Q. I read that the retirement age for Social Security purposes is set to increase by two months each year until it hits 67? I heard this is one of many significant changes to Social Security this year. What other major changes can we expect in 2021? Thanks so much for your help!
A. 2021 is a year of change, and Social Security is where some of the biggest changes can be found. Whether you’re receiving benefits or are working toward your eventual retirement, it’s possible that these changes will affect what you’ll take home in 2021 or beyond.
Social Security may provide a substantial chunk of income for you as a senior, but for many people, it’s not enough. Hopefully, some of the changes will prove to be positive and helpful for recipients. Here are some of the things you can expect in 2021:
• An Older Social Security Full Retirement Age: The full retirement age used to be 65 for those born in 1937 or earlier. Those born between 1943 and 1954 have a full retirement age of 66. But, as you mentioned, starting this year, the full retirement age will further increase in two-month increments each year to 66 and 10 months for those born in 1959, up from 66 and 8 months for those with a birth year of 1958.
• A Bigger Reduction If You Claim Social Security Early: Workers who are eligible for Social Security can start payments at age 62, regardless of their full retirement age. However, the benefit reduction for early claiming is bigger for those who have an older retirement age. So, if you turn 62 in 2021 and your full retirement age is 66 and 10 months, you get less if you start early or more if you delay until later. Need to start early? Some people do, but keep in mind that starting at 62 in 2021 gets you a 70.83% payment for life (meeting 70.83% of what your full retirement benefit would be at your full retirement age). Every month you delay Social Security up to age 70 gets you a higher monthly payment for life.
• Less of a Benefit for Delaying Claiming Social Security: You can increase your monthly Social Security payments by delaying claiming Social Security after your full retirement age up until age 70. However, those who have an older retirement age have fewer months to delay claiming Social Security and less of an opportunity to earn delayed retirement credits. So, if a person files at age 70, if they had a full retirement age of 66, that means they waited 48 months beyond full retirement age, so they would get 132% of their primary insurance amount. But if they file at 70 with a full retirement age of 66 and six months, that means they waited 42 months beyond full retirement age, so they would only get 128% of their primary insurance amount.
• The Medicare Eligibility Age Remains the Same: While the Social Security full retirement age has increased over the past several years, the age when workers qualify for Medicare has remained age 65. Those who delay claiming Social Security until their full retirement age or later still need to sign up for Medicare at age 65 or maintain other group health insurance based on current employment to avoid hefty Medicare late enrollment penalties. While many retirees have their Medicare premiums withheld from their Social Security checks, those who enroll in Medicare before starting Social Security will have to pay premiums out of pocket.
• More earnings will be subject to Social Security taxation: For 2021, taxpayers will pay 6.2% Social Security tax and a 1.45% tax for Medicare (known together as FICA) on the first $142,800 they earn, up from $137,700. There is no FICA tax owed on any earnings above $142,800.
• Earnings limit will be higher: In 2021, beneficiaries who are collecting Social Security prior to reaching their full retirement age and continue to work will have any income they earn over $18,960 taxed, an increase of $720 from 2020.
o One benefit dollar of ever $2 they earn above that limit will be withheld. In the year that beneficiaries reach their full retirement, however, the earnings limit goes up $50,520 and only $1 out of every $3 above that amount will be withheld.
o Once beneficiaries reach their full retirement age, no earnings are withheld, so there is no penalty for working and taking benefits.
o Once beneficiaries reach full retirement age, their checks will be recalculated to include the withheld amounts.
President Joe Biden’s Social Security proposals
As part of his proposals on retirement, President Biden has several changes in store for Social Security. The president wants to increase the minimum Social Security benefits to 125% of the federal poverty level. In addition, he wants those who have only worked 10 years to be eligible for a prorated share of benefits.
President Biden also intends to replace the CPI-W, the index which determines the cost-of-living adjustments for Social Security benefits with the CPI-E, which is based on spending for adults 62 and older and considers more health care costs. The CPI-W tracks households with at least half of their household income coming from clerical or wage-paying jobs.
Under President Biden’s plan, caregivers who took care of children younger than 12 or family members with disabilities would also be eligible to receive Social Security credits with earnings equal to the average monthly wage.
Those who have been receiving retirement benefits for at least 20 years can expect a higher monthly check, too, under the president’s plan, if passed. President Biden also wants to eliminate penalties for teachers who have earned retirement benefits from various sources and allow them to earn Social Security sooner.
Wait to Take Social Security (If You Can) and Be Sure to Plan Ahead for Retirement
For those nearing retirement, Social Security may seem like a good source of income. But taking the benefit prior to full retirement age can mean an income reduction that’s locked in. And this isn’t something that will change despite the changes this year or changes President Biden will likely make.
Besides being a Certified Elder Law Attorney, I am also an experienced retirement planning advisor and long-term care financial advisor through my financial services company, Lifecare Financial Services, LLC, which has been in business since 2006.
Retirement planners, such as myself, generally work with people ages 55 and older, who are within 10-20 years or so of their desired retirement age. Contact us today for an initial consultation to discuss your retirement planning, estate planning, and/or long-term care planning needs:
Retirement Planning Fairfax, VA: 703-691-1888
Retirement Planning Fredericksburg, VA: 540-479-
1435
Retirement Planning Rockville, MD: 301-519-8041
Retirement Planning Washington, DC: 202-587-2797
About Evan H Farr, CELA, CAP
