Social Security COLA 2021
Social Security Cost of Living (COLA) 2021 Update
The Social Security Administration has announced that there will be a 1.3% Cost of Living Adjustment (COLA) for 2021. The primary force behind this is rising health care costs, which is one of the largest cost drivers for seniors.
The 1.3% COLA announcement from the Social Security Administration, which had been widely expected, affects 70 million people, about 60 million retirees plus disabled workers and spouses and children who receive benefits.
Of note, this year’s COLA increase is lower than the previous two years - although, of course, a cost-of-living adjustment is never guaranteed in the first place. In 2009, 2010 and 2016, COLA bottomed out at zero percent. And in 2016, the COLA was a mere 0.3 percent - substantially lower than the 2.8 percent increase we saw in 2018.
The SSA also released a Social Security COLA Fact Sheet with additional details.
READ: When To Take Social Security Benefits
There is also considerable debate surrounding the COLA inflation measurements the government uses to calculate the annual adjustment. Some advocates believe that the calculation artificially lowers the "real" impact of inflation, especially on retirees that have been hit hard by a combination of lower real estate values, steep losses in retirement savings due to multiple market corrections that past 10 years, as well as staggering increases in health care and prescription drug costs. Meanwhile, certain lawmakers feel the government data actually overstates the actual inflation numbers.
Below is a table of historical SS COLA adjustments:
AUTOMATIC SOCIAL SECURITY COST-OF-LIVING ADJUSTMENTS
| July 1975 -- 8.0% July 1976 -- 6.4% July 1977 -- 5.9% July 1978 -- 6.5% July 1979 -- 9.9% July 1980 -- 14.3% July 1981 -- 11.2% July 1982 -- 7.4% January 1984 -- 3.5% January 1985 -- 3.5% January 1986 -- 3.1% January 1987 -- 1.3% January 1988 -- 4.2% January 1989 -- 4.0% January 1990 -- 4.7% January 1991 -- 5.4% January 1992 -- 3.7% January 1993 -- 3.0% January 1994 -- 2.6% January 1995 -- 2.8% January 1996 -- 2.6% January 1997 -- 2.9% January 1998 -- 2.1% | January 1999 -- 1.3% January 2000 -- 2.5%(1) January 2001 -- 3.5% January 2002 -- 2.6% January 2003 -- 1.4% January 2004 -- 2.1% January 2005 -- 2.7% January 2006 -- 4.1% January 2007 -- 3.3% January 2008 -- 2.3% January 2009 -- 5.8% January 2010 -- 0.0% January 2011 -- 0.0% January 2012 -- 3.6% January 2013 -- 1.7% January 2014 -- 1.5% January 2015 -- 1.7% January 2016 -- 0.0% January 2017 -- 0.3% January 2018 -- 2.0% January 2019 -- 2.8% January 2020 -- 1.6% January 2021 -- 1.3% |
| (1) The COLA for December 1999 was originally determined as 2.4 percent based on CPIs published by the Bureau of Labor Statistics. Pursuant to Public Law 106-554, however, this COLA is effectively now 2.5 percent. | |
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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.
The cost-of-living adjustment also affects the amount that Social Security recipients who claim benefits before full retirement age can earn without forfeiting any benefits, as well as the amount of payroll taxes that high-income workers will be subject to next year.
SOCIAL SECURITY EARNINGS LIMIT
The earnings limit for individuals who claim Social Security benefit before their full retirement age will increase to $18,960 in 2021, up from $18,240 this year. Individuals who are under full retirement age for all of 2021 will lose $1 in benefits for every two dollars earned over $18,960 next year.
The earnings restrictions apply only to salaries and wages, not investments, pensions or other types of income. However, the restrictions apply to anyone — including retirees, spouses, survivors and dependents — who collects Social Security benefits before their full retirement age while they continue to work.
It’s important to note that this limit increases somewhat substantially for those who will be reaching full retirement age that year. For 2020, that income limit is $48,600 per year, or $4,050 per month. In 2021, retirees will see that limit increase to $50,520 per year, or $4,210 per month. Applicable income earned above this amount will be withheld at a rate of $1 dollar for every $3 earned above the limit.
The earnings restrictions disappear at full retirement age, meaning an individual could earn any amount of money without sacrificing benefits once he or she turns 66. Benefits lost to the earnings cap are restored at full retirement age in the form of higher monthly benefits.
SOCIAL SECURITY TAX WAGE BASE
Next year, the maximum wage base subject to FICA taxes that fund Social Security and Medicare will increase to $142,800. Employers and employees each pay 7.65% of their gross wages up to the maximum taxable wage base. Self-employed individuals pay the combined employer/employee rate of 15.3%.
An estimated 175 million workers are covered by Social Security. About 18% earn more than the current maximum taxable wage of $137,700 in 2020 and will pay higher payroll taxes next year. The boost in the maximum taxable wage base means some employees could pay an additional $344.25 in FICA taxes next year and self-employed workers an extra $688.50 in 2021.
All earnings — even those above next year's $142,800 maximum wage — are subject to the 1.45% portion of the FICA tax that funds Medicare. 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.
About Robert Henderson and Lansdowne Wealth Management
Robert Henderson is the President of Lansdowne Wealth Management, an independent, fee-only advisory firm in Mystic, CT. His firm specializes in financial planning and investment management for retirement, with a special focus on the particular needs of women that are divorced or widowed. He is an Accredited Asset Management Specialist and a Certified Divorce Financial Analyst. Mr. Henderson can be reached at 860-245-5078 or bhenderson@LWMwealth.com. You can also view his personal finance blog, The Retirement Workshop at https://LWMwealth.com/blog and the firm’s website at https://LWMwealth.com.
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