Social Security COLA Set at 1.3% for 2021

Social Security and Supplemental Security Income recipients will see a 1.3% cost-of-living adjustment in 2021, the Social Security Administration announced today. The increase will begin on Dec. 31, 2020.

The Social Security Act ties the annual COLA to the increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers, known as CPI-W, as determined by the Labor Department's Bureau of Labor Statistics. There was no increase in 2010, 2011 or 2016.

Based on the increase, the maximum amount of 2021 earnings subject to the Social Security tax (taxable maximum) will increase to $142,800 from $137,700.

However, the tax rates will remain the same for 2021 as in 2020 for employees (7.65%, with another 7.65% paid by employers) and self-employed workers (15.30%).

The estimated average monthly Social Security benefit will be $1,543 for all retired workers; $2,596 for an aged couple, both receiving benefits; $1,453 for retired widow(er)s; and $1,277 for all disabled workers.

"People who have been receiving benefits for 12 years or longer have experienced an unprecedented series of extremely low cost-of-living adjustments," said Mary Johnson, a Social Security policy analyst for The Senior Citizens League, in a statement.

"What's more, those inflation adjustments do not account for rapidly rising Medicare Part B premiums that are increasing several times faster than the COLA," explained Johnson. "The situation is causing those with the lower Social Security benefits to see little growth in their net Social Security income after deduction of the Part B premium."

According to the league, a provision of a recently enacted government spending bill restricts Part B premium increases in 2021. The bill caps the Part B premium increase for next year at the 2020 amount plus 25% of the difference between the 2020 amount and a preliminary amount for 2021.

The preliminary amount would be calculated the same way that it would have been without the bill but would prevent dramatic increases that may have occurred as a result of Medicare Part B premiums growing when the COLA is so low.

COLA Calculations

The CPI-W, to which COLAs are tied, reflects prices paid by working adults under age 62 and gives greater weight to items like gas and electronics.

At the same time, this measure gives less weight to housing and medical expenses, which are the biggest areas of spending for older consumers, the Senior Citizens League says.

The U.S. Government Accountability Office, which reviewed the measurements this summer, concluded that the U.S. Bureau of Labor Statistics "faces accuracy, timeliness and relevancy challenges developing consumer price indexes (CPI) for subpopulations of blue-collar workers and older Americans."

Presidential candidate Joe Biden's economic plan calls for tying COLAs to the experimental Consumer Price Index for the Elderly, which would result in more generous adjustments.

"Unless Congress acts to boost Social Security benefits and finds a better way to adjust benefits for growing Medicare costs, this problem will continue occur with greater frequently in the future," according to Johnson.

"This approach of imposing future premium repayments doesn't fix the problem — it's like a payday loan. It just makes the premiums grow faster later, and the problem is triggered again the next time when COLAs are extremely low," she added.

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