Investor Column | Changes you will see in Social Security in 2021
The Social Security Administration announced late last year the annual cost of living adjustment or “COLA” for those receiving benefits will increase by 1.3%. While small, that increase is important to many Social Security beneficiaries. Those increases started last month. Here are how those increases break down for different beneficiaries.
The average retired worker will receive $1,543.00 each month. That’s up $20.from 2020. A retired couple will receive $2,596 each month, up $33 from 2020. A disabled worker will receive $1,277 each month, up $16 from 2020.
The maximum Social Security check for an individual at full retirement age has increased to $3,148 a month. That’s an increase of $137 over last year.
COLA is based on the year over year rate of inflation. Inflation has been modest which is reflected in the increase. In years when there is no change in the index or the index falls there is no COLA.
The payroll tax that funds Social Security is set at 12.4 percent with 6.2 percent being paid by the employer and the other 6.2 percent being paid by the employee. Self-employed individuals pay the entire 12.4 percent. Money being paid by current workers goes to covering current benefits with any remaining funds going into the Social Security trust fund.
The maximum earnings subject to the payroll tax is increasing to $142,800 this year. That’s up from $137,700 in 2021.
As many who work and collect Social Security benefits know, if you start collecting benefits before “full” retirement age that one dollar is withheld for every two dollars earned above a certain income level. In 2020 you could earn up to $18,240 a year or $1,520 per month before having your Social Security benefits temporarily reduced. In 2021 that amount increases to $18,960 per year or $1,580 per month.
It’s important to remember that upon reaching the month of full retirement that reduction ends. It’s also important to remember, and I have many inquiries regarding this over the years, is that your Social Security benefits will always be subject to income tax. While working your contributions to your Social Security payments are pre-tax, therefore making the benefit you receive when retired taxable.
In most cases workers must accrue 40work credits to be eligible for Social Security benefits. One work credit is equal to three months of qualified work. This is referred to a quarter of coverage. The amount of earnings needed to qualify for a quarter of coverage is increasing to $1,470 this year up from $1,412 in 2020. One will need to earn at least $5,880 this year to earn up to four quarters of credits.
Most of the people who are already collecting Social Security when they sign up for Medicare have their Part B premiums automatically deducted from their monthly Social Security payments. Part B covers doctor and outpatient services. In 2020 that amount was $144.60. This year that premium increased to $148.50. That’s an increase of $3.90 per month.
Finally, those that receive Supplemental Security Income (SSI) will also see an increase of 1.3% in their monthly benefits. For the average individual that means an increase from $783 per month to $794. SSI is a program administered by Social Security to help low income or no income individuals meet basic living needs.
There are several other things to remember for 2021 that are not Social Security related.
The age at which one must begin the Required minimum distribution (RMD) from one’s IRA has been changed. Individuals born prior to July 1, 1949, still must begin their RMD in the year they turn 70 ½. With the Secure Act of 2019 anyone born on or after July 1, 1949, will not need to begin RMD’s until the year they reach age 72. Generally, you must take your first distribution by December 31 of the year it is due. The IRS, however, does allow you to take your first RMD by April 1 of the next year.
The contribution limit for traditional and Roth IRA’s for this year remains at $6,000. That increases by $1,000 for anyone over age 50. That’s a total contribution of $7,000, the same as last year.
Social Security data and information sourced from AARP/ Biggest Social Security Changes that Start Jan.1 by John Waggoner, (https://www.aarp.org/retirement/social-security/info-2020/biggest-social-security-changes-for-2021.html Required minimum distributions information sourced from Raymond James.
Michael T. Doll, A.A.M.S. is an investment planner with Harbor Financial Services, can be reached at 941-896-2473 or at mtdoll@harborfs.com. This is the view and/or opinion of Michael T. Doll and not necessarily the views and/or opinion of Harbor Financial Services, LLC and SEC Registered Investment Advisor, whose main office is located in the state of Alabama. Medicare plans offered through Advocate Health.