Inflation has hit the US economy hard in 2022, and those who rely on the fixed income provided by Social Security have felt the effect of rising prices even more than most consumers. Fortunately, Social Security provides annual cost-of-living adjustments (COLAs) that help preserve the purchasing power of the monthly checks that tens of millions of people rely on in retirement.
It is likely that the Social Security COLA for 2023 will be one of the largest in history. It will be a few more months before the final figures are released, but current estimates suggest participants could get a 9% increase in their benefits in January.
This increase has many people nearing retirement wondering if they should file for Social Security sooner rather than later. No one wants to miss out on a potential 9% increase in their benefits, so it’s only natural to wonder if you’d lose a big COLA if you waited until after January 2023 to claim Social Security. It turns out those wondering when to claim their benefits need not worry about potentially leaving free money on the table.
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How your Social Security benefit is calculated
Many people are somewhat familiar with the numbers that go into the size of the check they receive from Social Security each month. In general, higher earnings over your career will increase your benefits, as will working longer. Also, the earlier you apply for Social Security retirement benefits between age 62 and 70, the less you receive per month.
However, the actual calculations are more complicated. The Social Security Administration (SSA) looks at your income history and selects the 35 years in which you earned the most on an inflation-adjusted basis. This produces what is called the Average Indexed Monthly Earnings (AIME).
In the next step of the calculation, the SSA takes the AIME number and plugs it into a formula to produce your primary insurance amount (PIA). The PIA plan is specific to people your age and becomes available when you turn 62. For example, those who were born in 1960 and therefore turned 62 in 2022 calculate their PIA as follows:
- Take 90% of the first $1,024 of your AIME.
- Add 32% of any amount between $1,024 and $6,172.
- If there is anything left, add 15% of the amount over $6,172.
The percentages do not change from year to year, but the amounts subject to each particular bracket to determine the AIP do.
Finally, once the PIA is available, it represents your expected benefit if you receive Social Security at full retirement age. If you apply early at age 62, however, you’ll have to accept up to 30% less per month in exchange for receiving more payments over your lifetime.
How COLAs increase your future social security
This allows those applying at age 62 to easily determine how much they will receive. But things get a bit more complicated – in a good way – for those who wait later.
The calculation above gives you your initial primary insurance amount. However, each year your PIA will be adjusted upward by the COLA percentage. For example, if the COLA for 2023 ends up being 9% and your initial PIA in 2022 was $1,000, your new PIA in 2023 would be $1,090.
If you wait until 2023 to claim your Social Security, your benefit will reflect a few things that will increase its amount. First, waiting an extra year could reduce or eliminate the penalty for claiming before full retirement age, or it could give you deferred retirement credits to increase your payout above the PIA. The PIA itself will also be higher, as it will reflect the adjusted COLA amount.
Make the right decision
There are still a number of factors that go into deciding whether to apply for Social Security early, at full retirement age or later. However, those considering their options need not worry about making a quick decision in order to qualify for the large COLA scheduled for 2023. Even those who wait beyond January to start receiving benefits should still see their checks monthly amounts reflect the higher amounts when they do choose to claim.
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