Social Security Recipients Get a Modest Raise in 2021

About 70 million Social Security recipients will receive a 1.3% increase in payments next year. For retirees, the average monthly retirement benefit in 2021 will be $1,543 — a $20 increase. Though likely not as high as many retirees would like to see, it is better than many analysts were predicting earlier in the year.

The cost-of-living adjustment (COLA) is based on inflation from July through September of 2020 compared with the third quarter of 2019. And after the coronavirus pandemic plunged the economy into a recession early this year and energy prices sank, it seemed like inflation would be flat — or that the cost of goods and services might be lower than the year before. Under that scenario, recipients would not have seen any raise in 2021 for the fourth time since 2009.

Low inflation also means that contributions to 457, 401, and 403(b) plans remain the same for 2021. Workers can contribute up to $19,500 to a plan for 2021, plus an extra $6,500 if they are age 50 and older. Also, the maximum contribution limit to an IRA remains unchanged at $6,000 a year, and an additional $1,000 for those 50 and older. Learn more about 2021 contribution limits, including the Age 50 Catch-Up and Pre-Retirement Catch-Up limits.

Besides the COLA, the Social Security Administration made other adjustments for 2021:

Higher-income workers to pay more. The amount of earnings subject to the Social Security payroll tax will also rise from $137,700 in 2020 to $142,800 next year. Workers will pay a tax equal to 6.2% of the first $142,800 of earned income (employers kick in the same amount) for Social Security.

Earnings test limits rise. Workers who collect Social Security retirement benefits before their full retirement age can also earn more next year before their benefit is reduced. In 2021, Social Security will withhold $1 of benefits for every $2 earned over $18,960 — an increase of $720 for the year. For those reaching their full retirement age in 2021, Social Security will deduct $1 for every $3 earned above $50,520 — a $1,920 increase — until the month they reach full retirement age. The earnings test disappears once workers reach full retirement age.

Note: This benefit reduction is temporary. Social Security will recalculate workers' benefits once they reach their full retirement age to account for the months they were affected by the earnings test.

Have questions? Meet with your ICMA-RC Retirement Plans Specialist to learn more about how your retirement plan contributions and Social Security factors into your retirement savings strategy.