Important Trends in Social Security That Every Citizen Must Know

For retirees, Social Security benefits form a huge portion of their retirement income. Presently, over 64 million people depend on income from Social Security to sustain their retirement expenses. Even though an average retiree only gets about $18,000 annually from Social Security, this comprises more than half of the yearly income for 62% of the retirees presently. This is one of the reasons why tens and millions of senior citizens hope for adjustments in Social Security rules and also pay close attention to any possible Social Security changes. Each year, in October, the Social Security Administration makes adjustments to the benefits, taxable income for Social Security purposes, and maximization of earnings.
Social Security was not a popular topic in 2020, which was a year that saw unprecedented changes, including the COVID-19 pandemic, rampant unemployment, economic slump, and the Presidential elections. However, when President Joe Biden took charge, the platform proposed several changes that could modestly increase Social Security cheques for retirees in 2021 and beyond. To better understand these changes and their implications, you may hire the services of a financial advisor
to ensure that you do not miss out on any benefits or get blindsided by any unforeseen expenses.

It is highly recommended that retirees working towards their eventual retirement and those already receiving Social Security benefits review these Social Security changes in 2021:

1. Social Security benefits have increased slightly

   Every year, the Social Security Administration considers the fluctuations in prices of goods and services to determine possible Social Security changes. There is no audit of the spending habits of retirees. Instead, the decision to increase payments is based on the annual price change in different goods and services, taking the Consumer Price Index (CPI) for Urban Wage Earners and Clerical Workers as a base. Going by this trend, the Social Security benefits in 2021 were increased by 1.3%, owing to the cost-of-living adjustment, or COLA. This was news for retirees who were anticipating a rise in Social Security in 2021. For more than 64 million retirees that receive Social Security, the change means an average monthly benefit raise of $20, increasing their cheques to $1,543 per month in 2021 from $1,523 per month. For married couples, where both spouses get the benefits, there will be an estimated increase of $33, resulting in an average payment of $2,596 per month in 2021. For disabled workers, Social Security increased by $16, raising their Social Security cheques to $1,277 from $1,261. On an aggregate level, the maximum Social Security cheque for a person retiring at their full retirement age will rise from $3,011 to $3,148 per month in 2021, with an increase of $137. The Social Security benefits increase in 2021 was effective from January 2021. But most retirees feel the adjustment is low. In fact, as per The Senior Citizens League, the difference is “extremely low.” Moreover, as per findings from a recent study, over six in 10 retirees received a Social Security raise of only $15 (instead of $20) per month. The objective of COLA is to ensure Social Security benefits can keep pace with inflation over time. In this aspect, the recent changes have not done a fair job. In the past two decades, benefits have lost over 30% of their purchasing power. This year’s raise was relatively small and, instead, is lower than 1.6% in 2020 and 2.8% in 2019. However, there have been years when the raise has dipped below 1% (2016 and 2017), but given the present economic situation and the impact of the coronavirus pandemic, in particular, the Social Security raise is barely any relief for retire

2. Social Security payroll taxes have risen

   Another important Social Security change that retirees must note is the change in Social Security taxation amount due to an increase in the wage base limit. The wage base limit is the maximum amount of wages that are subject to Social Security tax. In the year 2020, the wage base limit was $137,700. However, due to the Social Security changes for 2021, the wage base limit has been lifted to $142,800. This means that retirees who have earnings above this threshold are liable to pay more in Social Security taxes. In 2020, anyone who earned over $137,700 was charged with Social Security taxes on the entire sum they received as salary. But, for those earning above this amount, there was a portion of income that was not subject to Social Security taxes. With the new Social Security changes in 2021, there will be taxes on up to $5,100. As per the norms, employees in a Social Security-covered job pay 6.2% of their earnings into the Social Security system until their earnings exceed the taxable sum. Given the new alterations, the Social Security taxation ends when retirees have earned $142,800 instead of $137,700 previously. The wage limits exist because the program is not designed to benefit people with high salaries. Hence, there is a limit on the wages and a maximum benefit as per the annual limits. The Social Security changes of 2021 in taxation imply that wealthier retirees will be paying more than last year in taxes. Moreover, they could even pay a higher sum next year and beyond that because of possible Social Security changes in this space, proposed by President Joe Biden.

3. The full retirement age has increased

   As per the previous Social Security rules, the earliest a retiree could claim their Social Security retirement benefit was at the age of 62. If a retiree claimed Social Security before the full retirement age, the payout was permanently reduced. For the payout reduction, the rules remain the same despite the other Social Security changes in 2021. However, the full retirement age norms have changed. Earlier, people who turned 62 in 2020 considered 66 years and eight months as their full retirement age. But due to the Social Security changes for 2021, the full retirement age has increased by two months each year until the person is 67 years old. So, if a retiree is 62 in 2021, the full retirement age as per the new Social Security changes is 66 years and 10 months. Going by these alterations, everyone born in 1960 or later will only reach their full retirement age at 67. This is important to note because if retirees delay Social Security benefit withdrawals past their full retirement age, they can take more than the full or normal payout. Delaying Social Security withdrawals until 70 years can boost the Social Security payout by 32% than if retirees started withdrawing at their full retirement age. Beyond 70 years, there is no increment in delaying Social Security benefits. Alternatively, if a retiree makes withdrawals at 62, there will be a 29.17% reduction in the full retirement age paycheck.

