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Social Security Has Good News: an 8.7% Cost of Living Adjustment

October 13, 2022 Alyson Dorosky By Alyson Dorosky

You can’t go to the grocery store or pay your winter heating bill without swallowing hard at how much and how fast prices have gone up. The Social Security Administration (SSA) has noticed, too, and announced that its cost-of-living adjustment (COLA) for 2023 will be 8.7%.

The announcement was big news this year, with COLA being the highest since there was an 11.2% increase in July 1981 – 41 years ago.

If you’re wondering more about Social Security and COLA, here are some answers to common questions about it and how it it affects:

When will I see the extra dollars in my Social Security benefit?

If you’re receiving Social Security, you’ll see the adjustment in your check or direct deposit in January, when December benefits are paid. The Social Security Administration (SSA) mails COLA statements to beneficiaries in December. You will also be able to find yours later this year when you sign into your account at ssa.gov.

How does Social Security calculate my new benefit starting in January?

Social Security applies the COLA to your primary insurance amount (PIA) – the amount that you are eligible to receive if you file (or filed) for benefits at your full (also called “normal”) retirement age.

That amount is adjusted, depending on the benefit you applied for – early (at age 62), at your full retirement age (FRA) or later, up to age 70. Visit ssa.gov and sign in to see how Social Security calculates your benefit.

What’s a “cost of living adjustment” mean, exactly?

The COLA is an increase in benefits intended to help seniors and other beneficiaries, including people with disabilities or receiving survivors’ benefits, keep up with rising costs.

The Social Security benefit COLA is based on the percentage change in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) between the third quarter of last year and the third quarter of this year. The U.S. Bureau of Labor Statistics announces monthly inflation index figures.

Some experts contend that the CPI-W index doesn’t reflect the differences in the goods and services people over the traditional working age must pay for. But for now, the CPI-W index is the standard.

Does this mean I’ll get 8.7% more in my benefits in January?

What you’ll see in your check or bank account depends on a few factors, such as if you have deductions for healthcare benefits, like Medicare Part B premiums, or income taxes withheld.

Speaking of income taxes, the COLA could push some beneficiaries into higher income tax brackets. If you’re concerned about that, contact your accountant or tax advisor.

How does this affect me if I’m not collecting Social Security yet?

Depending on your age, you may get some value later. Here’s how:

When you file for Social Security benefits, the SSA calculates your primary insurance amount (PIA). That is the amount that you are, based on your earnings record, eligible for if you file for retirement benefits at your full (also called “normal”) retirement age (P.S. that’s no longer 65). You can look up your full retirement age at ssa.gov.

SSA will adjust that amount based on the sum of COLA increases between the time you turned 62 and the age you applied for benefits.

If you haven’t filed yet, delayed retirement credits accumulated by filing after your full retirement age (up to age 70)  on top of COLAs can significantly boost your monthly benefit amount. That’s another argument for delaying filing until your benefits max out at age 70 if you can afford to.

Should I file now to get the raise?

The COLA alone is not a reason alone to file for benefits. Many factors go into a decision to file. And if you’re married, you must make these decisions as a couple. When you file can affect how much your spouse will be able to collect while you’re alive and after your death.

I recommend consulting a financial or tax advisor with advanced software like LifeYield Social Security+ and complete knowledge of your financial and tax situations and expectations for retirement. (Note: Social Security+ is updated every January to reflect changes in earnings limits, COLAs and more.)

After all, Social Security replaces approximately 40% of what you earn while working. To retire with peace of mind, you’ll want to be reasonably confident in where the other 60% will come from for the rest of your life.

I’m thinking of taking a part-time job to help pay the bills. How will that affect my Social Security benefits?

It depends on how old you are and when you began collecting benefits.

You are free and clear if you are above your full retirement age for the entire year. There’s no limit to how much you can earn and still collect Social Security. (Remember, though, that your earnings plus Social Security benefits could mean you will pay more in taxes.)

It’s different if you filed for benefits before your full retirement age or if this is the year you reached it. Then, Social Security limits how much you can earn without withholding some of your benefits. This is called the “retirement earnings test.” The SSA announces the limits annually.

Even if you decide to take a job and forfeit some of your Social Security benefits, that’s only limited to when you are working. Once you stop working or at your full retirement age, Social Security will recalculate your benefits to include those you temporarily lost but over your projected lifetime (you don’t get a lump sum).

Do I see COLAs reflected in what I see when I view my account on ssa.gov?

No, your Social Security account on my Social Security shows estimated benefit amounts and projections in today’s dollars. The SSA does not include COLA in your benefit calculations until you apply for benefits.

Is COLA automatic? Can I expect an adjustment every year?

Not at all. Whether there’s a COLA or not, and what it will be, depends on that price index. There was no adjustment in 2009, 2010 and 2015, and in 2017 it was only 0.3%. Last year it reached a 40-year high of 5.9%, the highest since 1982. For a historical perspective, see this page on ssa.gov.

What’s the COLA based on? It feels like the prices I’m paying have gone up more than 8.7%.

You could be right. Last year’s Social Security COLA was 5.9%, the highest in 40 years. Yet inflation in 2022 was 8.2% as of September. Experts quickly point out that living costs vary widely by where you live. They also debate whether the COLA calculation reflects seniors’ real-world prices. For example, seniors tend to have higher healthcare costs, including prescription drugs.

There’s another index that some advocate using, called the CPI-E (for Elderly), that models the costs that are more typical of older people. However, according to an analysis by experts at the Center for Retirement Research at Boston College, that doesn’t guarantee a higher COLA every year.

I heard that Social Security will soon be insolvent. Shouldn’t I file as soon as I am eligible to make sure I get some benefits?

Social Security is indeed projected to be “insolvent.” That is, it will be paying more in benefits than collecting in taxes, by 2034, according to the most recent government report on the Social Security Old-Age and Survivors Trust Fund.

But that doesn’t mean the program shuts down. It’s wise to remember that the program has faced uncertainty before – only to be revived and bolstered by Congress. Their members understand that few programs are as popular with constituents as Social Security and Medicare.

Tossing the dice by filing for Social Security could imperil your financial future and your retirement dreams. Here’s some sound advice on approaching.