2020 has been tumultuous, who knows what 2021 will bring? One thing is certain: there will be some changes to social security. While no one yet knows some of the things that will be changing, we’ve got a pretty good overall view.
- The first important thing to know about Social Security in 2021 is that there will be a 1.3 percent cost of living increase (COLA). This isn’t much of an increase; it’s about a $20 jump per month for most people. If you’re married, and you and your spouse both receive Social Security, you’ll probably see an increase of about $33, and a widow or widower with two kids can expect a raise of about $39 per month. The maximum amount anyone will get is $137 per month, increasing the income of someone who retired at age 66 to a maximum of $3148 per month. Your personalized COLA numbers will be posted in your Social Security account in December 2020, so that you can know what to expect when the raise goes into effect in January.
- Disabled workers will get this COLA as well. SSI for an individual will go up by $11, and for a couple, $16 per month. The number is $16 for a disabled worker, too, and a disabled worker with a spouse and kids is looking at about $29 per month.
- The COLA is less than it has been in recent years, but not by much. The 1.3 percent number was calculated based on year-over-year inflation. To be more specific, it’s the difference between the Consumer Price Index for Urban Wage Earners in the third quarter of 2019 and the third quarter of 2020. There’s not always a COLA, because if the prices have fallen, there’s no adjustment. That happened in 2010, 2011, and 2016, but in 2020, there was a 1.6 percent COLA. The highest COLA since the adjustment became automatic in 1975 happened in 1980; that year it was 14.3 percent.
- The maximum earning cap is going higher, too. Social Security is funded by a payroll tax, which is set at 12. 4 percent on eligible wages. That 12.4 percent is split in half, with employees paying 6.2 percent and employers paying the other 6.2 percent. Self-employed workers have to pay the entire 12.4 percent. If you make over a certain amount of money, though, the amount that’s subject to these taxes is capped. In 2020, the maximum taxable amount was $137,700, but it’s going to be $142,800 in 2021.
- The amount of money you can earn and still receive benefits is going up in 2021. People who take retirement benefits before they hit retirement age, while they’re still working, don’t get full Social Security benefits. The way it’s calculated is that there’s a certain amount they’re allowed to earn and for every $2 above that amount, they lose $1 in benefits. In 2020, the amount a person could earn from working while receiving Social Security benefits was $18,240 per year, but in 2021 it will climb to $18,960 per year. The year you reach full retirement age, the earnings limit goes up to $50,520, and the penalty is reduced to $1 withheld for every $3 you earn, and once you actually turn your full retirement age, there’s no penalty if you choose to work and collect Social Security simultaneously.
- Full retirement age is shifting. When the program was initially established, in 1935, the full retirement age was set at 65. Currently, it’s 66 years and 8 months, but for people who turn 62 in 2021, it will be 66 and 10 months. The full retirement age is set to increase in two-month intervals for people born between 1955 and 1959, and for those more in 1960 or late, it will be 67.
- Medicare increase could reduce some of 2021’s gains. We’re not sure yet how much that will be, but it has the potential to eat into your COLA. The good news, thanks to a recent law change championed by AARP, the increase should be less than has been projected.
Social Security has been around since 1935, and most retirees depend on it, but a lot of myths persist about the system. There’s the idea that Social Security is running out of money or being raided to pay for other programs. Many people also believe that our elected officials don’t pay into the Social Security program like the rest of us. In truth, as long as payroll taxes continue to be paid, Social Security will not run out of money, because it’s a pay-as-you-go system. Senators and representatives have been paying into the program since 1984. And money can’t be stolen from Social Security to pay for other programs, though it can be borrowed. The tax revenue from Social Security is invested in special U.S. Treasury securities, and as with all Treasury bonds, the proceeds can be spent by the federal government on other programs. However, the Treasury, like other bondholders, has to pay the money back, with interest. There are funding challenges, because the retiree population is growing faster than the working population, and people are living longer. This could result in a reduction of benefits by about 2035, though the program still won’t be broke. It’s likely that it will be revamped between now and then to cover the deficit, much like it was in the 1980s.
Another myth is that Social Security is like a retirement savings account, with money being socked away in a personal account for you, paid to you with interest when you retire. Your benefit is not based on how much you put in, but rather how much you earned over your working life. On average, Social Security benefits are about 40 percent of a person’s pre-retirement earnings. That’s one reason it’s important to have a retirement fund that will provide you with supplemental income after you retire.
As we begin to emerge from the COVID-19 pandemic, economists are describing the economic recovery as being K-shaped. The economy is often explained using letters like a U, V, or W, to demonstrate the ups and downs, but what does a K represent? It’s indicative of the fact that people in higher-income households, with jobs that are more flexible and easier to do from home, are doing better in this time of recovery than lower-income families with less portable jobs. Similarly, larger companies have fared better than small businesses. These are factors to consider when you’re making investments during this time of upheaval.
When you’re looking for good advice on building a strong financial plan, Nelson Financial Planning can help. As one of the best financial planning firms in Central Florida, we provide guidance and financial advice so that you can make informed decisions about your future. We believe you should enjoy your retirement, so we’ll work with you to create a plan for a stress-free future. Call (407) 307-3061 or contact us today to set up your free consultation.
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