By Diane M. Wilson CFP® November 23, 2020 Social Security and Supplemental Security Income (SSI) benefits will increase 1.3% in 2021 according to the Social Security Administration. The cost of living adjustment (COLA) was announced in October 2020. The increase will apply to Social Security retirement benefits, Disability benefits and Supplemental Security Income (SSI) benefits.
The 1.3 percent cost-of-living adjustment (COLA) will begin with benefits payable to more than 64 million Social Security beneficiaries in January 2021. Increased payments to more than 8 million SSI beneficiaries will begin on December 31, 2020. (Note: some people receive both Social Security and SSI benefits)
The maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $142,800.
The earnings limit for workers who are younger than “full” retirement age will increase to $18,960. (Social Security deducts $1 from benefits for each $2 earned over $18,960.)
The earnings limit for people reaching their “full” retirement age in 2021 will increase to $50,520. (Social Security deducts $1 from benefits for each $3 earned over $50,520 until the month the worker turns “full” retirement age.)
There is no limit on earnings for workers who are “full” retirement age or older for the entire year.
In December 2020, Social Security COLA notices will be available online to most beneficiaries in the Message Center of their my Social Security account.
The purpose of the COLA is to ensure that the purchasing power of Social Security and Supplemental Security Income (SSI) benefits is not eroded by inflation. It is based on the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of the last year a COLA was determined to the third quarter of the current year. If there is no increase, there can be no COLA.
The CPI-W is determined by the Bureau of Labor Statistics in the Department of Labor. By law, it is the official measure used by the Social Security Administration to calculate COLAs.
Congress enacted the COLA provision as part of the 1972 Social Security Amendments, and automatic annual COLAs began in 1975. Before that, benefits were increased only when Congress enacted special legislation.
The Social Security Act provides for how the COLA is calculated. To read more, please visit www.socialsecurity.gov/cola.