Soc Sec Question RE: COLA increases

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MrWasabi65
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Soc Sec Question RE: COLA increases

Post by MrWasabi65 »

I am not quite at the age for early Soc Sec and don't plan to start taking anytime soon, if I can help it.

I have a question based on not being very knowledgeable about the program.

That said, there is so much current buzz about the 2023 COLA adjustment.

Does it matter to those who have not yet begun to take Soc Sec what the adjustments are?

They don't adjust the base tables for all?
terran
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Re: Soc Sec Question RE: COLA increases

Post by terran »

The wages used to calculate your benefit are adjusted for inflation, so higher inflation should mean a higher benefit.
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22twain
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Re: Soc Sec Question RE: COLA increases

Post by 22twain »

Loosely speaking, until you become eligible to collect SS at age 62, your projected benefit increases according to the National Average Wage Index, as calculated using data from two years previously. Historically, the annual increase in NAWI has usually somewhat outpaced price inflation per the Consumer Price Index (CPI).

When you become eligible to collect SS, the NAWI indexing ends, and your Principal Insurance Amount (PIA) increases according to the Cost of Living Adjustment (COLA) which is based on a specific version of the CPI, the CPI-U CPI-W. [corrected version of CPI]

For the gory details, start here and rummage around by following links:

https://www.ssa.gov/oact/cola/Benefits.html
Last edited by 22twain on Sat Jul 02, 2022 9:29 am, edited 1 time in total.
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JoeRetire
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Re: Soc Sec Question RE: COLA increases

Post by JoeRetire »

MrWasabi65 wrote: Thu Jun 30, 2022 11:02 pm Does it matter to those who have not yet begun to take Soc Sec what the adjustments are?

They don't adjust the base tables for all?
If you are asking "Will I lose out on Social Security COLAs if I haven't yet started to take benefits?", the answer is No.
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22twain
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Re: Soc Sec Question RE: COLA increases

Post by 22twain »

Right. I'm over 62, no longer working or paying SS taxes. I'm waiting till 70 to start collecting. Every year, the benefit SS says I'll get goes up by the announced COLA.
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David Jay
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Re: Soc Sec Question RE: COLA increases

Post by David Jay »

22twain wrote: Fri Jul 01, 2022 8:30 amI'm over 62, no longer working or paying SS taxes. I'm waiting till 70 to start collecting. Every year, the benefit SS says I'll get goes up by the announced COLA.
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pahkcah
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Re: Soc Sec Question RE: COLA increases

Post by pahkcah »

22twain wrote: Fri Jul 01, 2022 12:15 am When you become eligible to collect SS, the NAWI indexing ends, and your Principal Insurance Amount (PIA) increases according to the Cost of Living Adjustment (COLA) which is based on a specific version of the CPI, the CPI-U.
The COLA for Social Security and Federal pensions is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Below is a link to a description of how the COLA is calculated. The link contains a table that shows monthly changes in the COLA and the total change through May 2022. The COLA will be based on the difference between the third quarter (July, August, September) CPI-W of 2021 versus the third quarter CPI-W of 2022. Current COLA is 7.3%, but that number can go up or down between now and October when the September CPI-W change will be known.

https://www.narfe.org/federal-benefits-institute/cola/
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22twain
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Re: Soc Sec Question RE: COLA increases

Post by 22twain »

Ugh, I keep getting those CPI's mixed up. :oops: Thanks for pointing that out.
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Alan S.
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Re: Soc Sec Question RE: COLA increases

Post by Alan S. »

Question for you SS experts:

Is it correct that those born in 1960 will suffer from reduced AIME due to the effects of Covid, and those born in 1961 (age 61 in 2022) will not benefit from a large COLA effective 12/2022 for 2023?
Carl53
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Re: Soc Sec Question RE: COLA increases

Post by Carl53 »

Alan S. wrote: Sat Jul 02, 2022 9:42 am Question for you SS experts:

Is it correct that those born in 1960 will suffer from reduced AIME due to the effects of Covid, and those born in 1961 (age 61 in 2022) will not benefit from a large COLA effective 12/2022 for 2023?
I believe you are correct.
https://www.ssa.gov/OACT/COLA/Benefits.html
An insured worker becomes eligible for retirement benefits when he or she reaches age 62. If 2022 were the year of eligibility, we would divide the national average wage index for 2020 (55,628.60) by the national average wage index for each year prior to 2020 in which the worker had earnings and multiply each such ratio by the worker's earnings. This would give the indexed earnings for each year prior to 2020. We would consider any earnings in or after 2020 at face value, without indexing. Then we would compute the AIME and use this amount in computing the worker's primary insurance amount for 2022.

