Personal Finance

Social Security cost-of-living adjustment will be 1.3% in 2021

Key Points
  • The Social Security cost-of-living adjustment will be 1.3% in 2021.
  • The increase is in line with a previous estimate from The Senior Citizens League.
  • The average cost-of-living adjustment since 2010 has been 1.4%
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Social Security beneficiaries will see a 1.3% increase to their monthly checks in 2021.

The amount was announced on Tuesday by the Social Security Administration, and was in line with previous estimates.

The 1.3% raise applies to about 70 million Americans, including those who receive Social Security and Supplemental Security Income, or SSI, benefits.

Last month, The Senior Citizens League, a nonpartisan advocacy group for older Americans, projected a 1.3% boost, based on available consumer price index data.

The 1.3% rise is not necessarily good news for retirees and other beneficiaries, many of whom may have had a tougher time stretching their benefit checks in 2020, thanks to Covid-19.

In 2021, retirees' estimated average monthly benefit will increase by $20 per month, to $1,543 from $1,523 after the 1.3% rise.

Disabled workers' average monthly benefit is estimated to go up by $16 per month, to $1,277 from $1,261.

The maximum amount of wages taxed for Social Security will be $142,800 in 2021, up from $137,700 in 2020.

Medicare Part B premiums for 2021 have yet to be announced. Those premium payments are often deducted directly from Social Security benefit checks. Congressional legislation has put a cap on how much Medicare Part B premiums can go up this year.

The 1.3% Social Security cost-of-living adjustment is smaller than the 1.6% bump to benefits retirees and other beneficiaries saw in 2020. In 2019, they received a 2.8% boost to their monthly checks.

But it is bigger than those in some recent years. In 2010, 2011 and 2016, the COLA was zero. In 2017, it was 0.3%.

The average cost-of-living adjustment since 2010 has been 1.4%. Between 1999 and 2009, annual increases averaged 3%.

"They've never been this low for this long a period in the history of Social Security," said Mary Johnson, Social Security policy analyst for The Senior Citizens League, of the increases.

The Senior Citizens League is lobbying Congress for an emergency 3% COLA to help beneficiaries in 2021. That would be in place of the 1.3% boost announced Tuesday.

The group's advocacy comes after its own research found that if the annual COLAs had been 3% from 2009 to 2020, the average retiree benefit would be 19.8% higher today.

The average benefit of $1,075 per month in 2009 is now $1,249 in 2020. But with 3% COLAs, it would be $247 more per month, for a total of $1,496. From 2010 to 2020, their Social Security income would have been $18,227.40 more.

The flat COLAs make it more difficult for retirees to be able to afford to pay for Medicare Part B premiums, which are going up about three times faster than the annual benefit increases, Johnson said.

The cost-of-living adjustment is calculated using the consumer price index for urban wage earners and clerical workers, or CPI-W.

The problem with that index is it focuses on younger working adults who are under age 62, Johnson said. Consequently, Medicare costs are not represented at all.

How Social Security benefits are calculated on a $50,000 salary
How Social Security benefits are calculated

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It also doesn't account for other rising costs seniors face, including prescription drugs, food and housing, according to the National Committee to Preserve Social Security and Medicare. Instead, the advocacy group wants to see a different measurement — the consumer price index for the elderly, or CPI-E — used.

Changing to the CPI-E is an idea included in the Social Security 2100 Act, a Democratic proposal aimed at fixing Social Security put forward by Rep. John Larson, D-Conn.

The switch is also included in Democratic presidential nominee Joe Biden's plans to reform the program.

"The current COLA formula — the CPI-W — is woefully inadequate for calculating the true impact of inflation on seniors' pocketbooks," Max Richtman, president and CEO of the National Committee to Preserve Social Security and Medicare, said in a statement.

"The CPI-E is part of Joe Biden's plan for older Americans, one of the many reasons that the National Committee has endorsed him for president," he said.

Social Security benefits in 2021: How much more money you can expect
Social Security benefits in 2021: How much more money you can expect