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Social Security Taxes Will Rise Higher than Benefits in 2021: Are You Prepared?
Learn How These Changes Will Impact Your Financial Security
Each year, the Social Security Administration announces important numbers that impact both workers and retirees. In October, new wage base and benefit information for 2021 was released and it means a significantly larger tax bill for nearly 12 million high-earning workers. Why? Let’s dig into the numbers for both taxes and benefits below.
Wage Base News
The Social Security wage base is the maximum amount of earned income that is subject to Social Security tax, and it’s based on an index that measures wage growth. For 2021, the wage base will rise by 3.7% to $142,800. This is up from $130,700 in 2020 and, while an increase in the wage base sounds like a positive development, it will end up equating to a higher tax bill for high-earning workers. That’s because the increase in the wage base reflects any real wage growth. For 2021, the maximum Social Security tax per worker will be $17,707.20, which is split evenly between the employer and the employee, with each paying a 6.2% Social Security tax. (Self-employed individuals pay both sides of the tax themselves.) This means a maximum of $8,853.60 will be withheld from a highly paid employee’s 2021 earnings.
The Cost of Living Adjustment (COLA)
The most important announcement for retirees each year is the Cost of Living Adjustment, commonly called the COLA. It was made law in 1973 through amendments to the Social Security Act (SSA), and it is meant to offset inflation. It is calculated using a formula legislated in the SSA. In particular, COLA increases are based upon increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which is calculated monthly by the Bureau of Labor Statistics.
For 2021, approximately 64 million Social Security recipients will get a benefit boost of 1.3%. This is slightly down from the 1.6% COLA in 2020, and it will amount to a paltry benefit increase of $20 per month, on average, for a single recipient. The benefit for a retired couple will increase by an average of $33 per month.
This announcement represents the fifth time since 2010 that the COLA was calculated as extremely low – or nonexistent. The COLA was zero in 2010, 2011, and 2016, with a minute increase of 0.3% in 2017. This makes it quite difficult for many retirees to keep up with inflation, especially since many are paying far greater medical expenses; a fact that some experts believe is not given proper weight in the Social Security Act’s COLA formula.
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Medicare Premiums
The Social Security Act also requires that Medicare premiums, deductibles, and coinsurance rates be adjusted annually. The Centers for Medicare & Medicaid Services (CMS) announced that Medicare Part B monthly premiums – and the annual deductible – are increasing for 2021. For enrollees paying the standard monthly premium for Part B, the rate will be $148.50 for 2021. This represents an increase of $3.90 from 2020’s rate of $144.60. The 2021 annual deductible for all Medicare Part B beneficiaries will be $203, which is an increase of $5 from 2020’s annual deductible of $198.
Many retirees will face income-related surcharges related to Medicare Part B and Part D premiums, which serve to reduce their overall benefits package. Part B covers doctor and outpatient services, while Part D covers prescription drugs. These premiums were indexed for inflation for the very first time in 2020, which was helpful in providing some semblance of relief, and they apply to individuals with $87,000 in income and married couples filing jointly with incomes of $174,000 combined. This means the wealthiest tier of senior couples is currently paying nearly $12,000 in Medicare Part B premiums for 2020, and that number will increase for 2021.
Earnings Limits for Workers Under Full Retirement Age
The Social Security Administration also announced earnings limits for all workers who fall under Full Retirement Age (FRA). You can learn your FRA here, but for anyone born from 1943-1954, it is age 66. If you claim benefits before this time, they will be reduced. Recipients who are under FRA will face penalties for earnings greater than $1,580 per month ($18,960 per year) in 2021. For every $2 earned above that amount, they will be docked $1.
Social Security recipients who will meet FRA in 2021 (turning age 66 and two months for anyone born in 1955) can earn up to $4,210 per month without losing benefits. Amounts over that threshold, however, will be penalized at $1 for every $3 earned. Of course, once you reach FRA, you can earn as much income as you’d like without any penalty to your benefits.
SEE ALSO: FSA vs. HAS: How to Make the Most out of Your Employee Benefits
Preparing Your Finances for These Social Security Changes
If you’re a worker who will be paying significantly more in Social Security taxes in 2021, or a retiree getting an insignificant COLA, you’ll need to plan ahead to ensure your income will continue to meet your needs.
At Paces Ferry Wealth Advisors, we help our clients prepare for the future and secure their finances. If you believe you could benefit from the experience and vision of a financial professional to guide you toward accomplishing your goals, let’s begin a conversation today. Please reach out and schedule a discovery call to learn more about the support and peace of mind we provide.