The Social Security Administration recently announced 2021 increases to both benefits and the taxable wage base for FICA taxes.
Increases Announced for 2021
Workers are facing a 3.7 percent increase in the taxable wage base subject to Social Security taxes, increasing the amount from $137,700 up to $142,800. This means high earners who make as much as or more than the taxable wage base will pay $8,853.60 of the employee withholding portion or $17,707.20 in total for the self-employed – who pay both employee and employer portions of the tax.
Retirees receiving benefits will only garner a 1.3 percent cost-of-living (COLA) raise in 2021, resulting in a raise of $20 per month for the average single beneficiary and $33 per month for the average retired couple. COLA increases for beneficiaries have been low for a long time, with several years seeing zero increases in the past decade or so. You can see the historic trend of COLA increases in the chart below, going back to 1975.
|Historical Social Security COLA Increases1
Medical Expenses Outpacing COLA increases
Low COLA increases are putting pressure on retirees’ finances as medical expenses are rising at a much faster pace, with some believing they are given too little weight in the COLA calculation. Moreover, retirees need to consider Medicare Part B and Part D premiums.
While the official 2021 premiums are not announced yet, there are estimates out there that Part B premiums (covering doctor and outpatient services) will raise $9 per month, or approximately 6.2% percent, from $144.30 to $153.30. These are just average figures, as there are income-related surcharges that apply to both Part B and Part D drug premiums. During 2020, for example, individuals making more than $87k per year and couples filing jointly making over $174k per year began paying higher premiums for Part B and Part D than other recipients, with those at the top of the surcharge paying almost $1,000 per month for Part B premiums alone.
Income Caps on Working Beneficiaries
Finally, there are new earnings limits for workers below full retirement age (age 66 for people born in 1943 through 1954). In 2021, those who are not at full retirement age will lose $1 in Social Security benefits for every $2 they earn over $1,580 a month ($18,960 per year). After reaching one’s full retirement age, there are no earning thresholds that will impact benefits.
The 2021 COLA increase continues the recent trend of coming in low and putting pressure on retirees’ finances, while medical expenses continue to rise at much faster rates. As a result, retirees will see less disposable income from their benefits, while high-earning workers will see continued tax increases that outpace benefit payouts. This puts pressure on all beneficiaries of the system.
1 Starting in 1975, Social Security benefit increases have been based on cost-of-living adjustments (COLAs). Pre-1975, the benefit increases were set by legislation.
In order to survive – and even thrive – during these unprecedented times, small businesses have had to find new ways to make money. The UPS Store’s Small Biz Buzz survey found that 41 percent of small businesses in the United States took steps to modify their businesses in hopes of survival. Fifteen percent provided customers with curbside delivery options, 28 percent moved to online sales as their primary source of sales, and 65 percent made a concerted effort to grow their e-commerce capabilities.
More than 50 percent of those polled by a U.S. Census Bureau Small Business Pulse Survey said it would be at least half a year before pre-COVID levels of business come back. Looking at overall economic recovery, and we could be waiting five years or more for things to return to where they were before. When it comes to small businesses, it might take even more time; however, businesses that adapt will be more likely to succeed.
In order to increase the chances of the pivot being successful, Harvard Business Review recommends doing so based on the newly created conditions of the crisis. In the case of the pandemic, it’s created more telecommuting, disrupted supply chains, and required everyone to socially distance for work, leisure, and daily tasks. In light of these circumstances, there are three factors for a pivot to be successful.
Social Distancing Opportunities
With the pandemic demanding less contact, chiefly through social distancing, businesses must find ways to work around the new circumstances. One example is how dating websites have added video dating for users. Other examples include grocery stores limiting in-store customers, requiring workers and customers to wear masks, and adding more and wider delivery areas for groceries and other products.
Building on Original Business Concept
The second recommendation by HBR is that businesses examine how additional and different services or products complement the original business concept.
Let’s consider Airbnb; when travel and resulting bookings collapsed, the platform’s hosts received financial assistance that helped facilitate guest relations virtually. In a shift from its non-hotel lodging option via homeowners and apartment dwellers offering their abode for rent, Airbnb moved to provide hosts with the ability to hold online events, such as cooking classes, art therapy, virtual tours, or other activities.
