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.