Will I lose the big 2023 Social Security hike if I don’t deposit now? | Smart Change: Personal Finance

(Dan Caplinger)

Inflation hit the US economy hard in 2022, and those who rely on the fixed income provided by Social Security have felt the effect of rising prices even more than most consumers. Fortunately, Social Security provides annual cost-of-living (COLA) adjustments that help preserve the purchasing power of the monthly allowances that tens of millions of retired people rely on.

COLA Social Security for 2023 is likely to be one of the largest in history. It will still take a couple of months before the final figures are released, but current estimates suggest participants could get a 9% increase in their benefits starting in January.

This increase has many people close to retirement wondering if they should apply for Social Security sooner rather than later. Nobody wants to miss out on a potential 9% increase in their benefits, so it’s natural to wonder if you’d lose a big COLA if you wait until after January 2023 to apply for Social Security. As it turns out, those who are considering 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 allowance is calculated

Many people are quite familiar with the numbers that go into the size of the allowance they get from Social Security each month. In general, higher earnings during your career will increase your advantage, as will work longer. Also, the sooner you apply for Social Security retirement benefits between the ages of 62 and 70, the less you receive per month.

However, the actual calculations are more complicated. The Social Security Administration (SSA) reviews your earnings history and selects the 35 years you have earned the most based on inflation. This produces what is known as Indexed Average Monthly Earnings (AIME).

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

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

The percentages do not change from year to year, but the amounts subject to each particular band for the determination of the PIA change.

Finally, once the PIA is available, it represents your expected benefit if you take Social Security at full retirement age. If you apply for your application early at the age of 62, however, you’ll have to accept up to 30% less per month in exchange for receiving more payments over the course of your life.

How COLAs increase your future social security

This makes it easy for those who claim at the age of 62 to understand how much they will receive. But things get a little complicated, in a good way, for those who wait later.

The above calculation gives you yours initial amount of primary insurance. However, each year, your PIA will be adjusted higher than the COLA percentage. For example, if the COLA for 2023 ends up being 9% and your starting PIA in 2022 was $ 1,000, your new PIA starting in 2023 would be $ 1,090.

If you wait until 2023 to apply for your Social Security, your benefit will reflect a couple of things that will increase its amount. First, waiting an extra year could reduce or eliminate the claim penalty before full retirement age, or it could give you late retirement credits to raise your payment above the PIA. The PIA itself will also be higher, as it will reflect the correct amount for the COLA.

Make the right decision

There are still a number of factors that contribute to deciding whether to apply for Social Security early, at full retirement age or later. However, those considering their options need not worry about making a quick decision to get the benefit of the large COLA slated for 2023. Even those who wait beyond January to start receiving benefits should still see their monthly allowances reflect the higher matters when they Do choose to claim.

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