Do Future Retirees Benefit from Social Security’s 8.7% COLA Adjustment?
Many of my current retired clients received a sizeable cost-of-living adjustment (COLA) of 5.9% in 2022 and are set to receive an 8.7% increase in 2023 as inflation numbers remain high. However, I recently had a client who has delayed taking their benefit ask if they will miss out on the high COLA adjustment since they do not have a current benefit that Social Security could increase.
Fortunately, the answer for them was straightforward and beneficial – their estimated benefit will see a large increase in January when COLA adjustments are reflected. This is also the case for most (but not all) pre-retirees who have not yet collected benefits. To understand whether your future benefits will be increased, it’s important to understand how Social Security calculates benefits in the first place.
Your Social Security benefit is calculated from your “Average Indexed Monthly Earnings” (AIME). AIME is calculated by taking your earnings for each year you paid into Social Security and adjusting them for inflation up to the year in which you turned 60. It then averages 35 of your highest inflation-adjusted years, divides by 12 (months), and is put through a specific formula to calculate your Primary Insurance Amount (PIA), which is your standard monthly benefit.
Because of this calculation where each year is indexed by inflation until age 60, retirees that are under age 60 will see a nice increase because each year on their earnings record will be adjusted for inflation. In addition, retirees who are 62 or over and are not taking their benefits, will see their benefit estimate increase as the PIA from above is increased by the COLA adjustment.
There is no increase from ages 60 to 62, leaving one unfortunate group of people – those who are ages 60 or 61 in the years of the high cost-of-living adjustments. Social Security has not written about this specifically, so I am using my best judgment (please do your own research), but I don’t see any way for these individuals to benefit from the COLAs the way the current formula is calculated. COLA adjustments will be made on December 30th and reflected in January benefits or estimates. Because these individuals are already 60, they will receive no more inflation increases on their wage history since inflation indexing on wages ends at age 60. And because they are not yet 62, they will not receive any inflation adjustments to their PIA (which affects benefit estimates) since it is not calculated until age 62.
Fortunately, most future retirees will receive sizeable inflation increases that should be factored into future retirement planning scenarios!
Happy Planning,
Alex
This blog post is not advice. Please read disclaimers.