Four Important Social Security Shifts to Know For 2021

3 minute read

Key updates include a cost-of-living increase.

Since payments began in 1940, Social Security – one of only three sources of protected lifetime income – has been one of the most important sources of income for retirees. Annual updates to the nearly 86-year-old entitlement program, which benefits more than 64 million Americans, aren’t uncommon. However, this year there are some significant shifts in Social Security taxes and benefits you should know about.

So, whether you’re already collecting Social Security benefits or anticipate beginning them in the near future, here are four notable shifts that just went into effect this year.

WATCH YOUR MONEY MAP: Social Security Planning

Elaine Floyd, director of retirement and life planning at Horsesmouth, joined Jean Chatzky on Your Money map to discuss Social Security planning on April 7, 2021. To learn more about Elaine and her “Savvy Social Security Planning” program, visit the Horsesmouth website.

    • Beneficiaries received a raise: Starting in January, Americans received a 1.3% cost-of-living adjustment (COLA) increase in their Social Security benefits and Supplemental Security Income payments. This modest bump reflects the relatively low rate of inflation we’ve seen over the past year. In years when there is no change in the index, or if prices have fallen year over year, there is no COLA. For the average retiree, this year’s increase will amount to an extra $20 a month and for the average retired couple, the increase will translate to an extra $33 a month.


    • More earnings are now subject to the Social Security payroll tax: The maximum amount of earnings subject to the Social Security tax will increase from $137,700 to $142,800. Employees and employers will each pay 6.2% (with self-employed workers shouldering the entire 12.4%). The money paid into Social Security by today’s workers is used to cover current benefits, with any excess going into the Social Security trust fund.


    • The full retirement age was moved higher for younger people: Under current law, the full retirement age (FRA) for Social Security purposes is set to increase by two months each year until it hits 67. So, if you turn 62 in 2021, your full retirement age is 66 and 10 months. Unless the law changes, anyone born in 1960 or later will not reach FRA until age 67. The Social Security Administration has a good tool that can help you determine which full retirement age benefits you qualify for.


    • There’s a bigger reduction if you claim Social Security too early: While you may start Social Security payments as early as 62, your monthly payouts will be significantly smaller. For example, if you turn 62 in 2021 and elect to begin receiving your Social Security benefits, they will be about 29.2% lower than if you had waited to receive your benefits at your FRA . Every month you delay receiving Social Security benefits, up to age 70, gets you higher monthly payments for life. Instead of retiring early, protected lifetime income from an annuity may be a better option – either to create an income “bridge” that allows you to wait and claim your maximum Social Security benefit or generate a reliable stream of income for as long as you live. Consumers who wait until full retirement age often use an annuity as their source of protected lifetime income in order to maximize their Social Security benefits.

It’s important to keep in mind that while Social Security benefits are guaranteed for life, they are designed to replace only 40% of the average worker’s pre-retirement income, and only 27% for high-earners. To fill that income gap, many consumers add annuities – the only other source of protected lifetime income outside of pensions – to their retirement portfolio, with the help of a financial professional.

To learn more about Elaine Floyd and her “Savvy Social Security Planning” program, visit the Horsesmouth website.

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