SSA Announces COLA for 2021

Oct 16, 2020 / Elaine Floyd, CFP®, Horsesmouth Director of Retirement and Life Planning

Social Security checks will be going up by 1.3% in 2021. The adjustment will take effect in December and appear in January’s checks. In December Social Security beneficiaries will receive a letter informing them of their new benefit amount. This information will also be posted on their online mySocialSecurity account. Clients can do their own math now by logging into their Social Security account and bringing up their benefit verification letter which shows the gross amount of their benefit before deductions. Then they can just multiply that amount by 1.013.

Medicare premiums will be announced in November. For most people the 1.3% COLA should cover the rise in the Part B premium, so there will likely not be a hold-harmless situation this year. But that Medicare premium will eat into their COLA increase. If the Part B premium goes up to $153.30 as projected in the 2020 Medicare trustees’ report (page 192), the $8.70 increase over the 2020 premium of $144.60 will absorb part of the COLA. Higher income clients could see their net Social Security checks go down if the new IRMAA exceeds their COLA.

The Social Security portion of the payroll tax will be assessed on earnings up to $142,800 in 2021, up from $137,700 in 2020. At 6.2%, this means that for maximum earners the employee and employer will each pay $8,853.60 in tax. Self-employed individuals will pay both sides: $17,707.20. As always, the Medicare tax of 1.45% each will be assessed on all earnings.

The new earnings test thresholds are $18,960 pre-FRA (up from $18,240), and $50,520 (up from $48,600) during the FRA year up to the FRA month. If earnings exceed these thresholds, one dollar in benefits will be withheld for every two dollars earned over the pre-FRA year threshold, and one dollar will be withheld for every three dollars earned over the FRA-year threshold. Monthly amounts are $1,580 and $4,210, respectively. The monthly amounts come into play the first year a person files for benefits. Earnings prior to application will not be considered, but if earnings exceed these monthly amounts, the benefit will be subject to withholding.

The indexing factors and bend points used to calculate PIAs for people born in 1959, who will turn 62 in 2021, were adjusted to account for a 3.75% increase in the 2019 average wage index. Individuals with maximum earnings since age 22 (year 1981) will have a PIA of $3,262.70. This is the amount they will receive if they apply for benefits at their full retirement age of 66 and 10 months, not counting additional earnings or COLAs between now and then. There is still some concern that the 1960 cohort (those turning 62 in 2022) will see a drop in their PIA compared to the 1959 cohort if the 2020 average wage index falls due to COVID. Congressional action would be required to fix this. (Note: The Social Security Fact Sheet shows the maximum benefit in 2021 as $3,148. This is the amount for the 1955 cohort, which turns FRA in 2021. It was calculated based on 2017 indexing factors and bend points, plus COLAs and additional earnings over the past four years.)


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