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7 Changes to Social Security in 2021 Thumbnail

7 Changes to Social Security in 2021

From what recipients will be paid to what workers could owe in payroll tax, big changes are on the way for our nation's top social program.


There isn't a social program in this country that bears more importance to the financial well-being of seniors than Social Security. Each month, nearly 65 million people receive a Social Security benefit, and more than 46 million of them are retired workers. Of these retirees, more than 3 in 5 rely on their monthly payouts to account for at least half their income.

Here's a closer look at the seven biggest changes to Social Security in 2021. 

A person grasping a Social Security card between their thumb and index finger.

IMAGE SOURCE: GETTY IMAGES.

1. Recipients are going to get more money

October is the most important time of the year for Social Security recipients, primarily because it's when the SSA announces the cost-of-living adjustment (COLA) for the upcoming year. Think of COLA as the "raise" that Social Security beneficiaries receive that's designed to keep their benefits on par with inflation.

For 2021, Social Security beneficiaries are looking at a good news/bad news scenario. The good news is simple: You're getting more money. The SSA announced a 1.3% COLA for the upcoming year, which for the average retired worker is going to translate into an extra $20 a month, working out to an estimated monthly payout of $1,543 a month by January 2021. Considering that prices for goods and services headed lower between March and May as a result of the coronavirus disease 2019 (COVID-19) pandemic, a 1.3% COLA is a victory for the program's 64.8 million recipients.

The bad news is that 1.3% ties for the second-smallest positive COLA in history. But with inflation in shelter and medical-care services outpacing 1.3%, senior citizens are going to see the purchasing power of their Social Security income decline, once again.

A person filling out a Social Security benefits application form.

IMAGE SOURCE: GETTY IMAGES.

2. The full retirement age is inching higher

The only change we knew for certain that would happen in 2021 was an increase in the full retirement age (which is also known as "normal retirement age" by the SSA). A person's full retirement age is the age when they can receive 100% of their monthly payout, as determined by their birth year.

In 2021, the full retirement age is going to inch up higher by two months, to 66 years and 10 months for people born in 1959 (i.e., beneficiaries who can become newly eligible next year). Put simply, claiming benefits at any point prior to reaching your full retirement age means accepting a permanent reduction to your monthly payout. Conversely, waiting to take benefits until after 66 years and 10 months for workers born in 1959 can pump up retirement benefits.

Social Security's full retirement age will peak at age 67 in 2022 for anyone born in 1960 or later.

Two Social Security cards lying atop a W2 tax form.

IMAGE SOURCE: GETTY IMAGES.

3. High earners can expect to pay more taxes

Keep in mind that changes to the Social Security program don't just affect people currently receiving benefits. One of the biggest updates next year is an increase to the payroll tax earnings cap.

The payroll tax is Social Security's workhorse. In 2019, it generated $944.5 billion of the $1.06 trillion collected by the program. Revenue is brought in by applying a 12.4% tax on earned income (wages and salary, but not investment income) ranging between $0.01 and $137,700, as of 2020. Note, all earned income above $137,700 in 2020 is exempt from the payroll tax.

In 2021, all earned income up to $142,800 will be taxable, representing an increase of $5,100. For the roughly 6% of workers who are expected to hit this cap, we're talking about an increase in payroll tax of up to $632.40 next year.

If you're wondering how the SSA came up with $142,800 as next year's cap, it has to do with the year-over-year increase in the National Average Wage Index (NAWI). Between 2018 and 2019, the NAWI rose from $52,145.80 to $54,099.99 -- a gain of 3.74%, or 3.7% when rounded to the nearest tenth of a percent. Next year's tax cap is 3.7% higher than the $137,700 in 2020. It's that simple. 

A happy senior couple sailing on a lake.

IMAGE SOURCE: GETTY IMAGES.

4. The wealthy can pocket a bigger monthly benefit

Though high earners will be tasked with opening up their wallets a bit wider in 2021, well-to-do beneficiaries can also expect to receive more. After the SSA capped monthly retirement benefits at $3,011 for persons of full retirement age in 2020, the maximum payout at full retirement age is increasing to $3,148 a month in 2021. That's an extra $1,644 a year for wealthy workers.

