4 Changes to Social Security You Probably Didn’t Know About

Social Security probably won’t replace all of your working wages. But for the average American, it could provide 40% of income in retirement, which is significant.

When changes happen that could affect these benefits, knowing as much as possible can help you get the most out of this program. Here’s what’s changed recently.

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The maximum wage base limit has increased

You’ve probably seen a line item on your pay stub for taxes for Social Security. The amount that you pay as an employee is 6.2% of your income, but only up to a certain amount — the wage base limit. In 2021, it is $142,800, an increase of $5,100 from $137,700 in 2020. This is the maximum amount of earnings that you will owe Social Security taxes on.

It helps determine how big a monthly check you receive when you retire. If you earn the maximum wage base for 35 years, you could qualify for the highest monthly Social Security benefit, which in 2021 is $3,148 at full retirement age (FRA) — up from $3,011 in 2020. And the higher the payment you get, the greater the percentage of your pre-retirement income it could make up.

You got a pay increase

The cost of living adjustment (COLA) is an increase in your monthly benefit to help you keep pace with inflation. And in 2021, that was a 1.3% increase. So if your payment in 2020 was $2,000 each month, it would grow to $2,026 in 2021.

Every dollar counts, so it could help cover more of your bills. But it will not necessarily equal the inflation rate, which is projected to be 2.26% in 2021. This means that your benefit won’t keep pace with the price of the goods and services that you spend your money on — especially if, as you age, your medical expenses increase faster than inflation. Knowing this, having investments in things like stocks, which can grow at a higher rate than inflation, can be crucial in retirement.

You can earn more while working

You can work after you’ve started taking Social Security. But depending on your age and how much you make, you could see your payments reduced. If you haven’t reached your FRA, you will have $1 deducted for every $2 that you earn above $18,960 in 2021. In 2020, that limit was lower, at $18,240.

In the year that you reach your FRA, you will have $1 deducted for every $3 that you earn above $50,520 in 2021 prior to reaching full retirement age; in 2020, that figure was $48,600. While the increases in earnings limits weren’t huge, they could impact your monthly benefit. And depending on how much gets deducted, it could be a deciding factor in whether or not you will delay retirement or the start of your benefits.

It takes more earnings to qualify

You are eligible for Social Security after you earn at least 40 work credits. You get 1 work credit for each $1,470 in income, up to 4 credits each year. This means that you can qualify for Social Security in as little as 10 years. This amount needed for a work credit has increased by $60 this year; in 2020, it was $1,410 per credit.

Social Security could make up a significant portion of your income when you’re retired. Learning more about how the program works can help you better plan for its impact on your retirement.

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