7 changes to Social Security in 2021

There isn't a social program in this country that bears more importance to the financial well-being of seniors than Social Security. Each month, nearly 65 million people receive a Social Security benefit, and more than 46 million of them are retired workers. Of these retirees, more than 3 in 5 rely on their monthly payouts to account for at least half their income.

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It's also a dynamic program. Despite laying a financial foundation for those who can no longer provide for themselves, the Social Security program undergoes a number of changes every year. It just so happens that these updates were unveiled by the Social Security Administration (SSA) this past week.

Here's a closer look at the seven biggest changes to Social Security in 2021.

1. Recipients are going to get more money

October is the most important time of the year for Social Security recipients, primarily because it's when the SSA announces the cost-of-living adjustment (COLA) for the upcoming year. Think of COLA as the "raise" that Social Security beneficiaries receive that's designed to keep their benefits on par with inflation.

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For 2021, Social Security beneficiaries are looking at a good news/bad news scenario. The good news is simple: You're getting more money. The SSA announced a 1.3% COLA for the upcoming year, which for the average retired worker is going to translate into an extra $20 a month, working out to an estimated monthly payout of $1,543 a month by January 2021. Considering that prices for goods and services headed lower between March and May as a result of the coronavirus disease 2019 (COVID-19) pandemic, a 1.3% COLA is a victory for the program's 64.8 million recipients.

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The bad news is that 1.3% ties for the second-smallest positive COLA in history. But with inflation in shelter and medical-care services outpacing 1.3%, senior citizens are going to see the purchasing power of their Social Security income decline, once again.

2. The full retirement age is inching higher

The only change we knew for certain that would happen in 2021 was an increase in the full retirement age (which is also known as "normal retirement age" by the SSA). A person's full retirement age is the age when they can receive 100% of their monthly payout, as determined by their birth year.

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In 2021, the full retirement age is going to inch up higher by two months, to 66 years and 10 months for people born in 1959 (i.e., beneficiaries who can become newly eligible next year). Put simply, claiming benefits at any point prior to reaching your full retirement age means accepting a permanent reduction to your monthly payout. Conversely, waiting to take benefits until after 66 years and 10 months for workers born in 1959 can pump up retirement benefits.

Social Security's full retirement age will peak at age 67 in 2022 for anyone born in 1960 or later.

3. High earners can expect to pay more taxes

Keep in mind that changes to the Social Security program don't just affect people currently receiving benefits. One of the biggest updates next year is an increase to the payroll tax earnings cap.

The payroll tax is Social Security's workhorse. In 2019, it generated $944.5 billion of the $1.06 trillion collected by the program. Revenue is brought in by applying a 12.4% tax on earned income (wages and salary, but not investment income) ranging between $0.01 and $137,700, as of 2020. Note, all earned income above $137,700 in 2020 is exempt from the payroll tax.

In 2021, all earned income up to $142,800 will be taxable, representing an increase of $5,100. For the roughly 6% of workers who are expected to hit this cap, we're talking about an increase in payroll tax of up to $632.40 next year.

If you're wondering how the SSA came up with $142,800 as next year's cap, it has to do with the year-over-year increase in the National Average Wage Index (NAWI). Between 2018 and 2019, the NAWI rose from $52,145.80 to $54,099.99 -- a gain of 3.74%, or 3.7% when rounded to the nearest tenth of a percent. Next year's tax cap is 3.7% higher than the $137,700 in 2020. It's that simple.

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4. The wealthy can pocket a bigger monthly benefit

Though high earners will be tasked with opening up their wallets a bit wider in 2021, well-to-do beneficiaries can also expect to receive more. After the SSA capped monthly retirement benefits at $3,011 for persons of full retirement age in 2020, the maximum payout at full retirement age is increasing to $3,148 a month in 2021. That's an extra $1,644 a year for wealthy workers.

To net this maximum monthly payout, workers would need to have done three things:

• Waited until their full retirement age to claim benefits.
• Worked at least 35 years, as every year less of 35 worked results in a $0 being averaged into their eventual monthly payout.
• Hit or surpassed the maximum taxable earnings cap in each of the 35 years the SSA takes into account when calculating a person's retirement benefit.

A check next to all three of these criteria allows a retiree to net the maximum monthly benefit.

5. Disability income thresholds climb higher

There's no question that Social Security's primary job is to financially protect our nation's retired workforce. But don't overlook the fact that 9.7 million beneficiaries are receiving a monthly payout from the Social Security Disability Insurance Trust. In 2021, the income thresholds where benefits cease to disabled beneficiaries will climb higher.

For example, non-blind disabled beneficiaries can earn up to $1,260 a month in 2020 without having their Social Security payouts stopped. Next year, this threshold is increasing $50 a month to $1,310. This means non-blind disabled beneficiaries are able to earn up to $600 extra annually without losing their benefits.

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The increase is even larger for blind disabled beneficiaries. Folks who fall into this category will be allowed to earn up to $2,190 a month in 2021 -- $80 a month higher than the 2020 threshold -- without having their benefits stopped.

6. Withholding thresholds for early filers receive a boost

Social Security has a number of ways it penalizes early filers. None is arguably more confusing or surprising to retired workers than the retirement earnings test. Put simply, the retirement earnings test allows the SSA to withhold some or all of an early-filer's benefit if they earn above a preset income threshold. In 2021, these income thresholds are heading higher.

For instance, early filers who won't reach their full retirement age in 2020 are only allowed to earn up to $18,240 a year ($1,520 a month) before $1 in benefits can be withheld for every $2 in earnings above this threshold. In 2021, early filers who won't reach full retirement age can earn up to $18,960 annually, or an extra $60 a month ($1,580/month) before withholding kicks in.

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Early filers who will reach full retirement age in 2021 will see a boost in the withholding threshold, too. Next year, early filers who hit their full retirement age at some point during the year will be allowed to earn up to $50,520 ($4,210 a month) before $1 in benefits is withheld for every $3 in earnings above this threshold. For those who are curious, that's an increase of $160 a month from 2020 levels.

Take note that the retirement earnings test is no longer applicable once you hit your full retirement age (regardless of when you claimed benefits), and withheld benefits are returned to recipients in the form of a higher monthly payout after hitting full retirement age.

7. You'll have to earn more to qualify for a retirement benefit

Last but certainly not least, working Americans are going to have to try a bit harder to qualify for a Social Security retired worker benefit.

Despite what you might have heard, Social Security isn't simply given to someone for being born in the United States. In order to receive a retirement benefit, you'll need to have earned 40 lifetime work credits, of which a maximum of four credits can be earned each year. These credits are awarded according to an individual's income in a given year.

For example, workers received one lifetime work credit in 2020 with $1,410 in earned income. Put another way, if a worker nets at least $5,640 in earned income ($1,410 X 4) this year, they'll receive the maximum four credits.

In 2021, it'll take $1,470 in earned income to earn one lifetime work credit, or $5,880 for the full year to maximize your Social Security work credits.

Though folks will have to work a bit harder to ensure a retirement benefit from Social Security, the bar to qualify is set relatively low.

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