Will I lose the big Social Security hike of 2023 if I don’t file now?

Will I lose the big Social Security hike of 2023 if I don't file now?

Inflation has hit the US economy hard in 2022, and those who rely on the steady income that Social Security provides have felt the effect of rising prices even more than most consumers. Fortunately, Social Security provides annual cost-of-living adjustments (COLAs) that help maintain the purchasing power of the monthly checks that tens of millions of people rely on in retirement.

It is likely that Social Security’s COLA for 2023 will be one of the largest in history. It will be a few more months before the final figures are known, but current estimates suggest participants could receive a 9% increase in their benefits in January.

That rise is leaving many people nearing retirement wondering whether they should apply for Social Security sooner or later. No one wants to miss out on a potential 9% increase in their benefits, so it’s natural to ask whether you’d lose a major COLA if you waited until after January 2023 to claim Social Security. As it turns out, those who are thinking about when to claim their benefits don’t have to worry about potentially leaving free money on the table.

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How your Social Security benefit is calculated

Many people are somewhat familiar with the numbers that relate to the size of the check they get from Social Security each month. In general, a higher wage over your career will increase your benefits, as will working longer. In addition, the sooner you claim Social Security retirement benefits between the ages of 62 and 70, the less you will receive per month.

However, the actual calculations are more complicated. The Social Security Administration (SSA) looks at your income history and chooses the 35 years in which you earned the most on an inflation-adjusted basis. That yields what is known as Average Indexed Monthly Earnings (AIME).

In the next step in the calculation, the SSA uses the AIME figure and plugs it into a formula to produce your primary insurance amount (PIA). The PIA formula is specific to people your age and becomes available when you turn 62. People who were born in 1960 and thus will have reached the age of 62 in 2022 calculate their PIA as follows:

  • Take 90% of the first $1,024 from your AIME.
  • Add 32% of any amount between $1,024 and $6,172.
  • If there is anything left, add 15% of the amount above $6,172.

The percentages do not change from year to year, but the amounts that fall under each specific bracket for determining PIA do change.

Finally, once the PIA is available, it will represent your expected benefit if you take Social Security at full retirement age. However, if you claim early at age 62, you’ll have to accept as much as 30% less per month in exchange for receiving a greater number of payments over the course of your life.

How COLAs Boost Your Future Social Security

That makes it easy for those who claim at age 62 how much they will receive. But things get a little more complicated – in a good way – for those who wait until later.

The above calculation gives you your initial basic insurance amount. However, each year your PIA is adjusted higher by the COLA percentage. For example, if the COLA for 2023 is 9% and your initial PIA was $1,000 as of 2022, then your new PIA would be $1,090 as of 2023.

If you wait until 2023 to claim your Social Security, your benefits will reflect a number of things that will increase the amount. First, waiting an extra year can reduce or eliminate the penalty for claiming before full retirement age, or it can give you deferred retirement credits to increase your payout above the PIA. The PIA itself will also be higher, as it reflects the COLA-adjusted amount.

Make the right decision

There are still a number of factors that determine whether you qualify for Social Security early, at full retirement age, or later. However, those considering their options need not worry about making a quick decision to take advantage of the big COLA expected before 2023. Even those waiting to receive benefits after January should still see their monthly checks the higher amounts when they to do choose to claim.

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