Although Social Security has been around for really a long time, the program does change from year to year. In fact, sometimes it changes a lot. Whether you're already collecting benefits or still have many more years of work ahead of you, here are some ways you may be affected by Social Security in 2021.
1. A stingy cost-of-living adjustment
Each year, Social Security recipients are entitled to a cost-of-living adjustment, or COLA, that serves as their raise, so to speak. The purpose of COLAs is to allow seniors to retain their buying power in the face of inflation. But some years, COLAs are far from generous, and unfortunately, 2021 is one of them. In the coming year, seniors will see their benefits go up by a mere 1.3%. For the average beneficiary, that's under $20 extra per month -- even less when we factor in a rise in Medicare Part B premiums for 2021.
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2. A higher wage cap for taxes on earnings
Each year, workers pay taxes into Social Security so the program can stay afloat. But there's a limit as to how much income is taxed that changes annually. Currently, workers pay Social Security tax on their first $137,700 of earnings. In 2020, that threshold will rise to $142,800.
Workers who are self-employed and earn $142,800 or more will pay $17,707.20 in Social Security taxes in 2021. Salaried workers, meanwhile, will pay half that amount -- $8,853.60 -- while their employers pay the other half. President-elect Joe Biden has stated that he wants to see Social Security taxes on income reinstated once earnings exceed $400,000 so that wealthy individuals pay their share. But even if that change goes through eventually, it won't be in effect for the start of 2021, so higher earners need not worry about extra taxes beyond the jump of a wage cap of $137,700 to $142,800.
3. A higher earnings test limit
Seniors on Social Security are allowed to work and receive benefits simultaneously, but those who do so ahead of full retirement age risk having benefits withheld if their income exceeds what's known as the earnings test limit. That limit, like the wage cap for taxes, changes from year to year.
In 2021, Social Security recipients can earn up to $18,960 without affecting their benefits. Beyond that point, $1 in Social Security is withheld for every $2 earned. Workers reaching full retirement age next year get a higher earnings limit -- $50,520. Beyond that, they have $1 in benefits withheld for every $3 in earnings. Withheld benefits are paid back eventually, but reduced benefits -- those that come with filing for benefits before full retirement age -- are set for life.
Whether you rely on Social Security for your present income or plan to do so in the future, it's important to keep tabs on changes to the program. The more you read up on Social Security, the better equipped you'll be to make smart choices that let you make the most of your benefits.
