How Social Security Benefits Keep Up With Inflation

Wealthy Behavior: September Market Update

With the impact of record high inflation putting a strain on wallets, social security beneficiaries are looking forward to 2023’s record high cost of living adjustment (COLA). The increase of 8.7% is the largest increase in benefits since 1982*. This boost in benefits has dominated headlines and raised questions as to how the COLA is calculated and what impact it may have on claiming decisions. To help you maximize your social security benefits, we’ve put together a primer on how social security keeps up with inflation—both before and after retirement.

First, social security is one of the few sources of predictable, inflation-adjusted lifetime income available to retirees. This, by itself, is a reason to maximize benefits through strategic claiming. Compared to the task of repositioning investment portfolios for an inflationary environment, maximizing one’s inflation-adjusted social security benefit is easy—just claim at the optimal age and let social security’s automatic inflation adjustments raise the income each year at a rate that keeps up with rising prices (though on a lagging basis).

should you claim your social security benefit early in order to get the COLA?

Before we get into how it all works, we must acknowledge that there is often a misguided notion of the optimal claiming strategy with regard to the COLA. We are often asked if one should claim their social security benefit early in order to get the COLA. The answer is a resounding NO. All primary insurance amounts (PIA—the benefit a person would receive if they elect to begin receiving retirement benefits at their normal retirement age) are raised with the COLA, whether or not benefits have been claimed.

In fact, the optimal claiming strategy with regard to the COLA is to claim at an age that will provide the highest possible benefit—age 70 for retirement benefits and full retirement age (FRA) for spousal benefits—because that will maximize the dollar amount of the COLA. For example: A client with a PIA of $3,000 and FRA of 67 will receive $2,100 if they claim at 62 vs. $3,720 if they claim at 70. 2022’s COLA of 5.9% would have given the early claimant a monthly increase of $123.90, versus $219.48 for the later claimant. This is why, when we run financial planning scenarios incorporating a COLA, we see that after the breakeven age the disparity between early and later claiming grows with each passing year.

what is social security’s COLA based on?

The COLA is based on the Consumer Price Index (CPI) which measures price increases of goods and services from year to year. The CPI usually makes headlines when it’s announced,  especially during environments like today’s, when inflation is running higher than normal and there are other factors creating an imbalance between supply and demand. Annual social security COLAs are meant to help maintain the standard of living for social security beneficiaries, therefore we caution you not to get too used to such generous COLAs in the future. The Federal Reserve Board is working to tamp down inflation by raising interest rates, but it is not known what impact(s) the Fed’s actions will have and when we’ll see them, since we’ve never been in a situation exactly like today’s, where prices are rising but wages are not, despite a low unemployment rate.

How Do I Get What I Deserve?

At Heritage Financial, our financial planning process includes personalized social security analysis and income maximization strategies, leaving clients with the peace of mind that they are getting the decision right. If you are wondering how and when to apply for social security, and how your monthly benefit will fit into your overall retirement income plan, let’s talk.

*Social Security Administration

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