To net this maximum monthly payout, workers would need to have done three things:

  • Waited until their full retirement age to claim benefits.
  • Worked at least 35 years, as every year less of 35 worked results in a $0 being averaged into their eventual monthly payout.
  • Hit or surpassed the maximum taxable earnings cap in each of the 35 years the SSA takes into account when calculating a person's retirement benefit.

A check next to all three of these criteria allows a retiree to net the maximum monthly benefit.

Two Social Security cards and two one hundred dollar bills lying atop a payout sheet.

IMAGE SOURCE: GETTY IMAGES.

5. Disability income thresholds climb higher

There's no question that Social Security's primary job is to financially protect our nation's retired workforce. But don't overlook the fact that 9.7 million beneficiaries are receiving a monthly payout from the Social Security Disability Insurance Trust. In 2021, the income thresholds where benefits cease to disabled beneficiaries will climb higher.

For example, non-blind disabled beneficiaries can earn up to $1,260 a month in 2020 without having their Social Security payouts stopped. Next year, this threshold is increasing $50 a month to $1,310. This means non-blind disabled beneficiaries are able to earn up to $600 extra annually without losing their benefits.

The increase is even larger for blind disabled beneficiaries. Folks who fall into this category will be allowed to earn up to $2,190 a month in 2021 -- $80 a month higher than the 2020 threshold -- without having their benefits stopped.

A senior woman standing in front of a bench in her workshop.

IMAGE SOURCE: GETTY IMAGES.

6. Withholding thresholds for early filers receive a boost

Social Security has a number of ways it penalizes early filers. None is arguably more confusing or surprising to retired workers than the retirement earnings test. Put simply, the retirement earnings test allows the SSA to withhold some or all of an early-filer's benefit if they earn above a preset income threshold. In 2021, these income thresholds are heading higher.

For instance, early filers who won't reach their full retirement age in 2020 are only allowed to earn up to $18,240 a year ($1,520 a month) before $1 in benefits can be withheld for every $2 in earnings above this threshold. In 2021, early filers who won't reach full retirement age can earn up to $18,960 annually, or an extra $60 a month ($1,580/month) before withholding kicks in.

Early filers who will reach full retirement age in 2021 will see a boost in the withholding threshold, too. Next year, early filers who hit their full retirement age at some point during the year will be allowed to earn up to $50,520 ($4,210 a month) before $1 in benefits is withheld for every $3 in earnings above this threshold. For those who are curious, that's an increase of $160 a month from 2020 levels.

Take note that the retirement earnings test is no longer applicable once you hit your full retirement age (regardless of when you claimed benefits), and withheld benefits are returned to recipients in the form of a higher monthly payout after hitting full retirement age.

A smiling barista at the register in a coffee shop.

IMAGE SOURCE: GETTY IMAGES.

7. You'll have to earn more to qualify for a retirement benefit

Last but certainly not least, working Americans are going to have to try a bit harder to qualify for a Social Security retired worker benefit.

Despite what you might have heard, Social Security isn't simply given to someone for being born in the United States. In order to receive a retirement benefit, you'll need to have earned 40 lifetime work credits, of which a maximum of four credits can be earned each year. These credits are awarded according to an individual's income in a given year.

For example, workers received one lifetime work credit in 2020 with $1,410 in earned income. Put another way, if a worker nets at least $5,640 in earned income ($1,410 X 4) this year, they'll receive the maximum four credits.

In 2021, it'll take $1,470 in earned income to earn one lifetime work credit, or $5,880 for the full year to maximize your Social Security work credits.

Though folks will have to work a bit harder to ensure a retirement benefit from Social Security, the bar to qualify is set relatively low.


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The Worst Mistake Tesla Investors Can Make Right Now

Those with big winning stocks in their portfolios need to understand the risks of failing to rebalance their stock portfolio.

