Inflation has hit the U.S. economy hard in 2022, and those counting on the fixed income that Social Security provides have felt the effect of rising prices even more than most consumers. Fortunately, Social Security provides for 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's likely that the Social Security COLA for 2023 will be one of the largest in history. It'll still be a couple of months before final figures are out, but current estimates suggest that participants could get a 9% increase in their benefits come January.
That increase has many people near retirement wondering whether they should file for Social Security sooner rather than later. Nobody wants to miss out on a potential 9% increase in their benefits, and so it's a natural question to ask whether you'd lose a big COLA if you wait until after January 2023 to claim Social Security. As it turns out, those pondering when to claim their benefits don't need to worry about potentially leaving free money on the table.
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How your Social Security benefit gets calculated
Many people are somewhat familiar with the numbers that go into the size of the check they get from Social Security every month. In general, higher earnings over your career will boost your benefit, as will working longer. Moreover, the earlier you claim Social Security retirement benefits between age 62 and age 70, the less you get per month.
However, the actual calculations are more complicated. The Social Security Administration (SSA) looks at your earnings history and picks out the 35 years in which you earned the most on an inflation-adjusted basis. That produces what's known as average indexed monthly earnings (AIME).
In the next step in the calculation, the SSA uses the AIME figure and plugs it into a formula in order to produce your primary insurance amount (PIA). The PIA formula is specific to people your age and becomes available when you turn 62. For instance, those who were born in 1960 and therefore reached age 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's anything left over, add 15% of the amount over $6,172.
The percentages don't change from year to year, but the amounts subject to each particular bracket for determining PIA do change.
Lastly, once the PIA is available, it represents your expected benefit if you take Social Security at full retirement age. If you claim early at age 62, however, you'll have to accept as much as 30% less per month in exchange for receiving a greater number of payments over the course of your lifetime.
How COLAs increase your future Social Security
That makes it easy for those claiming at age 62 to figure out how much they'll receive. But things get a little more complicated -- in a good way -- for those who wait until later.
The calculation above gives you your initial primary insurance amount. However, each year, your PIA will get adjusted higher by the COLA percentage. For instance, if the COLA for 2023 ends up being 9% and your initial PIA as of 2022 was $1,000, then your new PIA as of 2023 would be $1,090.
If you wait until 2023 to claim your Social Security, then your benefit will reflect a couple of things that will boost its amount. First, waiting an extra year could reduce or eliminate the penalty for claiming before full retirement age, or it could give you delayed retirement credits to boost your payout above the PIA. The PIA itself will also be higher, as it will reflect the COLA-adjusted amount.
Make the right decision
There are still a number of factors that go into deciding whether to claim Social Security early, at full retirement age, or later. However, those considering their options don't have to worry about making a snap decision in order to get the benefit of the large COLA expected for 2023. Even those who wait beyond January to start receiving benefits should still see their monthly checks reflect the higher amounts when they do choose to claim.
