Millions of seniors rely on Social Security to pay the bills in retirement. The program is constantly evolving, though, and with a new year comes new changes you should be aware of. Here are three big ones to look out for in 2021.
1. A 1.3% cost-of-living adjustment
Earlier this year, it seemed as though seniors were in danger of not getting a cost-of-living adjustment, or COLA, at all, due to dipping gas prices. But once inflation data was analyzed for July, August, and September, it was determined that seniors will, in fact, be in line for a raise for 2021.
Next year, Social Security benefits will be subject to a 1.3% COLA, which is better than no COLA, but a relatively stingy raise nonetheless. In fact, 2021's COLA is lower than 2020's, which came in at 1.6%.
A 1.3% raise will translate into roughly $20 extra a month for the average Social Security beneficiary, but that's without taking Medicare premium hikes into account. If Part B premiums go up in 2021, seniors will see even less of that raise, as a portion will be used to cover Medicare increases.
2. A higher wage cap for Social Security taxes
Higher earners don't pay Social Security tax on all of their income. Rather, there's a wage cap that dictates how much income workers pay taxes on each year.
In 2020, wages of up to $137,700 were subject to Social Security taxes, but in 2021, that threshold is increasing to $142,800. This means that someone who's self-employed earning at least $142,800 will be on the hook for a total of $17,707.20 in Social Security taxes, while a salaried employee will split that bill with their employer.
Many critics of the wage cap have argued for years that it needs to be lifted or even eliminated to pump more revenue into the program. And Joe Biden, if elected president, will seek to reinstate Social Security taxes for wages above $400,000.
3. A higher earnings test limit
Seniors who collect Social Security are allowed to earn money from a job, as well. But those who claim benefits before reaching full retirement age will be subject to what's known as the earnings test. Wages that exceed the earnings test limit will result in benefits being withheld until full retirement age.
In 2020, workers could earn up to $18,240 without having their benefits impacted. In 2021, that threshold is increasing to $18,960, but for wages beyond that, $1 in Social Security will be withheld for every $2 earned. That threshold is rising to $50,520 (an increase from $48,600 in 2020) for those who collect Social Security, hold down a job, and will be reaching full retirement age in 2021. From there, $1 in Social Security will be withheld for every $3 earned.
Keep up with Social Security changes
Whether you're planning to sign up for Social Security in 2021, you're already on it, or you're a worker who's still paying into the program, it's important to know what changes are set to take place in the new year. It's also a good idea to stay current on Social Security news, even if you're not planning to claim benefits for many years.