4. Social Security earning limits have escalated

   Apart from the above Social Security changes for 2021, there has been a shift in the earning limits too. As mentioned, the basic objective for Social Security is to benefit the average retiree, especially the ones retiring at their full retirement age or later. However, those who work and draw their Social Security benefits before their full retirement age will see a temporary reduction in their benefits. In 2020, retirees withdrawing their Social Security benefits had $1 in benefits held back for every $2 they earned from working above the income of $18,240 annually. However, as per the Social Security changes, the income limit has escalated. The new earning limit for those under their full retirement age is now $18,960. This means that the Social Security Administration will withhold $1 from benefits for each $2 earned over $18,960. This has increased by $720 from 2020. Alternatively, the earning limit for retirees at their full retirement age in 2021 has increased to $50,520. In this context, the administration holds $1 from benefits for each $3 earned over $50,520. This continues until the person attains the full retirement age. Despite the Social Security changes for 2021, there are no alterations in the earnings limit for workers who have attained their full retirement age or more. So, there is no penalty for retirees working and collecting their Social Security benefits at their full retirement age. In this case, the benefit is recalculated to grant credit for the continued earnings and even for any benefits withheld in the past.

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5. The accruing work credit threshold has risen

   An important Social Security change in 2021 is the accruing work credit limits. For people born in 1929 or later, the eligibility for Social Security benefits was set at accrual of 40 working credits (not more than four per year). In such a case, one work credit equals three months of qualifying work in a year. The amount required to earn a single credit rises each year. In 2020, the work credit threshold was $1,410 in earnings per credit. However, owing to the Social Security changes of 2021, the work credit limit has gone to $1,470, up by $60 from 2020. This means that in 2021, retirees can earn up to four work credits if they earn at least $5,880.

6. Benefits for the disabled have gone up

   The Social Security Disability Insurance (SSDI) is an insurance policy that provides income for disabled people who cannot work to earn a living. The objective of the policy is to provide a regular stream of income for disabled people during retirement. As per the Social Security changes in 2021, Social Security payments for disabled workers have been raised for more than 10 million such Americans. In 2020, disabled workers received $1,261. However, for 2021, the benefits were raised by $16 to reach $1,277 on an average per month. A disabled worker, a spouse with one or more kids, will receive $2,224 on an average per month. This is $29 more than 2020. But applicants must meet the eligibility criteria to receive the benefits under the SSDI program. The worker must be earning less than $1,310 per month to qualify for the Social Security disability benefits. Blind workers can earn up to $2,190 per month. Moreover, the definition of disability as per the Social Security norms is different from other programs. Social Security disability benefit is paid only for cases that result in total disability. No amount is given for partial or short-term disability. Social Security considers a person disabled when the person cannot perform the work they did before the medical condition. Further, they cannot adjust to any other form of work because of their medical state. Also, the disability must have lasted or should likely last for one year. In addition to meeting the definition of disability, Social Security disability benefit is given only when the person has worked long enough and earned the required work credits based on their total yearly wages or self-employment income. A person can earn up to four working credits in a particular year. The amount required for work credit differs every year. For 2021, one credit is granted for each $1,470 in wages or self-employment income. This implies that for earnings of $5,880, a person can get four credits for the year. The total number of work credits required for disability benefits varies with the age of disablement. Generally, a disabled person requires 40 credits, 20 of which should be earned in the last 10 years ending with the year the person becomes disabled. However, younger and disabled workers can qualify with fewer working credits.

7. SSI receipts have improved

   In the Social Security changes for 2021, people who receive SSI (Supplemental Security Income) benefitted. SSI is a program administered by the Social Security Administration to support people that have a low or no income to cover their living expenses and other basic needs. The Social Security changes for 2021 also raised the monthly benefits for such individuals by 1.3%. For an average individual in this category, the Social Security benefits rose to $794 from $783. This adds $11 more in monthly receipts. For couples, the benefits are up from $1,175 to $1,191, an increase of $16 a month

To summarize

Apart from the above trends witnessed in the Social Security domain, there have been specific changes concerning Medicare for 2021. However, they do not have a direct effect on the average Social Security cheque. It is important for retirees and those approaching their retirement age to be aware of the new trends and other possible Social Security changes to create an effective retirement plan. However, going by the current data and the most recent report submitted by the Social Security and Medicare Boards of Trustees, trust funds will be depleted by 2035. If these predictions are to be believed, retirees should consider looking out for other retirement income sources to reduce their dependence on Social Security benefits.

Engaging with a professional financial advisor
can help retirees create a competent retirement income plan and gain a better understanding of how to navigate the Social Security changes in 2021.