The Social Security Administration recently announced several adjustments to the program for 2021 that will affect retirees and workers alike. These revisions may not have an immediate impact on your own situation, but it is always wise to understand how changes like these can affect our finances.
Cost of Living Adjustments (COLA)
For 2021, benefits paid by Social Security are scheduled to increase by 1.3%. This may not seem material on the surface, and it is not. The small adjustment is a reflection of the challenges our monetary institutions have faced in giving a boost to measured inflation across the board. Over the 46 years since COLA’s began in 1975, a 1.3% increase ranks in the bottom of the pack, 40-42 nd place to be exact, tied with 1986 and 1998. 2009-10 and 2015-16 were the only smaller increases, including three years with no increases and a 0.3% increase in 2016. So it could be worse.
Looking at the average of all retired workers, expected monthly benefits will increase $20 from $1,523 to $1,543. For an aged couple who are both receiving benefits, the average monthly benefits will increase $33 from $2,563 to $2,596.
COLAs are based on an inflation metric called CPI-W, the short version of a more academic title, the Consumer Price Index for Urban Wage Earners and Clerical Workers published by the Bureau of Labor Statistics. By comparison, the Federal Reserve measures its inflation-seeking success by another measure called PCE, or Personal Consumption Expenditure index, published by the Bureau of Economic Analysis. These are just two of the many inflation measurements assembled by various government agencies, few of which seem to accurately reflect the changing prices so many of us read about and experience day to day. In fact, lawmakers in the House of Representatives have discussed introducing a new bill to put a 3% emergency COLA in place for 2021. Stay tuned.
Maximum Taxable Earnings
The changes affect workers too. The maximum taxable earnings upon which Social Security deductions are based will increase by $5,100 for 2021, or a 3.7% increase to $142,800. Any dollar earned beyond that point will forgo the 7.65% employee tax rate or the 15.3% self-employed tax rate. This continues a stable pattern that started in 2019 reflecting increases growing at more than 3.5% per year, after an erratic pattern from 2016-18 of 0.0%, 7.3% and 0.9%, respectively. We can expect to see these limits raised in coming years, increasing contributions to a dwindling Social Security Trust Fund.
Higher Full Retirement Age
For beneficiaries who become newly eligible in 2021, or those born in 1959, the full retirement age will move higher by two months to 66 years and 10 months. 2022 will be the final stage in a 22 year plan to gradually increase the full retirement age from 65 to 67. As we live longer than ever, it is increasingly likely there will be additional steps in the future to slowly move the full retirement age higher still.
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