collage of blue colored social security cards (Photo: Shutterstock)

By any measure, 2020 has been an extraordinary year, what with a pandemic, sputtering economy and other news. By these standards, the changes to Social Security are far less dramatic and won’t cause major disturbances.

Still, it’s important to be aware of them, seeing as how for the average wage earner, Social Security makes up some 40% of their pre-retirement income.

Each year, the Social Security Administration adjusts the amounts of benefits retirees receive, how much income is taxable for Social Security purposes and how much beneficiaries can earn before having some of their benefit withheld.

1. Higher benefit amounts

Social Security benefits will rise by 1.3% in 2021. For the average Social Security recipient, that equals an additional $20 a month, taking their checks from $1,523 to $1,543.

While any increase is certainly welcome, it may not go that far, note Social Security experts.

The Social Security COLA increase is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, known as CPI-W from the fourth quarter of 2019 to the third quarter of 2020.

That index includes some categories of the goods and services that went up significantly more than 1.3%. Take food, for example.

The Bureau of Labor Statistics reports that food prices increased 3.6% from November 2019 to this November; utilities went up 4.4% during that time period. Energy prices, however, declined nearly 10%.

“Energy was down and that skewed everything,” says Elaine Floyd, author of “Savvy Social Security Planning for Boomers,” and director of retirement and life planning at Horsesmouth, which helps advisors’  business building.

“But seniors don’t spend that much on things like transportation. In general, it’s typical for the COLA to not cover the things that seniors spend their money on,” Floyd explains.

Another category that rises higher than inflation is health care, and retirees are big consumers of that. Medicare Part B, the portion of the health insurance plan for retirees that covers outpatient care, medical equipment and other medical services, will rise by 6%, from $144.60 to $153.30 a month.

“Over the long term Medicare will consume a bigger and bigger portion of a person’s Social Security check,” says CFP Mark Orr of Retirement Wealth Advisors in Alpharetta, Georgia, and author of “Social Security Income Planning: Baby Boomer’s 2020 Guide to Maximize Your Retirement Benefits.”

2. More earnings subject to Social Security taxation

For 2021, taxpayers will pay 6.2% Social Security tax and a 1.45% tax for Medicare (known together as FICA) on the first $142,800 they earn, up from $137,700 in 2020.

There will be no FICA tax owed on any earnings above $142,800. (The yearly increase in earnings is based on the national average wage index.)

“Wages tend to go up faster than inflation, so the earnings threshold usually goes up more than the COLA increases,” Floyd explains.

President-elect Joe Biden has proposed taxing incomes over $400,000 for Social Security and Medicare as a way to bring in additional funds and shore up both systems.

The SSA says that both Social Security and Medicare face long-term financial shortfalls and estimates that trust funds of both will be depleted within a decade.

If passed, Biden’s proposal would create a “donut hole,” between $142,800 and $400,000 where no FICA tax would apply. “Over time, that donut hole will close as more income is taxed,” says Floyd. “But that will take decades.”

Of course, it all depends on which party controls the U.S. Senate in 2021.

3. Earnings limit will be higher.

In 2021, beneficiaries who are collecting Social Security prior to reaching their full retirement age and continue to work will have any income they earn over $18,960 taxed, an increase of $720 from 2020.

One benefit dollar of every $2 they earn above that limit will be withheld.

In the year that beneficiaries reach their full retirement age (FRA), however, the earnings limit goes up to $50,520 (from $48,600). Plus, only $1 out of every $3 above that amount will be withheld.

According to the SSA, from the month individuals reach their FRA, their earnings no longer reduce their benefits, no matter how much they earn. ”We will recalculate your benefit amount to give you credit for the months we reduced or withheld benefits due to your excess earnings,” it states.

Once beneficiaries reach full retirement age, their checks will be recalculated to include the withheld amounts. They should receive more per month than they had been getting.

3 Social Security strategies to consider

The coronavirus has dealt a blow to the U.S. economy, causing numerous job losses. For those nearing retirement, Social Security may seem like a good source of income.

But taking the benefit prior to full retirement age can mean an income reduction that’s locked in. If you’re working with someone who’s  been forced into early retirement, consider these strategies:

Let the highest benefit accumulate. Married couples have options when it comes to retirement. If both partners are over 62 and have been laid off in the past year, consider tapping only the lowest of the two benefits.

“You should put off taking the higher Social Security check for as long as possible”, says Orr. “That’s a guaranteed check that will get COLA increase.”

Repay Social Security. Some people who were laid off and started taking Social Security may have found new jobs. They have some options, says Elaine Floyd of Horsesmouth.

“If you go back to work and it’s been less than 12 months, they can withdraw their application, repay your benefit and continue to delay for a higher benefit,” she says.

Wait until FRA. Those who don’t find new jobs within 12 months have options too, Floyd notes. They can wait until full retirement age and suspend at that point, which will result in a higher eventual benefit.

Roth conversions look more attractive. With higher taxes likely in the future, Orr argues Roth conversions make more sense. It allows high earners to pay taxes on their income at  today’s lower rates in order to avoid taxes on withdrawals later on when rates might be higher.

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