2021 Social Security Tax and Benefit Increases Announced
The Social Security Administration recently announced 2021 increases to both benefits and the taxable wage base for FICA taxes.
Increases Announced for 2021
Workers are facing a 3.7 percent increase in the taxable wage base subject to Social Security taxes, increasing the amount from $137,700 up to $142,800. This means high earners who make as much as or more than the taxable wage base will pay $8,853.60 of the employee withholding portion or $17,707.20 in total for the self-employed – who pay both employee and employer portions of the tax.
Retirees receiving benefits will only garner a 1.3 percent cost-of-living (COLA) raise in 2021, resulting in a raise of $20 per month for the average single beneficiary and $33 per month for the average retired couple. COLA increases for beneficiaries have been low for a long time, with several years seeing zero increases in the past decade or so. You can see the historic trend of COLA increases in the chart below, going back to 1975.
Medical Expenses Outpacing COLA increases
Low COLA increases are putting pressure on retirees’ finances as medical expenses are rising at a much faster pace, with some believing they are given too little weight in the COLA calculation. Moreover, retirees need to consider Medicare Part B and Part D premiums.
For 2021, the Part B premiums (covering doctor and outpatient services) will rise $3.90 per month, or approximately 2.7% percent, from $144.60 to $148.50. This is just the standard premium, as there are income-related surcharges that apply to both Part B and Part D drug premiums. For 2021, individuals that made more than $88k per year and couples filing jointly that made over $176k per year in 2019 (base period), will be paying higher premiums for Part B and Part D than other recipients.
Income Caps on Working Beneficiaries
Finally, there are new earnings limits for workers below full retirement age (age 66 for people born in 1943 through 1954). In 2021, those who are not at full retirement age will lose $1 in Social Security benefits for every $2 they earn over $1,580 a month ($18,960 per year). After reaching one’s full retirement age, there are no earning thresholds that will impact benefits.
The 2021 COLA increase continues the recent trend of coming in low and putting pressure on retirees’ finances, while medical expenses continue to rise at much faster rates. As a result, retirees will see less disposable income from their benefits while high-earning workers will see continued tax increases that outpace benefit payouts. This puts pressure on all beneficiaries of the system.