. 1, 2021, according to the SSA’s annual fact sheet. Keep them in mind when you update or track your Social Security status.
Key Takeaways
- Social Security recipients got a 1.3% raise for 2021, compared with the 1.6% hike that beneficiaries received in 2020.
- Maximum earnings subject to the Social Security tax also increased—from $137,700 a year to $142,800.
- Other changes for 2021 included an increase in how much money working Social Security recipients can earn before their benefits are reduced and a slight rise in disability benefits.
- Social Security tax rates remain the same for 2021: 6.2% on employees and 12.4% on the self-employed.
- It now takes $1,470 to earn a single Social Security credit, up $60 from 2020.
1. Beneficiaries Received a 1.3% Increase
For 2021, nearly 70 million Social Security recipients are seeing a 1.3% cost-of-living adjustment (COLA) to their monthly benefits. The adjustment helps benefits keep pace with inflation and is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) as calculated by the U.S. Bureau of Labor Statistics (BLS). If the CPI-W increases more than 0.1% year over year between the third quarter of the previous year and the third quarter of the current year, then Social Security will raise benefits by the same amount.
The 1.3% bump for 2021 compares with the 1.6% COLA for the previous year (2020). In 2019, the COLA was 2.8%, the largest increase since 2012. For the average Social Security recipient, the 1.3% raise amounts to just $20 per month on an average monthly payout of $1,543 vs. $1,523 in 2020.
2. Maximum Taxable Earnings Rose to $142,800
In 2020, employees were required to pay a 6.2% Social Security tax (with their employer matching that payment) on income of up to $137,700. Any earnings above that amount were not subject to the tax. In 2021, the tax rate remains the same at 6.2% (12.4% for the self-employed), but the income cap has increased to $142,800.
The flip side is that as the taxable maximum income increases, so does the maximum amount of earnings used by the SSA to calculate retirement benefits. In 2020, the maximum monthly Social Security benefit for a worker retiring at full retirement age was $3,011. In 2021, the maximum benefit increases by $137 per month to $3,148.
3. Full Retirement Age Continues to Rise
The absolute earliest that you can start claiming Social Security retirement benefits is age 62. However, claiming before your full (or normal) retirement age will result in the payout being permanently reduced. For those who turned 62 in 2020, the full retirement age was 66 and eight months.
Under current law, the retirement age for Social Security purposes is set to increase by two months each year until it hits 67. If you turn 62 in 2021, then your full retirement age is 66 and 10 months. Unless the law changes, anyone born in 1960 or later will not reach full retirement age until they are 67.
If you delay collecting Social Security past your full retirement age, then you can collect more than your full, or normal, payout. In fact, if you put off claiming until age 70, then you will receive up to a 132% higher annual payout than if you started receiving benefits at full retirement.
After age 70, there is no further incentive for delaying: Your monthly benefit stops increasing, with or without put-offs.
4. Earnings Limits for Recipients Were Increased
If you work while collecting Social Security benefits, then all or part of your benefits may be temporarily withheld, depending on how much you earn. However, those income limits have increased slightly for 2021.
Prior to reaching full retirement age, you will be able to earn up to $18,960 in 2021. After that, $1 will be deducted from your payment for every $2 that exceeds the limit. The 2021 annual limit represents a $720 increase over the 2020 limit of $18,240.
If you reach full retirement age in 2021, then you will be able to earn $50,520, up $1,920 from the 2020 annual limit of $48,600. For every $3 you earn over the 2021 limit, your Social Security benefits will be reduced by $1, but that will only apply to money earned in the months prior to hitting full retirement age. Once you reach full retirement age, no benefits will be withheld if you continue working.
5. Social Security Disability Benefits Increased
Social Security Disability Insurance (SSDI) is an insurance program in which workers can earn coverage for benefits by paying Social Security taxes through their paycheck. The program provides income for those who can no longer work due to a disability, to help replace some of their lost income. Payments increased slightly in 2020 for the 9.6 million Americans who receive Social Security disability benefits.
Disabled workers will receive on average $1,277 per month in 2021, up from $1,261 in 2020. However, for a disabled worker, a spouse with one or more children, they’ll be paid on average $2,224 per month, an increase of $29 from 2020.
6. Credit Earning Threshold Went Up
If you were born in 1929 or later, then you must earn at least 40 credits (maximum of four per year) over your working life to qualify for Social Security benefits. The amount it takes to earn a single credit goes up slightly each year. For 2021, it will take $1,470 in earnings per credit, up $60 from 2020. The number of credits needed for disability depends on your age when you become disabled.
Shortfalls Ahead?
According to the most recent (2021) Social Security and Medicare Boards of Trustees annual report, both trust funds face depletion in the decades ahead. If the predictions hold, it means that, beginning in 2033, retirees who receive money from the Old-Age and Survivors Insurance (OASI) Trust Fund benefits, will receive about three-quarters (76%) of their scheduled benefit; those who receive payouts from the Disability Insurance (DI) Trust Fund will receive 91% of their benefit, starting in 2057. The report concludes by urging lawmakers to address these financial shortfalls, “taking action sooner rather than later.”