Looking to the future and building on the opportunity for growth, tourists could learn about new places to travel and things to do and learn while visiting the new destination.
Adapting to Change by Adding Value
The final ingredient of a successful pivot, according to HBR, is that the move demonstrates how well a company can adapt, work through problems and adjust to market forces while proving profitable and resonating as a value in the consumer’s view.
Before the lockdown orders, Spotify placed a sizeable portion of its business model on having primarily free customers stream music on personal devices. Spotify would benefit in two ways – they wouldn’t have to send out Spotify-specific devices, along with relying on receiving advertisers’ income that free users would listen to in exchange for a free Spotify membership. However, when the pandemic hit, Spotify’s advertisers cut their marketing budgets, making this business model difficult for Spotify to sustain.
Spotify’s pivot offered podcasts for users from music artists, talk show hosts, celebrities, etc. By offering premium subscriptions for its podcasts, along with curated, niche programming, Spotify gave customers more control and a better value over previous media offerings.
While the pandemic doesn’t necessarily mean a “going out of business sign” for companies, it could spell the end of the road for those that don’t adapt to the new economy.
With the nation on the precipice of a transition of administrations on Jan. 20, 2021, there will need to be many roles filled both in and out of the White House. With the potential for Janet Yellen to replace Steven Mnuchin as the next treasury secretary, there is much speculation about how the Federal Reserve will be shaped by the Biden administration.
Predicting Changes to the Federal Reserve
When 2022 arrives, Chair of the Federal Reserve Jerome Powell’s term will expire. While presidents have historically given another term to first-term chairs who were appointed by the outgoing administration, there is no indication that Powell will stay on for another year. President Trump deviated from this norm when he appointed Powell to replace then-Chair Janet Yellen. Originally appointed by Obama to the Fed in 2012, Powell was first a Fed governor and a Republican politically.
First Vice Chair Richard Clarida’s term expires in January 2022. Vice-Chair of Banking Supervision Randal Quarles’ term expires in October 2021. Both vice-chairs are expected to be replaced when their terms are up.
With two Fed board seats still unfilled, and if the Biden administration nominates Fed Governor Lael Brainard to become the next Treasury Secretary, it would create a third Fed board seat opening. Brainard is favored as a strong candidate because many economic experts see a need for the Fed and the U.S. Treasury to work together closely.
While President Trump attempted to fill one of the empty Fed seats with Judy Shelton, on Nov. 17, the U.S. Senate declined her nomination to sit on the Federal Reserve Board of Governors; Christopher Waller still could be confirmed during the Senate’s post-election session. Assuming he doesn’t get confirmed before Congress adjourns and 2020 closes, the nomination will expire.
What’s Not Expected to Change
When it comes down to how the Fed handles monetary policy, chances are things won’t change much from the current status quo. Since the U.S. economy is still in a malaise due to the harmful effects of the COVID-19 pandemic, the Fed has made a crystal-clear statement that interest rates will remain at “near zero” for the next 36 months, at a minimum.
In August 2020, the Fed announced that it’s recommitting itself to maintain existing rates as the economy emerges from the downturn for a longer period of time, compared to past Federal Reserve efforts to spur economic growth. Then on Nov. 5, the Federal Reserve’s FOMC Statement reinforced that the federal funds rates will stay at 0 percent to ¼ percent, as long as economic growth is threatened.
Part of the Democrats’ legislative agenda is for the Fed to take action to reduce racial inequality. The objective is for this to become part of the Fed’s existing mandate, which currently includes price stability and maximum employment. If President Biden endorses this legislation, it would likely have an even greater impact on the Fed.
Another thing to consider is that Biden is expected to appoint more minorities to the FOMC, which, with the exception of Janet Yellen serving a four-year term, has been all white men.
Many at the Fed already recognize the importance of including all Americans in opportunities to benefit from a robust economy. During August 2020, the Fed announced that it is taking its time boosting interest rates, in contrast to how it handled past economic challenges, in order to produce an economy that favors job seekers, especially minorities.