For example, a person who had maximum-taxable earnings in each year since age 22, and who retires at age 62 in 2022, would have an AIME equal to $11,430. Based on this AIME amount and the bend points $1,024 and $6,172, the PIA would equal $3,357.60. This person would receive a reduced benefit based on the $3,357.60 PIA. The first COLA this individual could receive is the one effective for December 2022.
My bolding. The first case the person turning 62 this year does not have his earnings since 2020 adjusted for inflation and his prior ones adjusted to 2020. In the second case the first COLA (age 62 beneficiary) you receive is effective the end of the year you take benefits, if 62 this year it would be this December of 2022, while if age 61 this year it would be December 2023 and received the following month.
billaster
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Re: Soc Sec Question RE: COLA increases

Post by billaster »

Alan S. wrote: Sat Jul 02, 2022 9:42 am Question for you SS experts:

Is it correct that those born in 1960 will suffer from reduced AIME due to the effects of Covid, and
You need to clarify what you mean by "reduced". AIME is based on an adjustment using the national average wage index. The index was about 2.8% higher in 2020 than in 2019, so the person born in 1960 will have an approximately 2.8% higher AIME than one born a year earlier. Maybe that's a lesser bump than in some previous years, but it certainly isn't a reduction.
those born in 1961 (age 61 in 2022) will not benefit from a large COLA effective 12/2022 for 2023?
Yes, but they will benefit from an increased nation average wage index and increased AIME for 2021.

Nobody's benefits are "reduced".
Soon2BXProgrammer
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Re: Soc Sec Question RE: COLA increases

Post by Soon2BXProgrammer »

billaster wrote: Sat Jul 02, 2022 2:25 pm
Alan S. wrote: Sat Jul 02, 2022 9:42 am Question for you SS experts:

Is it correct that those born in 1960 will suffer from reduced AIME due to the effects of Covid, and
You need to clarify what you mean by "reduced". AIME is based on an adjustment using the national average wage index. The index was about 2.8% higher in 2020 than in 2019, so the person born in 1960 will have an approximately 2.8% higher AIME than one born a year earlier. Maybe that's a lesser bump than in some previous years, but it certainly isn't a reduction.
those born in 1961 (age 61 in 2022) will not benefit from a large COLA effective 12/2022 for 2023?
Yes, but they will benefit from an increased nation average wage index and increased AIME for 2021.

Nobody's benefits are "reduced".
I believe Alan S. is referring to this glitch:
https://www.aarp.org/retirement/social- ... efits.html
Which i do not believe came to pass.
Earned 43 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
billaster
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Re: Soc Sec Question RE: COLA increases

Post by billaster »

Soon2BXProgrammer wrote: Sat Jul 02, 2022 2:55 pm I believe Alan S. is referring to this glitch:
https://www.aarp.org/retirement/social- ... efits.html
Which i do not believe came to pass.
Right, I see. It did not come to pass. The Average Wage Index went up 2.8% in 2020, not down.

Thanks to efforts of the Fed and fiscal policies, the unemployment rebound was quicker than many expected. Also, a part of this average wage increase is what is called a composition change. Many of the people that were laid off first were lower wage workers, so the remaining employed workers, on whom the average is based, where primarily higher wage workers. This boosted the reported average wage.
Carl53
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Re: Soc Sec Question RE: COLA increases

Post by Carl53 »

Carl53 wrote: Sat Jul 02, 2022 1:31 pm
Alan S. wrote: Sat Jul 02, 2022 9:42 am Question for you SS experts:

Is it correct that those born in 1960 will suffer from reduced AIME due to the effects of Covid, and those born in 1961 (age 61 in 2022) will not benefit from a large COLA effective 12/2022 for 2023?
I believe you are correct.
https://www.ssa.gov/OACT/COLA/Benefits.html
An insured worker becomes eligible for retirement benefits when he or she reaches age 62. If 2022 were the year of eligibility, we would divide the national average wage index for 2020 (55,628.60) by the national average wage index for each year prior to 2020 in which the worker had earnings and multiply each such ratio by the worker's earnings. This would give the indexed earnings for each year prior to 2020. We would consider any earnings in or after 2020 at face value, without indexing. Then we would compute the AIME and use this amount in computing the worker's primary insurance amount for 2022.