Ryan DownieRyan Downie(TMFrdownie)Jan 17, 2021 at 12:01PM

Tesla (NASDAQ:TSLA) returned more than 720% for investors in 2020. That's a huge year by any standard, and holders should be very excited by that performance. However, for many, it creates an allocation problem that requires rebalancing.

As I see it, the worst mistake that Tesla investors can make is to ignore the need to diversify. This suggestion may fall on deaf ears for speculators or Tesla disciples, but it's a great time to sell a portion of your shares while retaining some for future growth.

The auto-maker grew aggressively in 2020

Tesla was one of the most popular stocks among investors coming into 2020, and many people held it as part of their portfolios. That stock has almost certainly grown to take up a much larger portion of their portfolios since the start of last year. A hypothetical portfolio that was 5% Tesla at the start of 2020, with the remainder spread between the S&P 500 and the NASDAQ, would now be roughly 25% Tesla due to that one position's excellent performance.

There's some dissent among Fool contributors and the investment community on this topic, but I'm a staunch advocate of diversification and rebalancing. This is especially important if stock performance is being driven by valuation inflation rather than fundamental growth. In the above example, investors established a volatile, high-growth position with 5% of the portfolio. Having exploded in value, Tesla now has less upside potential and more downside risk. To replicate this year's performance, the company would have to grow to $5.6 trillion in value. Tesla is likely to continue performing well, and that huge valuation may indeed be attained eventually. However, it's going to take a while, and I expect that we'll go through some market corrections before that day comes.

Tesla holders should be excited-the stock delivered your gains ahead of schedule without a corresponding rise in sales, and there's a good chance you'll be able to purchase more again later at a less aggressive valuation.

Rebalancing, taking gains, and allocation

Even if you fundamentally agree that rebalancing is important, the actual moves required to rebalance may be difficult to accept. Tesla is looking at 30% sales growth in 2020, and it achieved quarterly profits for the first time last year. Analysts are forecasting rapid growth again in 2021.

It might seem strange to sell a stock that's delivered great returns while reporting strong fundamentals and looking at another great year. However, that's exactly what you have to do to effectively rebalance.

Red electric car plugged into charging station

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The bull narrative for Tesla has not been disrupted. In fact, the auto maker's sustained growth and recent profits validate the optimism about the stock. Why would you need to sell some, if that's the case? Because risk is still present here.

Tesla trades at a forward price-to-earnings (P/E) ratio of 175, a price-to-sales of 24.5, and a price-to-book ratio of 41.7. Investors should expect promising growth stocks to attract high valuation ratios like these, but Tesla holders need to recognize that significant amounts of future success are already assumed in this price. Continued strong results are necessary to justify the current price. Any indication that Tesla might fall short of the market's optimistic forecasts could send shares tumbling, even if the company keeps growing.

That might not be an issue for bullish long-term holders who just want exposure to the eventual market leader they expect Tesla to become, but others recognize the opportunity to redeploy that capital into other stocks that can deliver strong returns without as much risk concentration. Growth investors can sell some Tesla shares and use the proceeds to buy several other high-growth stocks. Recent big-name IPOs and hot stocks from industries such as e-commerce, cybersecurity, or telehealth can offer tremendous upside along with the opportunity to dilute the risk that any single stock performs poorly.

Don't overreact

Rebalancing shouldn't mean completely abandoning a good position, either. It makes sense to lock in some gains and retain a smaller position in Tesla to take advantage of potential future growth. Investors might be nervous about Tesla's aggressive valuation, but that company may well become a leader in multiple major industries for the next several decades. Most investors who allocated a certain proportion of their portfolios to Tesla last year should feel comfortable allocating a similar percentage of their holdings to the stock this year. 

Tesla may have attracted large numbers of speculative growth investors, and they might not like to hear it, but this is a great moment to take some gains and reinvest them elsewhere. The stock has outperformed the rest of the market so drastically over the past 12 months that it has left portfolios over-exposed to its performance. This is especially risky with Tesla's high valuation ratios. Bullish investors should keep some of this stock in their portfolios to benefit from future growth, but there are more than enough high-potential companies out there to warrant diversification.