Chairman Jerome Powell explained to the media that the Fed is ready and able to implement its financial instruments to prop up the economy and ensure that the country’s emergence from COVID-19 will be assisted. Powell has called on Congress to pass more stimulus, especially to help those who lost jobs from the pandemic.
Depending on who is selected and confirmed as treasury secretary, there could be a renewed hope for recently discontinued stimulus programs, some in conjunction with the Fed. In a letter dated Nov. 19, Treasury Secretary Steven Mnuchin indicated to Jerome Powell the following Federal Reserve programs that will cease functioning on Dec. 31, 2020:
- Program 1: Primary Market Corporate Credit Facility (PMCCF)
- Program 2: Secondary Market Corporate Credit Facility (SMCCF)
- Program 3: Municipal Liquidity Facility (MLF)
- Program 4: Main Street Lending Program (MSLP)
- Program 5: Term Asset-Back Securities Loan Facility (TALF)
Funded via Congress’ CARES Act, these programs give the Fed the power to loan as much as $4.5 trillion to markets.
Naturally, this move is currently opposed by the Fed because it takes away additional tools that can be deployed to support the economy and its underlying financial systems. Treasury Secretary Mnuchin’s actions will return $429 billion from the Fed to Congress to be re-appropriated.
One program that will be lost is the MSLP, which was recently modified to give loans as small as $100,000 per applicant. With no more access by year-end, this will likely impact smaller businesses.
It is noteworthy that the following programs were extended for an additional 90 days after Dec. 31, 2020. These include Commercial Paper Funding Facility (CPFF), Market Mutual Fund Liquidity Facility (MMLF), Primary Dealer Credit Facility (PDCF), and Paycheck Protection Program Liquidity Facility (PPPLF), used to shore-up money market liquidity. Though, depending on who is the treasury secretary in 2021, there might be a reconsideration of any or all of these programs.
There are certain year-end financial transactions that must clear by Dec. 31 to be reported on the 2020 tax return. It’s important to take a good look at your financial portfolio in light of the plethora of unusual events that occurred this year. Now is a good time to see if you have fallen off track and reposition your portfolio for better opportunities in 2021.
Despite the dramatic stock market drop that accompanied the outbreak of COVID-19 on our shores, markets have recovered remarkably well. This means the traditional strategy of harvesting gains and losses at year-end could be appropriate for many investors. When your capital losses are more than your capital gains for the year, you can claim up to $3,000 to reduce your taxable income and even carry over remainder losses on next year’s tax return.
Harvesting is also a good way to rebalance your asset allocation strategy, so you are well-positioned to meet long-term goals starting in the New Year. If you are interested in selling winners and losers to mitigate your 2020 tax liability, make sure, these transactions are fully completed by Dec. 31.
Tip: Some investors might be tempted to sell shares for a loss and then buy back into that position. However, take pains to avoid running afoul of the “wash rule,” which is when an investor purchases a “substantially identical” security within 30 days of a loss sale. Doing so diminishes the losses you can claim on your taxes, even if you buy it back in January. This also can occur inadvertently through automatic dividend and capital gains reinvestment purchases – so monitor your holdings and make sure there’s a 30-day lag between sale and reinvestment.
For workers who invest in an employer-sponsored 401(k) plan, you have until the end of the year to defer up to $19,500 ($26,000 if you’re age 50 or older) from your paycheck. If you’d like to stash away more money, the combined annual limit for traditional and Roth IRAs is $6,000 ($7,000 for age 50+) for 2020. Note, however, that contributions for these accounts may continue to be made up until you file your 2020 tax return.
Tip: Given the potential for higher taxes under the new administration, it might be wise to max out after-tax Roth IRA contributions while taxes are low. When taxes are higher, traditional IRAs and 401(k)s tend to be more valuable because tax-deferred contributions help reduce current income. You also might want to convert a portion of traditional IRA funds to a Roth this year to take advantage of the lower tax environment. Convert only a strategic portion to avoid tipping your current income into a higher tax bracket.
