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5 Changes to Social Security You Probably Didn't Know

By James Brumley - Mar 22, 2021 at 9:09AM

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Investors at or near their full retirement age may want to update their strategy to maximize their Social Security payments.

Occasional tweaks to the United States Social Security system aren't uncommon. But more than a just few changes are being implemented this year. Regardless of your age or your work status, and even if you're not counting on Social Security income in your retirement, it would be wise to note what's different. Here's a rundown of the five most important changes for 2021 and beyond.

1. You got a (small) raise

If you're already receiving Social Security payments, you may have noticed they're a little bigger than they were just a few months ago. The program's administrators made an upward cost-of-living adjustment to the tune of 1.3% for the year.

It's not exactly a thrilling improvement. In fact, it's smaller than the long-term average, and the weakest COLA increase since 2016, when retirees only saw a 0.3% raise.

On the flip side, the Bureau of Labor Statistics reports last year's consumer inflation rate was a similar 1.4%. It would be great for payments to outpace inflation, but this adjustment is workable.

An application form for Social Security benefits, with a calculator, a pen, and a pair of glasses on top

Image source: Getty Images.

2. This year's cohort of people reaching full retirement age had to wait a little longer

When Social Security was invented way back in 1935, participants were eligible to begin receiving their full benefits immediately after they turned 65. That minimum age for maximum payouts, however, has been creeping higher since 2000. It's not been a consistent, uniform increase, though. Those born from 1943 to 1954 have a full retirement age of 66. Those born between 1955 and 1959 had two months added per year. For those born in 1960 or later, full retirement age is 67.

Those born in 1955 will hit age 66 this year, but they'll have to wait two months beyond their 66th birthdays to claim full retirement benefits. If they claim at 66, their monthly checks will get reduced by 1.1% to reflect the extra two months.

The age at which most workers can start taking early benefit payments still stands at 62.

3. More earnings are subject to Social Security payroll tax

The Social Security Administration isn't raising the rate at which it taxes income to fund payouts. That still stands 6.2% of earnings for employees, or 12.4% of earnings for self-employed individuals.

The SSA is taxing more of your income at that same rate, though, if you're a high earner.

This year, the first $142,800 of any single person's earnings are subject to Social Security taxes, up from last year's cap of $137,700. Any amount of income above and beyond that $142,800 threshold remains untaxed by Social Security.

4. Early retirees can earn a little more at a job before it affects their benefits payment

If you're not yet at full retirement age (between 65 and 67, depending on the factors described above) but already collecting Social Security payments while also supplementing those checks by working a paying job, you've run into a conundrum: earning too much at that job can reduce your benefits payment. Last year, retirees could earn up to $18,240 before Social Security payments began to shrink. That cap's been moved up to $18,960 per year for 2021.

It's not necessarily disastrous if you do end up making more than that. The SSA only reduces your total payments by $1 for every $2 you earn above and beyond $18,960 (or $1,580 per month) this year; you're still coming out ahead. If you're not yet at your full retirement age and looking to maximize your entitlement, though, be sure to plan your work schedule accordingly.

5. Those nearing full retirement age can earn slightly more, too

But what about people retiring this year, or anyone who's already retired?

While early retirees may have reason to keep their work earnings to a minimum in any given year, individuals who are going to reach their full retirement age in 2021 enjoy a little more flexibility. This year you can earn up to $50,520 worth of penalty-free wages ($4,210 per month), up from last year's $48,600. Your Social Security payment is reduced by $1 for every $3 earned beyond that mark.

There's a nuance to this calculation, however. That is, the withholding stops the very month you reach your full retirement age. If you have the option, it might make sense to delay any earnings until after you've reached your full retirement age.

And if you're already at full retirement age, you can still work as much as you want without worrying about diminishing your Social Security payments at all.

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