Edward A. Zurndorfer –
The Social Security Administration (SSA) recently announced key numbers that will affect both federal employees and retirees in 2021. The most significant changes will be a substantial increase in the Social Security taxable wage base for employees and a meager increase in monthly retirement benefits for retirees.
For retirees – this includes Social Security recipients, CSRS annuitants, and FERS annuitants over the age of 62, there will be a 1.3 percent cost-of-living adjustment (COLA) effective Jan. 1, 2021. The 2021 COLA of 1.3 percent compares to a 2020 COLA of 1.6 percent, a 2019 COLA of 2.3 percent, a 2018 COLA of 2 percent, and a 2017 COLA of 0.3 percent (there was a 0 percent COLA in 2016). The SSA has determined that the 1.3 percent COLA will result in the average Social Security benefit for a retired worker increasing by $20 a month to $1,543 in 2021, while the average benefit for a retired couple increasing $33 per month to $2,596 in 2021.
But the maximum Social Security taxable wage base news is worse. The maximum Social Security taxable wage base is defined as the maximum amount of a worker’s wage earnings (or a self-employed individual’s net profit) subject to Social Security (FICA) taxes during a calendar year. The maximum Social Security taxable wage base will increase 3.7 percent from $137,700 in 2020 to $142,800 in 2021. The substantial increase in the maximum wage base reflects any real wage growth. The maximum amount of Social Security (FICA) tax withheld from an employee’s paycheck during 2021 will be 6.2 percent of $142,800, or $8,853.60, up $316.20 from the maximum amount Social Security (FICA) tax withheld of $8,537.40 during 2020.
The following table presents the relevant Social Security-related numbers in 2021 with a comparison to the same numbers currently in effect during 2020:
|Maximum Taxable Earnings|
|Social Security (FICA Tax) Medicare (Hospital Insurance Tax)||$137,700 No Limit||$142,800 No Limit|
|Quarter of Coverage||$1,410||$1,470|
|Retirement Earnings Test Exempt Amounts|
|Under full retirement age Note: $1 in benefits will be withheld for every $2 in earnings above the limit||$18,240/year $1,520/month||$18,960/year $1,580/month|
|The year an individual reaches full retirement age (FRA)*(see table below showing FRA by year of birth Note: Applies only to earnings to months prior to attaining FRA. One dollar in benefits will be withheld for every $3 in earnings above the limit.||$48,600/year $4,050/month||$50,520/year $4,210/month|
|Beginning the month an individual attains FRA*||None||None|
*Full Retirement Age (FRA) by Year of Birth
|Year of Birth||Full Retirement Age|
|1937 or earlier||65|
|1938||65 & 2 mos.|
|1939||65 & 4 mos.|
|1940||65 & 6 mos.|
|1941||65 & 8 mos.|
|1942||65 & 10 mos.|
|1943 – 1954||66|
|1955||66 & 2 mos.|
|1956||66 & 4 mos.|
|1957||66 & 6 mos.|
|1958||66 & 8 mos.|
|1959||66 & 10 mos.|
Effect of COLA on 2021 Medicare Part B Premiums
Federal annuitants who are enrolled in Medicare Part B (Medical Insurance) will have to factor in the extremely low COLA in 2021 with respect to the likely increase of their Part B monthly premiums in 2021. The official Medicare Part B monthly premiums for 2021 have not been announced as of October 21, 2020. However, the spring 2020 Medicare Trustees’ Report estimated that Part B premiums (used to pay doctors’ and outpatient services) were expected to increase from $144.60 per month in 2020 to $153.30 a month in 2021.
Since most Medicare Part B enrollees pay their monthly Part B premium as a deduction from their monthly Social Security check, a $8.70 monthly increase in Part B premium cost (from $144.60 to $153.30, or 6.02 percent) will take away nearly 50 percent of the $20 average increase in individual monthly Social Security benefits resulting from the 1.3 percent COLA effective Jan. 1, 2021. But Congress, as part of the recent short-term budget bill, capped any Medicare Part B increase for 2021 as 25 percent of what it should be. This cap would be 25 percent of $8.70 or $2.18, meaning the Medicare Part B monthly premium would increase in 2021 to $146.78 (first “tier”).
Income-related surcharges which apply to Medicare Part B premiums were indexed for inflation for the first time in 2020 (except for the $500,000 and above income tier), providing some relief for high income individuals. For 2020, the income-related surcharges kick in for individuals with $87,000 in income and married couples filing jointly with $174,000 in income. During 2020, the wealthiest couples are paying nearly $12,000 a year in Medicare Part B premiums.
Edward A. Zurndorfer is a Certified Financial Planner, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While the employees of Serving Those Who Serve are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.