It has been my custom for most of the past 23 years to write a year-end column that summarizes the Social Security changes and updates scheduled to take place the following year.
Almost all Social Security beneficiaries are familiar with the most popular and publicized upcoming change: the increase in monthly benefit checks for 2021 due to the automated cost-of-living adjustment, or COLA. In fact, Social Security recipients have probably already received a letter from the Social Security Administration telling them of the expected increase.
All Social Security checks are going up 1.3 percent in 2021. The COLA is based on something called the Consumer Price Index for Urban Wage Earners and Clerical Workers. This is the official measuring stick the SSA has used to determine COLAs for the past 46 years. If you want to learn more about this measure, check out the website of the folks who maintain it: the Bureau of Labor Statistics. You’ll find them at BLS.gov.
I always dread mentioning COLAs in this column because every time I do, I am flooded with emails from readers complaining that the increase is not enough. (Maybe not unexpectedly, not once in 23 years has anyone ever written to me to say that their COLA increase was too high!)
Yet here’s the rub: Many economists and social planners believe Social Security COLAs are too generous! (I’ve explained why in past columns, but I don’t have the space to get into that argument today.) That’s why most discussions of long-range reform for Social Security include proposals to reduce cost of living increases.
OK, back to the 2021 Social Security COLA. Due to these increases, the average monthly retirement check will be $1,543 in 2021, a $20 increase from the 2020 level. The maximum Social Security check for a worker turning full retirement age next year will be $3,148, compared with $3,011 in 2020. And please note that $3,148 is the maximum for someone turning full retirement age in 2021. That does not mean it is the maximum Social Security payment anyone can receive. There are millions of Social Security beneficiaries who get much more than that, primarily because they worked well past their FRA and/or delayed starting their benefits until age 70.
Although this is a Social Security column, I must mention the upcoming increase in the Medicare Part B premium, which is deducted from Social Security checks for most people. In 2021, the basic Part B premium will be $148.50, a $3.90 increase from the 2020 rate. Wealthy people will pay more than the basic premium—as much as $504.90 per month for the richest Americans.
I don’t want to get into this complicated issue of Medicare premiums other than to make this quick point. Even though they are linked in the minds of most senior citizens, Social Security and Medicare are entirely separate programs, administered by entirely separate federal agencies, and they have entirely separate rules and regulations regarding their benefit and payment structures. For example, I already explained how Social Security COLAs are figured. Part B Medicare premium increases have nothing to do with the consumer price index. Instead, they must be set at a level that covers 25 percent of the cost of running the program. Taxpayers pick up the remaining 75 percent. (Again, wealthy people pay more than the 25 percent share.)
Another measuring stick called the “national wage index” is used to set increases to other provisions of the law that affect Social Security beneficiaries and taxpayers. Specifically, this includes increases in the amount of wages or self-employment income subject to Social Security tax; the amount of income needed to earn a “quarter of coverage”; and the Social Security earnings penalty limits.
The Social Security taxable earnings base will go up from $137,700 in 2020 to $142,800 in 2021. In other words, people who earn more than $142,800 this year will no longer have Social Security payroll taxes deducted from their paychecks once they hit that threshold. This has always been a very controversial provision of the law. (Bill Gates pays the same amount of Social Security tax as his plumber!) I think it’s a pretty good bet that any eventual Social Security reform package will include an increase in that wage base.
Most people need 40 Social Security work credits (sometimes called “quarters of coverage”) to be eligible for monthly benefit checks from the system. In 2020, people who were working earned one credit for each $1,410 in Social Security taxable income. But no one earns more than four credits per year. In other words, once you made $5,640, your Social Security record has been credited with the maximum four credits or quarters of coverage. In 2021, the one-credit limit goes up to $1,470, meaning you will have to earn $5,880 this year before you get the maximum four credits assigned to your Social Security account.
People under their full retirement age who get Social Security retirement or survivors benefits but who are still working are subject to limits in the amount of money they can earn and still receive all their Social Security checks. That limit was $18,240 in 2020 and will be $18,960 in 2021. For every $2 a person earns over those limits, $1 is withheld from his or her monthly benefits.
There is a higher earnings threshold in the year a person turns full retirement age that applies from the beginning of the year until the month the person reaches FRA. (The income penalty goes away once a person reaches that magic age.) That threshold goes up from $48,600 in 2020 to $50,520 this year.
A couple of other Social Security provisions are also impacted by inflationary increases. For example, people getting disability benefits who try to work can generally continue getting those benefits as long as they are not working at a “substantial” level. In 2020, the law defined substantial work as any job paying $1,260 or more per month. In 2021, that substantial earnings level increases to $1,310 monthly.
Finally, the Supplemental Security Income basic federal payment level for one person goes up from $783 in 2020 to $794 in 2021. SSI is a federal welfare program administered by the SSA, but it is not a Social Security benefit. It is paid for out of general revenues, not Social Security taxes.
Tom Margenau worked for 32 years in a variety of positions for the Social Security Administration before retiring in 2005. He has served as the director of SSA’s public information office, the chief editor of more than 100 SSA publications, a deputy press officer and spokesman, and a speechwriter for the commissioner of Social Security. For 12 years, he also wrote Social Security columns for local newspapers, and recently published the book “Social Security: Simple and Smart.” If you have a Social Security question, contact him at email@example.com.