Social Security Benefits to Increase in 2021
Last week, the Social Security Administration announced 1.3% Cost-of-Living Adjustment, or COLA, beginning in January 2021. This is slightly down from last year’s increase of 1.6%.
How is the 2021 Social Security Increase Calculated?
By law, Social Security benefits will increase from year-to-year when the cost of living rises. Cost of living is measured by the Bureau of Labor Statistic’s Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
According to the Social Security Administration, as of June 2020, the average Social Security payment to a retired worker was $1,514. The latest cost of living adjustment of 1.3% would result in an increase of about $20 per month.
Social Security Tax will Also Increase in 2021
It’s also important to note the maximum earnings subject to Social Security tax will also rise from $137,700 in 2020 to $142,800 in 2021. So, if you’re working you may be subject to additional Social Security taxes in 2021. For example, if you earned $150,000 in 2020, the first $137,700 is subject to a 6.2% Social Security Federal Insurance Contributions Act (FICA) tax, equal to $8,537.40. If you made the same $150,000 in 2021, this wage results in a tax increase of $316.20 for 2021.
Social Security Changes to the 2021 Earnings Limit
For recipients still working who haven’t reached their full retirement age, there are changes to the earnings limit for 2021. The earnings limit has been increased to $18,960, which is up from $18,240. Therefore, for every $2 of earned income above the $18,960 limit, Social Security will withhold $1 of benefits. Again, this earning limit only applies to workers who are receiving Social Security benefits and have not reached their full retirement age. A different earnings limit applies for workers who will reach their full retirement age in 2021. For every $3 of income earned above $50,520, $1 of Social Security benefits will be withheld until the month full retirement age is reached. Once a person reaches full retirement age, the earnings limits no longer apply to them.
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The views expressed represent the opinion of Barber Financial Group an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Barber Financial Group does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.