Social Security announces 1.3% COLA for 2021

Benefits and taxable wages will increase by one of the smallest amounts ever next year

The Social Security Administration announced Tuesday that benefits and the maximum amount of wages subject to payroll taxes will increase by 1.3% in 2021, the smallest cost-of-living adjustment since 2017, when the COLA was 0.3%, and one of the smallest increases since COLAs became automatic in 1975.

A 1.3% COLA would boost the average monthly Social Security retirement benefit to $1,543 in 2021, up slightly from this year’s $1,523 average monthly benefit. A 1.3% COLA would also increase the maximum retirement benefit, currently $3,011 per month, to $3,148 for someone who retires at full retirement age in 2021.

The average and maximum Social Security benefits do not include delayed retirement credits. Social Security recipients who delay claiming benefits beyond full retirement age earn an additional 8% per year for every year they postpone benefits up to age 70. Those who retire before full retirement age receive reduced benefits for the rest of their life.

Social Security benefits increase automatically if the CPI-W, which measures price inflation for urban workers, increases in the third quarter (July, August and September) of the current year over the corresponding third quarter of the previous year. The 1.3% COLA in 2021 follows a 1.6% increase in 2020, a 2.8% increase in 2019, a 2.0% hike in 2018 and a meager 0.3% COLA posted in 2017. There was no COLA in 2016.

The 1.3% COLA for 2021 also affects how much beneficiaries can earn from a job without jeopardizing any of their benefits if they claim Social Security before their full retirement age.

In 2021, individuals who are under full retirement age for the full year will be able to earn up to $18,960 per year without forfeiting any benefits. That’s up from $18,240 this year. If their earnings from a job exceed that cap, they would lose $1 in benefits for every $2 earned over the limit. The earnings cap does not apply to pensions, investments or other forms of unearned income.

In the year someone reaches full retirement, there is a more generous earnings cap. In 2021, they would be able to earn up to $50,520 in the months leading up to their birthday. That’s up from $48,600 this year. If their earnings exceed that limit, they would forfeit $1 in benefits for every $3 earned over that limit.

The earnings restrictions disappear at full retirement age, which currently ranges from 66 to 67 depending on birth year. Any benefits lost to the earnings cap are restored in the form of higher monthly benefits at full retirement age.

The annual COLA also affects how much workers pay in FICA taxes that fund Social Security benefits.

Employers and employees each pay 7.65% of wages to support Social Security and Medicare. Self-employed individuals pay both the employer and employee share for a combined tax rate of 15.3%. In 2021, the 6.2% portion of the payroll tax that funds Social Security applies to the first $137,700 of gross earnings. A 1.3% COLA would boost the maximum taxable wages to $142,800 in 2021.

The Medicare portion of the tax is 1.45% on all earnings, even those about the maximum Social Security tax limit. Plus, individuals with earned income of more than $200,000 ($250,000 for married couples filing jointly) pay an additional 0.9% in Medicare taxes.

Many retirees should see a slight increase in their net Social Security benefits in 2021 even after factoring in Medicare Part B premiums. Such premiums, which cover doctors’ fees and outpatient services, are usually deducted directly from Social Security benefits.

The latest Medicare Trustees’ report projects that basic Medicare Part B premiums will increase by about $8.70 a month, to $153.30 per month, in 2021. The official announcement about Medicare premiums for 2021 will be issued later this year. High-income retirees pay more for the same Medicare coverage.

Currently, individuals with modified adjusted gross income of $87,000 or more and married couples whose joint income exceeds $174,000 pay a high-income surcharge on both their Medicare Part B premiums and Part D prescription drug plans. Surcharges, officially known as an income-related monthly adjustment amount, or IRMAA, are based on the last available income tax return, so 2021 premiums will be based on 2019 income. Medicare beneficiaries subject to IRMAA surcharges receive notifications, usually in November, regarding their Medicare costs for the following year

In 2020, high-income Medicare beneficiaries pay from $202.40 to $491.60 per month per person, depending on income, compared to the standard Medicare Part B premiums of $144.60 per month.