(TheStreet) - Oddsmakers have been busy predicting the cost-of-living adjustment (COLA) for Social Security recipients for 2023. With inflation continuing to whip up prices of food, fuel, clothing, rent, and other daily expenses, many predict that the COLA could set a 40-year record.
For people receiving Social Security benefits, any COLA adjustment provides extra cash in their checks to pay their bills. For everyone, it’s worth understanding what’s behind the chatter about COLA in advance of the mid-October announcement of what it will be for 2023.
COLAs have been low for years – until this one
We’ve had a long spell of low inflation since the late 1970s and early 1980s – a volatile and troublesome economic period. Since then, COLAs have been low, exceeding 5% only twice, in 2008 and last year. That explains why few people paid much attention to them.
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 (which ends Sept. 30). The U.S. Bureau of Labor Statistics announces monthly inflation index figures.
There’s no guarantee that Social Security benefits will be enriched with a COLA. It all depends on how inflation is tracking. In 2009, 2010, and 2015, there was no adjustment. However, it was 5.9% last year, the highest since 1982.
Speculation recently puts the 2023 COLA at between 8% and 9%. We’ll know what it will be when the SSA announces it on or around Oct. 13. The COLA will be reflected in benefits payments starting in December and received in January.
The SSA mails COLA statements to beneficiaries in December, but you can find yours more quickly by signing into your account at ssa.gov.
How the COLA applies to your benefits – and your benefit decisions
Social Security uses the COLA to your Primary Insurance Amount (PIA) starting at age 62, your first year of benefit eligibility. Once you apply for Social Security benefits, the SSA calculates your PIA and then increases it based on the sum of COLA increases between the time you turned 62 and the age at which you applied for benefits.
That amount is then subject to a reduction based on which type of benefit you apply for and when. Using Delayed Retirement Credits that you can accumulate by filing after your Full Retirement Age (FRA) 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.
When consulting with financial advisors and their clients on Social Security filing strategies, I recommend not including COLA in calculations and projections. Besides not being guaranteed, the COLA effect depends on the size of your benefit amount, which is affected by several factors. Plus, Social Security does all its calculations based on today’s dollars, not what those might be in the future.
Another word of caution about COLA: higher Social Security benefits could have the untoward effect of pushing recipients into higher tax brackets.
While advocates applaud that the COLA adjusts benefits for seniors, at times – such as this year – they are also quick to note that it doesn’t always keep pace with the prices those same seniors paid at the gas pump, in the grocery store, or on fuel bills. Inflation in 2022 has exceeded last year’s 5.9% COLA.
By Alyson Dorosky
October 3, 2022
About the author: Alyson Dorosky
Alyson Dorosky, CSSCS, is head of Social Security Support for LifeYield. She has seen thousands of different Social Security scenarios in five years of working with advisors and their clients to customize filing strategies and maximize retirement income.
