Government benefits for seniors are adjusted annually, and a new year is just around the corner. Some updated figures have been released, and we will share them in this post so you can stay a step ahead of the pack.
Cost of Living Adjustment (COLA)
The Social Security Administration uses the Department of Labor’s Consumer Price Index to consider cost-of-living increases. We are using the term “consider” because it is not a given; there were no increases for three of the last 11 years.
In 2021, there will be a very modest increase of 1.3 percent. The average benefit amount this year is $1523, and theoretically, the increase would bring this average monthly benefit up to $1543. We will explain the choice of the word “theoretically” in a later section.
Maximum Taxable Income
Payroll and self-employment taxes are broken up into the Medicare tax and the old-age, survivors, and disability insurance (OASDI) tax. The latter tax carries a 6.2 percent rate, and there is a maximum amount of income that is subject to the tax.
This year, the maximum is $137,700, and it will go up to $142,800 next year. Since there is a maximum amount of income that can be taxed, there is also a maximum benefit. Right now, it is $3011 a month, and it will be raised to $3148 in 2021.
Early Retirement Income Penalty Threshold
The age at which you can start to receive your full Social Security benefit depends on the year of your birth. We will not get into all the details here, but the age will range from 66 to 67, with monthly increments in between.
If you choose to do so, you can accept an early benefit when you are as young as 62 years of age. This can sound appealing on the surface, but there are two problems with the early benefit.
One of them is the fact that it is a reduced benefit, and the reduction is significant. Depending on your birth year, it will be somewhere between 25 percent and 30 percent.
In addition to this drawback, many people are still working when they are 62 years old. If you accept the benefit at this age and you are still earning income, you are penalized if you earn more than a certain amount.
This year, the maximum income before a penalty is $18,240, and it is going up to $18,960 when we enter into the new year. If you are receiving an early benefit, it is reduced by one dollar for every two dollars that you earn above the limit.
Medicare Part B Increase
The cost of living adjustment is certainly welcome, but it can be offset by increased out-of-pocket Medicare costs. Part B is the portion of the program that pays for treatment that is provided by doctors and other health care providers. Medicare will pay 80 percent of expenses that are covered under Part B, and you are responsible for the rest.
A federal budget provision that was passed as a response to the economic impact of the coronavirus included a cap on the amount that Medicare Part B can be raised for next year.
It cannot go over 25 percent of the increase that would have been imposed under ordinary circumstances. Plus, there is an existing provision that ensures that a beneficiary will not receive a reduced benefit if the Part B premium increase is more than the cost of living adjustment.
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