1. A smaller cost-of-living adjustment
Each year, Social Security recipients are entitled to a cost-of-living adjustment or COLA.
This serves as a raise for Social Security beneficiaries, many of whom rely on their monthly checks as their primary source of income.
The purpose of COLAs is to allow seniors to retain their buying power in the face of inflation (rising prices of goods and services)
However, due to low inflation in recent years, COLAs increases have been very small.
For example, in 2020, the COLA increase was 1.6%.
Social Security benefits will see a Cost of Living Adjustment of 1.3% in 2021. On Average, that equals an additional $20 a month.
This will increase the average Social Security retirement benefits check from $1,523 to $1,543.
Many retirees won’t see the impact of this increase in their pockets, however.
That’s because this $20 a month increase will likely be offset in part by higher Medicare premiums and deductibles in 2021.
For reference, here are the COLA increases over the last 10 years:
Social Security COLA History
Here’s a look at COLA increases since 2011.
2016: No increase.
As you can see, the COLA increases have been stingy, especially when one considers the rising cost of healthcare, including Medicare.
Medicare costs to rise
Medicare cost increases are one of the biggest financial burdens on seniors. 2021 will be no different.
Here’s how much Medicare costs will increase in 2021:
- The standard monthly premium for Medicare Part B will be $148.50, up from $144.60 in 2020.
- The annual deductible for Medicare Part B will be $203 — a $5 increase.
- The Medicare Part A inpatient hospital deductible will be $1,484 — a $76 increase.
2. The earnings limit for working retirees will go up
If you claim Social Security retirement benefits before reaching your full retirement age (FRA) and also continue working, continue reading.
As you are probably aware, the Social Security Administration will withhold some of your benefits if your income exceeds “the earnings limit”.
In 2021, the Social Security earnings limit increases to the following:
- From $18,240 to $18,960 if you will reach full retirement age after 2021
- From $48,600 to $50,520 if you will reach full retirement age in 2021
- No limit on earnings if you are full retirement age or older for the entire year.
3. Earnings subject to Social Security tax will increase
The maximum amount of a worker’s income that is subject to Social Security payroll taxes will rise from $137,700 in 2020 to $142,800 in 2021.
That means that you will pay Social Security taxes on any income you make up $142,800 in 2021.
However, any additional income you earn beyond the $142,800 will not be subject to Social Security payroll taxes.
Remember that there is no earnings limit on Medicare taxes.
This means every dollar of earned income is subject to Medicare tax.
Finally, the Social Security payroll tax rate will remain the same in 2021.
This means employees pay 6.2% and employers pay another 6.2%, for a total of 12.4% for the self-employed.
Self-employed individuals pay the entire 12.4% in Social Security taxes.
4. Lifetime work credits Amount Go Up
How much you have to earn per quarter to qualify for Social Security retirement benefits will go up.
To receive Social Security retirement benefits, most people need to accumulate at least 40 ‘credits’ during their working lifetime.
Currently, you can earn up to four credits per year if you work and pay Social Security taxes.
In 2021, the minimum about you have to earn a year to get the four credits for that year was $1470, an increase of $60 from 2020.
5. The Full Retirement Age will go up
As has been happening in recent years, the Full Retirement Age (FRA) for Social Security benefits is going up again.
In 2021, the full retirement age going higher by two months, to 66 years and 10 months for those born in 1959.
The full retirement age is the age when you are entitled to 100 percent of your Social Security benefits.
If you were born between 1943 and 1954, your full retirement age is 66.
However, if you were born in 1955, it is 66 and 2 months.
For those born between 1956 and 1959, it gradually increases, and for those born in 1960 or later, it is 67.
The earliest a recipient can start collecting Social Security retirement benefits is age 62.
It is important to note that seniors who claim Social Security before their full retirement age receive reduced payments.
For example, if you turn 62 and start receiving Social Security benefits in 2021, your monthly benefits will be 29.17% less than you will receive at your FRA.