There may be significant Social Security changes in 2021. The results of the late-stage COVID-19 vaccine may bring an end to the pandemic. Besides, President-elect Joe Biden’s inauguration in January will bring in a new dawn for politics. Still, one of the significant changes in 2021 will be in the Social Security program. Regardless of whether you are working towards retirement or are already receiving your benefits, these changes may affect your income in 2021 and beyond.
Beneficiaries are getting a small increase in Social Security benefits.
The pandemic wreaked havoc on the United States economy, while the price of goods and services also reduced. In May 2020, more than 46 million retirees relied on a monthly check from Social Security. The U.S economy is now back to normal due to the federal stimulus and an easing of restrictions during the late summer and spring months. This made the prices of goods and services in crucial spending categories rise meaningfully. Due to this increase, Social Security beneficiaries will receive a 1.3% increase in their cost-of-living adjustment (COLA) this year.
You must know that this 1.3% COLA increase is the second-smallest positive COLA recorded in the last four decades. Over the last two decades, Social Security benefits’ purchasing power has decreased due to the persistent low COLAs.
The wealthy are going to pay more.
Since Social Security has three funding sources—the taxation of benefits, income earned in assets reserves, and the 12.4% payroll tax on earned income—payroll tax is, therefore, the major revenue generator for Social Security benefits.
In 2020, you will pay Social Security payroll tax on your earned income (such as salary and wages) up to $137,700. Earned income above $137,700 is not subjected to payroll tax. In 2021, the maximum taxable earnings cap will increase by $5,100 to $142,000. This increase will not affect many Americans since more than 90% of workers earn below this amount annually. But people earning above this earning cap may owe about $632.40 as additional payroll tax in 2021.
The full retirement age is rising.
1983 amendments to the Social Security program stated a four-decade gradual increase of the FRA and introduced the taxation of benefits. You need to note that your FRA depends on your birth year. In 2021, the full retirement age will be 66 years and ten months for anyone born in 1959. This marks the eleventh time the FRA increased since the Social Security Act was passed into law.
Early filers may keep more money if they are still working.
Not everyone receiving Social Security benefits has left the workforce. It may seem good to be collecting a salary while receiving a monthly Social Security payout, but this may cause the Social Security Administration to penalize you if you earn a high income. However, this penalty applies only to early filers who claim their benefits before the full retirement age. In 2021, early filers can earn up to $18,960 annually before their income is withheld. Since there is a limit, early filers should earn more money if they decide to continue working.
The rich are getting richer.
The last biggest change in 2021 will be how wealthy Social Security beneficiaries increase their money. Just as there is an earnings cap subjected to a payroll tax, there is also a cap on benefits paid monthly at FRA. Irrespective of your total earnings over 35 years, your payout was capped at $3,011 every month at FRA in 2020. Due to the rise in maximum monthly benefit at FRA, the rich will get richer.
Suppose you want to have huge monthly benefits during retirement. You must be aware that you need to have a working history of at least 35 years, reach the maximum taxable earnings cap in those 35 years, and then wait for your FRA before claiming your retirement benefit.