On October 13th, the Social Security Administration announced that the annual Cost of Living Adjustment (COLA) for benefits paid and wages subject to payroll taxes will increase by 1.3% in 2021. This is slightly less, by 0.3%, than the 1.6% increase recipients experienced in 2020. The COLA will go into effect for Social Security benefits being paid in January of 2021.
For those still working, the COLA increases the amount of earnings that are subject to FICA taxes, which fund both Social Security and Medicare. Employers and employees each pay 7.65% of wages to fund Social Security and Medicare (self-employed individuals pay both the employer and employee share). The 2021 COLA will increase the maximum amount of wages subject to the 6.2% portion of the FICA tax that funds Social Security from $137,700 in 2020 to $142,800 in 2021.
The remaining 1.45% of the FICA tax is used to fund Medicare and applies to all earnings, even those above the Social Security limit of $142,800. Married couples filing jointly who make in excess of $250,000 and individuals who earn more than $200,000 pay an additional 0.09% in Medicare taxes - this is the same as in 2020.
The COLA also means the average retirement benefit will increase by $20, from $1,523 per month to $1,543 per month. The maximum retirement benefit for someone who retires at full retirement age (age 66 for those born between 1943-1954) will increase from $3,011 to $3,148.
Medicare Part B premiums are also set for a modest increase, with standard premiums increasing by $3.90, from $144.60 to $148.50. Those that are subject to the Income-Related Monthly Adjusted Amounts (IRMAA), will also see their adjusted premiums increase as well.
If you have any questions regarding the impact of the 2021 Social Security Cost of Living Adjustment, or the increase in Medicare Part B premiums, please feel free to contact our office. We always stand ready to help our trusted clients and friends as we all “Move Life Forward.”