For our nation's retired workforce, no social program is more important than Social Security. Each month, nearly 65 million people collect a payout, including more than 46 million retired workers. Without this guaranteed monthly benefit, the elderly poverty rate would be close to 40%, according to an analysis from the Center on Budget and Policy Priorities (it's under 9% with Social Security payouts).

But you might be surprised to learn that not all workers collecting a retirement benefit are actually retired. Some choose to continue working, either part-time or full-time, while collecting their retired worker benefit from the program. If you're one of these people, or you expect to claim benefits very soon while continuing to stay employed in some capacity, you should be aware of a handful of changes expected to occur in 2021.

A smiling senior person standing in front of a workstation and tools.

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Retirement earnings test exemption limits are changing

Perhaps the biggest change involves the retirement earnings test. The retirement earnings test allows the Social Security Administration to withhold some or all of the benefits of early retirees if they earn above a predetermined income threshold. By early retiree, I'm referring to a retired worker receiving a monthly payout who has yet to reach their full retirement age.

For example, retired workers who collect a benefit and won't reach full retirement age in 2020 are allowed to earn up to $18,240 for the full year ($1,520 a month) without any benefit withholding kicking in. If they surpass this amount, every $2 in earned income above this threshold results in $1 being withheld from benefits. For early retirees who won't reach their full retirement age in 2021, this threshold is increasing to $18,960 annually, or $1,580 a month. 

The same is also true for early retirees who will reach their full retirement age in 2021. Early filers who will hit their full retirement age next year will be allowed to earn up to $50,520, or $4,210 a month, before $1 in benefits is withheld for every $3 in earnings above this income threshold. That's an increase from the $48,560 full-year threshold in 2020.

It's worth pointing out that the retirement earnings test no longer applies once you've hit your full retirement age, regardless of when you began taking your benefit. Additionally, withheld benefits aren't lost forever. Rather, they're returned in the form of a higher monthly benefit after hitting full retirement age.

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Social Security payroll tax deferrals come due

Social Security beneficiaries still choosing to work might also see an increase in the payroll taxation they're subjected to in 2021.

As you may already know, the 12.4% payroll on earned income (wages and salary) is responsible for the lion's share of the revenue collected by Social Security -- $944.5 billion of $1.06 trillion in 2019. With Congress at an impasse over a second round of stimulus, President Trump signed an executive order in August allowing payroll taxes to be deferred between Sept. 1, 2020, and Dec. 31, 2020, for workers earning up to $104,000. This was done to temporarily increase workers' take-home pay while they navigate their way through the coronavirus disease 2019 (COVID-19)-induced recession.

Although not all states or businesses opted into this four-month payroll tax deferral, 2021 could bring quite the surprise to some working Americans who've pocketed a bit extra since the beginning of September. You see, since President Trump's order is a deferral and not a payroll tax holiday, it requires the deferred payroll tax to be repaid into the program. This means working Americans who accepted this deferral in 2020 will repay what was deferred in 2021. That could certainly come as a shock to seniors who count on their combined wages/salary and benefits to make ends meet.

Two Social Security cards lying atop a W2 tax form.

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High earners could owe more

High-earning workers who are collecting Social Security benefits might also be required to open their wallets a bit wider in the upcoming year.

The aforementioned payroll tax is applicable in 2020 on earned income ranging between $0.01 and $137,700. Since 94% of working Americans will make less than $137,700 this year, they'll be paying into Social Security on every dollar they earn. Meanwhile, earned income above $137,700 is exempt from the payroll tax.

In 2021, this payroll tax earnings cap is increasing by $5,100 to $142,800. Though it'll have no impact on the 94% of working Americans who won't reach this cap, it'll require high earners to pay up to an additional $632.40 next year (assuming they're self-employed).