The Barron’s Roundtable panel provides insight and analysis of smart ways to invest for retirement.
The new year can bring big changes. The promising results of the late-stage COVID-19 vaccine could soon end the pandemic. Meanwhile, on January 20, 2021, President-elect Joe Biden will usher in a new era of politics on Capitol Hill.
However, some of the biggest changes in the coming year are to be found in the Social Security program. Whether you are receiving benefits or you eventually want to retire, it is possible that these changes will affect what you will take home in 2021 or later.
THIS WAS THE BEST NEWS FOR SOCIAL SECURITY IN 2020
Beneficiaries receive an increase (even if it is a small one)
As early as May, the outlook was bleak for the U.S. economy and for more than 46 million retired workers counting on a monthly Social Security benefit check. The coronavirus pandemic devastated the US economy and average prices for goods and services fell.
Federal stimulus and the easing of restrictions at the state level during the late spring and summer months have enabled the U.S. economy to recover somewhat. As a result, the prices of goods and services in important expenditure categories (for example, shelter, medical care services and food) could rise significantly higher. As a result, Social Security beneficiaries will receive a cost-of-living adjustment (COLA) in 2021.
Before you open the bubble, keep in mind that this 1.3% COLA is related to the second smallest positive COLA recorded since 1975. In fact, the past 11 years have been pretty cruel for social security recipients, with an average COLA of only 1.4% over that team. These persistently low COLAs have weakened the purchasing power of dollars for social security over the past two decades.
SOCIAL SAFETY CONTROLS THEN IN 2021. THEREFORE DOES NOT BUY POWER
The wealthy will pay more
Social security has three sources of financing: the 12.4% tax on earnings, the interest income earned from the asset reserves and the tax on benefits. The payroll tax is by far the most important revenue generator and accounts for $ 944.5 billion of the $ 1.06 trillion raised in 2019.
This year, earnings (wages and salaries, but not investment income) are between $ 0.01 and $ 137,700 subject to the social security wage tax. Meanwhile, any earnings in excess of $ 137,700 are exempt from payroll tax.
Next year, the upper limit of this taxable threshold, known as the maximum taxable income ceiling, will rise by $ 5,100 to $ 142,800. Since 94% of working Americans earn less than the maximum taxable income ceiling each year, this increase will not affect them. But the other 6% could be paid up to $ 632.40 extra in 2021.
5 OF THE BEST WAYS TO IMPROVE SOCIAL SAFETY BENEFITS
The full retirement age is increasing
Back in 1983, the Reagan administration implemented the last comprehensive dual overhaul of the social security program. The 1983 amendments introduced the tax on benefits, gradually increasing tax payments and setting out a gradual increase in the full retirement age of four decades – that is, the age at which a retired worker is eligible for 100% of their monthly collect payment, determined by their year of birth.
In 2021, the full retirement age will increase by two months to 66 years and ten months for persons born in 1959. This is the fifth consecutive year that the full retirement age has been increased by two months, but this is only the 11th time since the Social Security Act was signed in August 1935 that the full retirement age has been changed.
Your full retirement age is like a streak in the sand. If you start taking your retirement benefits before you reach this line, your monthly payout will be permanently reduced by up to 30%. On the other hand, you can increase your monthly benefit if you wait to take your payout up to this line.
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Early filers who also work may retain more of their income
Not all elderly people who receive a pension benefit for social security leave the labor force. The idea of pocketing a salary or salary plus a monthly Social Security paycheck probably sounds fantastic, but the Social Security Administration (SSA) can file early filers (those who take their paycheck before reaching full retirement age) punishment if they earn too much.
Early filers, for example, who will not reach their full retirement age by 2020, may earn only $ 18,240 per year ($ 1,520 per month) before the SSA withholds some or all of their benefits. For every $ 2 earned above this threshold, $ 1 is deducted from benefits. Withholding benefits also applies to seniors who will reach full retirement age in a given year, but do not have to do so yet.
By 2021, early filers who do not reach their full retirement age could earn up to $ 18,960 ($ 1,580 per month) before retiring. This would enable early filers to earn a little more if they would prefer to keep working.
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The rich get richer
The last major change is that the richest beneficiaries of social security will fill their pocketbooks.
Just as there is a limit to the amount of earnings that are subject to the payroll tax, there is also a limit to the monthly benefits paid at full retirement age. Whether you averaged $ 350,000 a year for more than 35 years or $ 10 million over the same time frame, payouts are limited to $ 3,011 a month at full retirement age in 2020. Next year, the rich can get even richer, with the maximum monthly full retirement age benefit increases to $ 3,148.
If you are wondering how you can achieve such an abundant monthly benefit during your retirement, then know that you must work at least 35 years, reach or exceed the maximum taxable income ceiling in each of the 35 years, and wait until your full retirement age before taking your retirement benefit.