Should You Sign Up for Social Security Before the 2023 COLA Kicks In?

(Kailey Hagen)

The average Social Security Check is set to jump about $147 next year, thanks to a historic cost-of-living adjustment (COLA) of 8.7%. That’s good news for seniors who have already claimed benefits, but it raises a question for those who are eligible but haven’t signed up yet: Should they claim before the end of the year so they too can enjoy a big boost in benefits in 2023?

The answer depends a lot on your personal situation. Here’s what you need to know to make the right call.

Image source: Getty Images.

How the government applies COLA to Social Security benefits

When you apply Social Security for the first time, the government calculates your primary insurance amount (PIA). This is done by looking at your average monthly income over the 35 years of your highest income, adjusted for inflation. This is known as your average index monthly income (AIME).

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The government takes your AIME and puts it into the benefit formula used for your year 62. For those born in 1960, the benefit formula is as follows:

  1. Multiply the first $1,024 of your AIME by 90%.
  2. Multiply any amount between $1,024 and $6,172 by 32%.
  3. Multiply any amount over $6,172 by 15%.
  4. The sum of the results from steps 1 to 3 is rounded up and rounded down to the nearest $0.10.

The formula for other years is the same. The only thing that changes is the folding point – $1,024 and $6,172 in the example above. The Social Security Administration maintains a list of folding points for all previous years.

The result of this formula tells you how much you will earn full retirement age (FRA). That’s anywhere from 66 to 67 for current workers, depending on your year of birth. This is what the government adds 8.7% COLA for 2023, and it happens no matter if you admit it. Whether you sign up in 2022 or wait until 2023 or beyond, you won’t miss out on that profit boost.

If you sign up, it still matters, though

Enrolling in 2022 may be a smart choice for some, but it’s more about FRA and their personal circumstances than 8.7% COLA. If you follow the steps discussed above, you will know what benefits you can expect in your FRA. But if you choose not to enroll at that age, there’s an extra step in your benefit calculation.

Claims under your FRA reduce your benefits by the following amounts:

  • 5/9 of 1% per month up to 36 months
  • 5/12 of 1% per month for all additional months if claimed more than the first 36 months

For those who immediately enroll at 62, that means a 25% reduction if your FRA is 66 or a 30% reduction if your FRA is 67.

On the other hand, you can delay benefits after your FRA and they will increase by two-thirds of 1% per month until you reach your maximum benefit at 70. That gives you an additional 24% per month if your FRA is 67, or 32% if Your FRA is 66.

The best claim age often comes down to your life expectancy and your financial situation. Early claims often make sense if you have a terminal illness or if you’re struggling to pay your bills without Social Security. But for people in their 80s or older, enrolling early can mean settling for a smaller age benefit. Deferring benefits can give you more money, but you should be comfortable paying all of your own living expenses until you’re ready to enroll.

Here’s what you should focus on when deciding whether to enroll in Social Security before 2023. Either way, you’ll get a COLA, but the choices you make can have big consequences for your retirement finances.

If you need help figuring out your benefit estimate at various starting ages, make one my Social Security account. There is a calculator that can estimate your profit every month between 62 and 70. Weigh all your options before deciding how to proceed. This shouldn’t take long, and if you decide to claim before 2023, you’ll still have plenty of time to do so.

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