If you receive Social Security benefits, congratulations. Your monthly payment will increase by 3.2% beginning in January 2024.
But what if you're old enough to claim Social Security but are holding off on doing so? Will you miss out on Social Security's annual cost-of-living adjustments (COLAs) if you wait until 67 to claim benefits?
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No "gotchas" with waiting until 67
There are some valid reasons for claiming Social Security benefits earlier than your full retirement age (FRA). However, the fear of missing out on the annual COLAs isn't one of them.
There are no "gotchas" associated with waiting until 67 (or longer, for that matter) to receive Social Security benefits. You don't have to worry in the least that your benefits will be negatively impacted by delaying when you retire.
Annual COLAs aren't just applied to current Social Security benefits. They're also applied to the base benefit levels for future beneficiaries. This means that you'll eventually reap the rewards of the 2024 COLA when you begin receiving your Social Security retirement benefits.
Importantly, the COLAs compound. For example, let's say you could have begun receiving Social Security benefits in 2022 at age 62 but chose to wait until 2027 when you'll reach your FRA of 67. The 3.2% COLA for 2024 will be added on top of the hefty 8.7% increase for 2023 in determining your benefits when you start collecting them. So will any future COLAs that come between now and 2027.
Why Social Security COLAs exist
Social Security hasn't always had COLAs. Prior to 1975, it literally took an act of Congress to increase Social Security benefits. Since then, though, there have been annual adjustments announced in all but three years (2009, 2010, and 2015).
The reason why Social Security COLAs exist is that politicians realized that inflation was eroding the buying power of retirees' benefits. They passed legislation to adjust benefits based on how much prices increased from year to year.
It's not a perfect system. The inflation metric used to calculate COLAs -- the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) -- has been criticized for not adequately factoring in cost increases experienced by seniors. The Social Security Administration also only compares the CPI-W averages from the third quarters of the previous and current years. Those periods don't necessarily fully capture how inflation has affected retirees.
However, the approach to determining COLAs doesn't unfairly impact anyone who opts to wait before collecting Social Security benefits. Inflation hurts both current and future Social Security recipients. But COLAs help both groups.
A smart move -- and an even smarter move
Waiting until your FRA to receive Social Security is a smart financial move. You'll avoid the early retirement penalties. You won't have any benefit "clawbacks" from continuing to work after you begin receiving Social Security retirement benefits.
It's even possible that your base benefits could be higher. Social Security uses the 35 highest earnings years to calculate benefits. Many Americans will earn more in the few years before they retire than they did earlier in their careers.
However, there's an even smarter move (at least, for most people): Hold off until age 70 to collect Social Security retirement benefits. An analysis conducted by economists in 2022 found that more than 90% of Americans should wait until 70 to receive Social Security to maximize their lifetime benefits. If you take this route, all of those COLAs in the interim years will be there waiting for you.
