We're already over a month into 2021. In every new calendar year it's important to take note of the Social Security Administration's updates to the cost-of-living adjustments (COLA) for retirees and tax changes for those currently employed.
Cost-of-Living Adjustment Increase
Social Security beneficiaries will see a 1.3% increase in their monthly benefit in 2021. This annual cost-of-living adjustment (COLA), which is on par with recent years’ increases, is designed to help benefits keep pace with inflation.
The 1.3% increase impacts about 70 million Americans who receive Social Security and Supplemental Security Income (SSI). For the average Social Security recipient who receives a monthly check of around $1,500, this 1.3% increase amounts to a raise of about $20 per month.
Affected Social Security beneficiaries should have received notification from the Social Security office indicating their new benefit amount in early December. Most recipients can also view their COLA notice online through their personal My Social Security account. If you don’t have an online account but would like to set one up visit socialsecurity.go/ myaccount.
Social Security Tax Cap Increase
For those still working, the amount of earnings subject to Social Security tax will increase 3.7% from a maximum of $137,700 in 2020 to a maximum of $142,800 in 2021. Employees and their employers will each continue to pay 6.2% of applicable earnings toward the 7.65% combined Social Security and Medicare rate. The 3.7% 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% of the Social Security and Medicare Tax Rate.
New Earning Limits
For those not yet at full retirement age (as determined by the Social Security Administration), but who are receiving Social Security benefits in addition to receiving a paycheck, there are new earning limits to be aware of in 2021. The chart below, provided by the Social Security Administration, gives information on the full retirement age.
Those receiving benefits who have not yet reached full retirement age will be docked $1 in benefits for every $2 earned above $18,960 (or $1,580 per month) in 2021. This is an increase of $720 from 2020’s per year limit of $18,240.
For those who will reach full retirement age during 2021, the limit increases substantially. In 2020, the earning limit for these individuals was $48,600 per year (or $4,050 per month). In 2021, the limit increases 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. Beginning in the month you reach full retirement age, you will no longer be subject to earning limits.
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 plan, reach out to our team to see how we can help.