For example, a person who had maximum-taxable earnings in each year since age 22, and who retires at age 62 in 2022, would have an AIME equal to $11,430. Based on this AIME amount and the bend points $1,024 and $6,172, the PIA would equal $3,357.60. This person would receive a reduced benefit based on the $3,357.60 PIA. The first COLA this individual could receive is the one effective for December 2022.
My bolding. The first case the person turning 62 this year does not have his earnings since 2020 adjusted for inflation and his prior ones adjusted to 2020. In the second case the first COLA (age 62 beneficiary) you receive is effective the end of the year you take benefits, if 62 this year it would be this December of 2022, while if age 61 this year it would be December 2023 and received the following month.
Consider two individuals that consistently made 150K per year from 1981 to 2020. One born in 1960 and the other in 1961. Both have FRAs of age 67. Both either plan to take SS at their FRA (or at the same age anyway). SS states that the one born in 1960 would have a PIA of $3357. (note my spreadsheet only shows $3353). If average wages increased 4% in 2021 (actual number won't be announced until later this year), the person born in 1961 with the exact same earning history, would have a PIA of $3487 (my spreadsheet number) or about 4% more than his year older counterpart. Fast forward to January 2023 when checks reflecting a TBD presumptive 8% inflation adjustment kicks in. Mr. 1960 gets an 8% boost in his PIA ($3621 my spreadsheet number), as well as any reduced benefit he might already be taking while Mr. 1961 gets no boost in his PIA ($3487 ) and won't get a COLA until the following year. His benefit is forever going to be nearly 4% lower than Mr. 1960.

Edited 7/3 6:11 Corrected 1961 Index factors thanks to billaster.
Last edited by Carl53 on Sun Jul 03, 2022 9:32 am, edited 2 times in total.
billaster
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Re: Soc Sec Question RE: COLA increases

Post by billaster »

Carl53 wrote: Sat Jul 02, 2022 5:34 pm Consider two individuals that consistently made 150K per year from 1981 to 2020. One born in 1960 and the other in 1961. Both have FRAs of age 67. Both either plan to take SS at their FRA (or at the same age anyway). SS states that the one born in 1960 would have a PIA of $3357. (note my spreadsheet only shows $3353). If average wages increased 4% in 2021 (actual number won't be announced until later this year), the person born in 1961 with the exact same earning history, would have a PIA of $3419 (my spreadsheet number) or about 2% more than his year older counterpart. Fast forward to January 2023 when checks reflecting a TBD presumptive 8% inflation adjustment kicks in. Mr. 1960 gets an 8% boost in his PIA ($3621 my spreadsheet number), as well as any reduced benefit he might already be taking while Mr. 1961 gets no boost in his PIA ($3419) and won't get a COLA until the following year. His benefit is forever going to be nearly 6% lower than Mr. 1960.
Are you accounting for an increase in the bend points for Mr. 1961 in 2023? Just at a glance, his PIA looks low.
Carl53
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Re: Soc Sec Question RE: COLA increases

Post by Carl53 »

billaster wrote: Sat Jul 02, 2022 8:30 pm
Carl53 wrote: Sat Jul 02, 2022 5:34 pm Consider two individuals that consistently made 150K per year from 1981 to 2020. One born in 1960 and the other in 1961. Both have FRAs of age 67. Both either plan to take SS at their FRA (or at the same age anyway). SS states that the one born in 1960 would have a PIA of $3357. (note my spreadsheet only shows $3353). If average wages increased 4% in 2021 (actual number won't be announced until later this year), the person born in 1961 with the exact same earning history, would have a PIA of $3419 (my spreadsheet number) or about 2% more than his year older counterpart. Fast forward to January 2023 when checks reflecting a TBD presumptive 8% inflation adjustment kicks in. Mr. 1960 gets an 8% boost in his PIA ($3621 my spreadsheet number), as well as any reduced benefit he might already be taking while Mr. 1961 gets no boost in his PIA ($3419) and won't get a COLA until the following year. His benefit is forever going to be nearly 6% lower than Mr. 1960.
Are you accounting for an increase in the bend points for Mr. 1961 in 2023? Just at a glance, his PIA looks low.
Thanks for another set of eyes. Bend points were correct but had a mistake in the index factors. Correction made in original post above.
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