2020 has been an extraordinary year. The coronavirus pandemic has had an immense impact on the economy and employment all across the country. The economy has changed tremendously and these changes will be reflected in the Social Security changes for 2021.
The changes in Social Security are important for virtually every American. Data suggests that Social Security represents about 40 percent of the pre-retirement income for the average American. Here are the major changes we expect to see in 2021:
#1 - Higher benefit amounts
The Social Security Administration has recently announced that the annual cost-of-living adjustment (COLA) for benefits will be 1.3 percent. This means that the Social Security and Supplemental Security Income (SSI) benefits will increase by 1.3 percent in 2021, for an estimated 70 million Americans.
The payments will be going out starting in January 2021 for 64 million Social Security beneficiaries. The 8 million Supplemental Security Income beneficiaries will receive payments on December 31st, 2020. People receiving both SS and SSI will receive the payments together starting in January 2021.
For the average Social Security recipient, this increase equals about $20 per month, from an average of $1,523 to about $1,543 per month. Although the increase is visible, experts suggest that it's not enough, especially considering the pandemic is still ongoing and Americans are relying on this income.
The increase was determined by the Consumer Price Index for Urban Wage Earners and Clerical Workers (abbreviated as CPI-W). The index was monitored from the fourth quarter of 2019 to the third quarter of 2020. Several prices were taken into consideration, such as food, utilities, and energy. For instance, The Bureau of Labor Statistics reports that food prices went up 3.6 percent in this period, utilities went up 4.4 percent, while energy prices went down 10 percent. Essentially, energy prices balanced out the other prices, leading to an overall increase of only 1.3 percent. However, experts suggest that seniors, who are the main beneficiaries of SS and SSI, don't spend much on transportation. According to multiple experts, COLA does not reflect precisely the type of products and services seniors spend their money on.
Medical services were also more expensive during the previous year. For instance, Medicare Part B, the health insurance plan for retirees that covers outpatient, will rise 6 percent, from $144 to $153 per month. Experts suggest that medical services will consume a bigger portion of a person's Social Security check, especially as seniors are major consumers of this type of service.
SSI recipients also get a raise in 2021. Americans who receive Supplemental Security Income, which is administered by SSA, will get 1.3 percent more every month. For the average person, this means $11 per month, from $783 to $794. For the average couple on SSI, the increase is $16 per month, from $1,175 to $1,191. Keep in mind that the SSI program is funded by general tax revenue, not from Social Security payroll taxes.
In most cases, workers need to get 40 work credits to become eligible for Social Security benefits. A credit is the equivalent of three months' worth of qualifying work in a year. The amount of earning required for a qualifying quarter is going from $1,410 to $1,470. A person can earn up to four work credits if he or she earns more than $5,880 per year.
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#2 – Social Security taxation will expand to more earnings
All taxpayers will pay 6.2 percent Social Security tax and an additional 1.45 percent tax for Medicare – commonly known together as FICA. These percentages will be paid on the first $142,800 they own, a rise from the previous $137,700. No FICA tax will be applied for earnings over $142,800.
This increase is based on the national average wage increase, which tends to go up faster than inflation. Because of this, the earnings threshold goes up more than the COLA increases. President Biden has promised a revised tax plan for incomes over $400,000 in order to bring in additional funds. Experts suggest that without this change, both Medicare and Social Security plans will face financial shortfalls. Some predictions suggest that the systems will be depleted within a decade if no additional measures are taken. However, if Biden's plan is implemented, there will be a financial donut hole, for people who are earning between $142,800 to $400,000, so the plan must be adjusted accordingly.
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#3 – Earning limits will be higher
New changes will be implemented for earning limits. For instance, any person who collects Social Security income prior to reaching retirement age, but continues to work will have any income above $18,960 taxed. The increase is $720 when compared to 2020. In other words, one benefit dollar of every $2 they earn above the limit will be taxed. However, in the year they reach full retirement, the earnings limit goes up to $50,520 (from $48,600 in 2020), and only $1 out of every $3 will be taxed. Once the retirement age is reached, there will be no earnings withheld, so seniors can work without being penalized. Essentially, seniors will get more per month than were getting.
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#4 – Other changes to expect in 2021
Here is a list of the main changes to expect in 2021:
- retired workers - $1,543 per month – up $20
- retired couples - $2,596 per month – up $33
- widow or widower - $1,453 per month – up $19
- widow with two children - $3,001 per month – up $39
- disabled worker - $1,277 per month – up $16
- disabled worker with spouse and children - $2,224 per month – up $29
- SSI for individuals - $794 per month – up $11
- SSI for couples - $1,191 per month – up $16
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