In one of the smallest annual cost-of-living adjustments on record, Social Security benefits will increase by 1.3% in 2021, boosting average benefits by $20 per month to $1,553 and increasing the maximum benefit for someone retiring at full retirement age in 2021 to $3,148 compared to this year’s maximum of $3,011 per month.
The standard Medicare Part B premium, which covers doctor’s visits and other outpatient services, will increase to $148.50 per month in 2021, up $3.90 from this year’s monthly premium of $144.60.
Of course, it's not just Part B premiums that are rising. The annual deductible for Part B is also going up from $198 in 2020 to $203 in 2021. And the Part A deductible per hospital benefit period is increasing, too, from $1,408 to $1,484 -- a $76 jump.
Individuals who claim Social Security before full retirement age and who continue to work can earn up to $18,960 in 2021 without forfeiting any benefits, up from $18,240 this year. If they earn more than that limit, they will temporarily lose $1 in benefits for every $2 earned over $18,960. Benefits lost to excess earnings are restored in the form of larger monthly payments beginning at full retirement age.
Full retirement age increases to 66 and 2 months in 2021. Workers who were born in 1955 and who will attain their full retirement age next year can earn up to $50,520 in the months before they reach that milestone. If they earn more than $50,520, they will forfeit $1 in benefits for every $3 earned over that limit. Earnings restrictions disappear at full retirement age.
Payroll taxes rise
In 2021, workers and their employers will each pay 7.65% of the first $142,800 of gross pay to FICA taxes that fund Social Security and Medicare, up from $137,700 this year. That means up to $5,100 of additional income will be subject to payroll taxes next year and some higher-income workers will an extra $390 in taxes.
The 1.45% portion that funds the Medicare hospital insurance trust fund applies to all earnings, even those above the $142,800 taxable wage base in 2021. In addition, individuals with earned income over $200,000 and married couples with earned income over $250,000 pay an additional 0.9% of payroll in Medicare taxes.
Self-employed individuals pay both the employer and employee share of the payroll tax. The 15.3% self-employment rate consists of two parts: 12.4% for Social Security and 2.9% for Medicare. In 2021, the combined rate is applied to the first $142,800 income and the 2.9% Medicare portion applies to all income. Self-employed individuals can deduct the employer portion of their payroll taxes to calculate their adjusted gross income for income tax purposes.