Retirement Plan Withdrawals
You have only until year-end to withdraw up to $100,000 without penalty from a retirement plan if you have been directly affected by COVID-19 this year. Note, too, that subsequent income taxes on this withdrawal either can be spread out over a three-year period or avoided entirely if you re-contribute the funds over the next three years.
Tip: Legislation passed early in the year permits retirees to skip taking required minimum distributions in 2020. However, because the stock market has recovered nicely, and in light of higher taxes in the future, it might be a good idea to go ahead and take this distribution before year-end.
Education Savings Accounts
If your college student received a tuition refund this year because the class experience moved online, be aware that any refunds of College Savings 529 plans must be deposited back into that account. Otherwise, that money is considered a distribution for non-qualified expenses. Make that deposit back into the 529 account by year-end to avoid any taxes or penalties.
Tip: Parents and grandparents can reduce their estates by making a year-end gift to a student’s 529 plan. You may gift up to $15,000 ($30,000 for married couples) per beneficiary without incurring gift taxes or affecting your lifetime gift tax exemption ($11.58 million).
While the pandemic is not over, we do have some good news. There are vaccines and they will be available soon. Here’s where we are in terms of an overall plan and where states are with distributing the vaccines.
Operation Warp Speed
The current administration has already purchased hundreds of millions of doses of several vaccine candidates. Two of them are from Moderna and Pfizer and they’ve shown significant efficacy in Phase 3 clinical trials. The incoming Biden administration will take on distribution and has established a COVID-19 Task Force. A limited number of doses may become available as early as December.
The Interim Playbook
This document from the Center for Disease Control and Prevention (CDC) is the roadmap for state, territorial, tribal, and local public health programs and their partners. It focuses on how to plan and operationalize a vaccine response to the pandemic within their jurisdictions. It’s quite comprehensive and is a good reference for the coming months.
In the Interim Playbook, the CDC has given states a set of planning assumptions by which they can develop their distribution plans and explains how the vaccine will likely be administered in phases.
- Phase 1 – there is an initial limited supply of vaccine doses that will be prioritized for certain groups. The distribution will be more tightly controlled and a limited number of providers will be administering the vaccine.
- Phase 2 – supply would increase and access will be expanded to include a broader set of the population, with more providers involved.
- Phase 3 – there would likely be sufficient supply to meet demand and distribution would be integrated into routine vaccination programs.
Common Themes and Concerns from State Plans
The Kaiser Family Foundation (KFF), a non-profit organization focusing on national health issues, sought to collect plans from all 50 states and DC. As of Nov. 13, they’ve reviewed 47 of these plans and have singled out key areas contained within each plan.
- Identifying priority populations for vaccination. Each state will determine who will be first in line, initially; however, every plan highlights the following categories as being the priority during Phase 1: healthcare workers, essential workers, and those at high risk (older people and those with pre-disposing health risk factors). A majority of states (25 of 47, or 53 percent) have at least one mention of incorporating racial and/or ethnic minorities or health equity considerations in their targeting of priority populations.
- Identifying the network of providers in their state will be responsible for administering vaccines. Even though states are at different points in the process, providers will likely include hospitals and doctors’ offices, pharmacies, health departments, federally qualified health centers, and other clinics that play a role in administering vaccines today. Given the need to quickly vaccinate most residents, additional partners will be needed, such as long-term care facilities, and will (potentially) set up public locations like schools and community centers for mass vaccinations.
- Developing the data collection and reporting systems needed to track the vaccine distribution progress. Many states are relying on (and often expanding) existing state-level immunization registries, while other states are developing new systems or using those provided by the federal government. To sum it up, each state is at a different stage in this process.
- Laying out a communications strategy for the period before and during vaccination. The CDC has asked states to design plans that anticipate and respond to different populations and include the need to address misinformation and vaccine hesitancy. Not surprisingly, some of these states’ plans are detailed while some are not.
All of these things are high-level summations of what is planned so far. For a more detailed explanation, check out the Interim Playbook from the CDC. The COVID-19 situation is ever-changing, but the most important takeaway is that steps are being put in place to help protect us all. Stay safe.
States Are Getting Ready to Distribute COVID-19 Vaccines. What Do Their Plans Tell Us So Far?