Social Security 2021: What Will and What Might Happen

2021 Social Security changes

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Some changes impacting Social Security beginning in 2021 we know about, and other potentially more significant ones are merely possibilities that could depend largely on the political landscape (looking at you, Georgia Senate runoffs) and the appetite of President-Elect Joe Biden to address financial challenges facing the world’s largest government program.

Social Security is projected to pay out $950 billion in benefits for older Americans this year, and even prior to the coronavirus pandemic, the entitlement program’s outgoing benefits were forecast to begin exceeding its tax revenues collected in 2020. Before the pandemic began, the program was expected to deplete its $2.9 trillion reserve fund by 2035 if no action is taken, with 79% of benefits payable at that time.

First, let’s take a look at some changes we know will impact Social Security starting in 2021.

Social Security COLA increase of 1.3%

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The Social Security Administration announced Oct. 13 that due to low inflation, the annual cost of living adjustment (COLA) for 2021 is a modest 1.3%. That will result in an average increase of about $20 a month next year for the roughly 70 million seniors who collect benefits, bumping it from $1,523 in 2020 to $1,543 starting in January.

That equates to about an extra $240 per year. The average retired couple’s collective payment will jump from $2,563 per month to $2,596—a mere $33 monthly raise—for two people.

Slight increase to “full retirement age”

The full Social Security retirement age—when beneficiaries can collect 100% of their monthly benefit, will increase by two months to 66 years and 10 months in 2021. The full retirement age will increase another two months to 67 years in 2022.

While Americans can still claim Social Security benefits as early as 62 (and too many do), the amount of their benefit if they do so will be 29.17% less than if they wait until full retirement age to claim, as the program incentivizes patience.

Recent research estimates that today’s older Americans will lose a total of $3.4 trillion in potential income because of early claiming, with an average lifetime loss of $95,000 per household. Only 4% of older Americans claim at the age that would maximize their wealth. Over 70% currently claim prior to age 64, even though only 6.5% of people would build more wealth by claiming before then.

Higher maximum benefit amount

The maximum Social Security benefit for a worker retiring at full retirement age will increase from $3,011 per month in 2020 to $3,148 per month in 2021.

The $137 increase from 2020 means an extra $1,644 a year for lifetime upper-income earners during retirement.

In 2020, a worker would’ve needed to earn the maximum taxable amount, currently $137,700, over a 35-year career to get this top Social Security payment.

Maximum tax also rising

Speaking of that maximum taxable amount—that will also be increasing in 2021. The maximum amount of wages taxed for Social Security will be $142,800 in 2021, up from $137,700 in 2020.

During his ill-fated 2020 presidential campaign, Bernie Sanders noted that “a billionaire today pays the same amount of money into Social Security as someone who makes [2019’s cap of] $132,900 a year because the Social Security payroll tax is capped.”

This could change under a Biden administration, as the president-elect proposed during his campaign the idea of imposing a 12.4% Social Security payroll tax on earnings above $400,000 while retaining the 2021 payroll-tax ceiling of $142,800. More on this below.

What MIGHT happen

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If enacted, Biden’s Social Security proposals would aim to improve financial security for many older adults and people with disabilities and, according to an October 2020 analysis by The Urban Institute, would close about a quarter of Social Security’s long-term financial shortfall and extend the life of the trust funds by about five years.

“Considering both his Social Security and SSI benefit expansions, we project that Biden’s proposals would cut the poverty rate for adult Social Security beneficiaries over the coming decades by more than half,” the Urban Institute analysis states.

What follows is a closer look at what changes could occur in 2021, which will depend largely on Biden’s sense of urgency to tackle Social Security specifically as well as the political environment.

Extending payroll tax to earnings above $400,000

Much of Biden’s plan for reforming Social Security will depend on his ability to extend the 12.4% Social Security payroll tax, capped at $142,800 in 2021, to earnings above $400,000.

If enacted, these high-salary workers would not accrue additional Social Security benefits on those earnings over $400,000 even though they would be paying tax on them. Retirement plan policy expert Andrew Biggs noted this “doughnut hole” between $142,800 and $400,000 would at least temporarily spare the upper middle class from higher Social Security taxes, as the gap would close in about three decades because the plan does not index the second-contribution threshold to inflation.

Getting this change done faces a tougher road if Republicans maintain control of the Senate after the Georgia runoff elections in January.

An analysis by the Tax Policy Center found adding this sort of “wealth tax” would raise an additional $740 billion for Social Security over a 10-year period, which would pay for Biden’s stated goal of increasing Social Security benefits for lower-income retirees.

By extending the payroll tax to earnings above $400,000, the plan would increase the program’s revenue, relative to what it would collect under current law, 7% in 2021, 12% in 2040, and 16% in 2065.

Increase benefits for lower-income, older beneficiaries

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Biden’s plan would replace Social Security’s existing minimum benefit, which some think is too low to help many beneficiaries, with a “meaningful” minimum benefit equal to 125% of the Federal Poverty Level for a single adult ($15,950 annually in 2020). Under the plan, Americans who spent 30 years working would get a benefit of at least 125% of the poverty level.

The Biden plan also says it will provide the oldest beneficiaries—those who have been receiving retirement benefits for at least 20 years—with a higher monthly check “to help protect retirees from the pain of dwindling retirement savings.”

Surviving spouses could also benefit if the Biden plan is enacted, as they would be allowed to keep a higher share of the benefits. The plan says this could help many women who live longer on average than men by raising the monthly payment by about 20% for affected beneficiaries.

Extend earnings credits to caregivers

As the Urban Institute analysis states, some of Biden’s benefit enhancements would target particular types of beneficiaries. He would extend Social Security earnings credits to workers who care for children younger than age 12 and for family members with disabilities.

Because Social Security benefits depend on how much workers earned during their career, these earnings credits would generally raise future benefit payments. Under Biden’s plan, for every month that caregivers provide at least 80 hours of care, Social Security would credit them with earnings equal to half the average national monthly wage in addition to whatever they earned in covered employment that month.

However, the plan would reduce the caregiver credit by 50 cents for every $1 a caregiver earns until the credit is eliminated for workers earning the average wage (which the Urban Institute notes was around $50,322 in 2017).

COLA change from CPI-W to CPI-E

President-elect Biden has said he wants to switch Social Security’s inflationary tether, used to calculate the annual COLA, from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to the Consumer Price Index for the Elderly (CPI-E), an experimental index that specifically tracks the spending of households with persons aged 62 and over.

Switching the Social Security COLA tether from CPI-W to CPI-E would result in slightly bigger annual COLAs than under the CPI-W, according to The Senior Citizens League. TSCL research found that the average difference between the two indexes from 1983 to 2019 was 0.25% per year, which is minimal in any given year but compounds over time.

Biden supports the switch as part of his stated campaign promise of preserving and strengthening Social Security, noting how this particular initiative would help older Americans in particular. Switch the pricing index to CPI-E would likely generate opposition from Republicans because the larger COLAs would result in increased benefits and therefore an increase in the overall cost of Social Security.

Had the CPI-E index been used to calculate the COLA for 2020, TSCL said this year’s increase would have been 1.9% instead of 1.6% provided by the CPI-W.

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