By John Waggoner, AARP, Updated November 9, 2020
Monthly benefits will increase, but so will tax cap, earnings test limits.
The Social Security Administration (SSA) recently announced that the annual cost-of-living adjustment (COLA) for benefits will be 1.3 percent. That's a small but important increase for millions of beneficiaries who will see a raise in their monthly payments starting in January.
But the benefits increase isn't the only change coming next year. Here's a closer look at some of the biggest changes affecting Social Security recipients in 2021.
Larger checks for retired, disabled workers
The 1.3 percent COLA that goes into effect in January was calculated based on the year-over-year rate of inflation. Specifically, it's the difference between the Consumer Price Index for Urban Wage Earners (CPI-W), a government measurement of prices typically paid for a basket of goods and services, in the third quarter of 2019 and the third quarter of 2020. The modest 1.3 percent increase reflects the relatively low rate of inflation over the past year. In years when there is no change in the index, or if prices have fallen year over year, there is no COLA.
For the average retired worker, the monthly Social Security benefit will rise by $20 to $1,543 in January from $1,523 in 2020. For the average retired couple who both collect benefits, the payment will rise by $33 to $2,596, up from $2,563. The average disabled worker will see monthly benefits increase by $16 to $1,277 from $1,261.
The maximum Social Security check for an individual retiring at full retirement age will rise to $3,148 a month in 2021 from $3,011 — an increase of $137.
Average Monthly Benefits in 2021 (+ difference from 2020)
Retired worker: $1,543 (+$20)
Retired couple: $2,596 (+$33)
Widow or widower: $1,453 (+$19)
Widow with two kids: $3,001 (+$39)
Disabled worker: $1,277 (+$16)
Disabled worker w/ spouse, kids: $2,224 (+$29)
SSI for individual: $794 (+$11)
SSI for couple: $1,191 (+$16)
Source: SSA
Tax cap goes higher
The payroll tax that funds Social Security is set at 12.4 percent on eligible wages. Employees pay 6.2 percent and employers pay the other 6.2 percent (with self-employed workers paying the entire 12.4 percent). The money paid in by today's workers goes to cover current benefits, with any excess going into the Social Security trust fund.
As it does every year, the maximum amount of earnings subject to the payroll tax is going up. In 2020, the maximum amount of taxable earnings is capped at $137,700; in 2021, that figure climbs to $142,800. Earnings over that amount aren't subject to Social Security taxes next year.
Earnings test limits climb
Social Security was designed with retirees in mind, so those who work and take retirement benefits before their full retirement age get temporarily reduced benefits. In 2020, beneficiaries under full retirement age have $1 in benefits held back for every $2 they earn from working above $18,240 a year ($1,520 a month). In 2021, that rises to $18,960 a year, or $1,580 a month.
In the year you hit full retirement age, the earnings test limit leaps to $50,520 a year ($4,210 a month) as of 2021, up from $48,600 a year ($4,050) in 2020, and SSA holds back $1 for every $3 you earn. The month you reach full retirement age, Social Security stops holding money back because of your work income and there are no longer earnings limits. Social Security effectively returns the money it withheld by increasing your monthly payout when you reach full retirement age.
Accruing work credits
In most cases, workers need to accrue 40 work credits to become eligible for Social Security benefits. One work credit is the equivalent of three months’ worth of qualifying work in a year. SSA refers to this as a “quarter of coverage.” The amount of earnings required for a qualifying quarter of coverage is going up to $1,470, from $1,410 in 2020. You can earn up to four work credits in 2021 if you earn at least $5,880.
A break on Medicare premiums
Many people who are already collecting Social Security when they sign up for Medicare at age 65 have their Part B premiums automatically deducted from their Social Security monthly payment. As such, a big jump in premiums can wipe out the increase from a COLA. The standard premium for Part B, which covers doctor and outpatient services, is $144.60 a month in 2020. The standard premium for Part B will cost $3.90 more, rising to $148.50 in 2021.
The good news for 2021: Under a recent change in law championed by AARP, the new Medicare premium will be less than previously projected, thus preserving part of the COLA for most beneficiaries. Initially, higher emergency Medicare spending due to COVID-19 was expected to lead to very high Medicare premiums in 2021. Most beneficiaries would have seen their COLA wiped out by Part B premium increases had the law not been changed.
SSI recipients also get a raise
Those who receive Supplemental Security Income (SSI), a program administered by SSA to help certain individuals with little or no income to meet basic living needs, will also see a 1.3 percent rise in their monthly benefits. For the average individual, that translates to $11 more a month, to $794 from $783. The average couple gets $16 more a month, to $1,191 from $1,175. SSI is funded by general tax revenue, not Social Security payroll taxes.