The Social Security 2023 Cola: Good Bad And Ugly News For Retirees
Social Security benefits have fallen behind inflation this year, leaving many retired Americans in a difficult position. In fact, more than seven in 10 retirees rank rising prices as their biggest financial concern right now, according to Goldman Sachs.
Fortunately, Social Security benefits are adjusted for inflation on an annual basis, and recipients will get a historic 8.7% cost-of-living adjustment in 2023. That is largest COLA enacted in more than four decades and the fourth-largest COLA in history. Generally speaking, that is a positive development for retired workers, though there are a few caveats.
Here’s the good, the bad, and the ugly news related to Social Security’s 2023 COLA.
Average The Highest 35 Years
The Social Security benefits calculation uses your highest 35 years of earnings to calculate your average monthly earnings. If you do not have 35 years of earnings, a zero will be used in the calculation, which will lower the average. In the table below, the highest 35 years are listed in Column G.
Total the highest 35 years of indexed earnings, and divide that amount by 420, which is the number of months in a 35-year work history, to find the Average Indexed Monthly Earnings.
For our example worker, who was born in 1953 and turned 60 in 2013, the highest 35 years of wages total $1,919,040. Divide by 420 to get an AIME of $4,569.
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How Are Your Social Security Benefits Calculated
Social Security uses your highest 35 years of earnings, indexed to a national average wage index, to calculate your primary insurance amount If you have fewer than 35 years of earnings, each year with no earnings will be entered as zero. You can increase your Social Security benefit at any time by replacing a zero or low-income year with a higher-income year.
There is a maximum Social Security benefit amount you can receive, though it depends on the age you retire. For someone at full retirement age in 2022, the maximum monthly benefit is $3,345. For someone filing at age 70, the maximum monthly amount is $4,194. And for someone retiring early, at age 62, the maximum monthly benefit is $2,364.
To estimate your benefits, use the Social Securitys online Retirement Estimator.
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How To Calculate Social Security Benefits In Excel
If you are in your late 50s and approaching retirement, you can create a useful model of your future benefits. It works best to do this in a Microsoft Excel spreadsheet, as follows:
- Using a recent Social Security statement, list in spreadsheet column A your taxable Social Security earnings year by year.
- List in column B the most recently published NAWI adjustment factors as published by the SSA.
- Multiply columns A and B and output the result to column C.
- Identify in column D the 35 highest values in column C. Add these together and divide the sum by 420 . This will approximate your AIME.
- Use the most recently published bend points to convert your AIME into a PIA.
You also can fill in hypothetical values for estimated taxable Social Security earnings in future years until you plan to stop working. To be conservative, use a NAWI adjustment factor of 1.0000 in column B for all future years.
A financial advisor who fully understands this process can help verify your calculations, advise you on when to start Social Security benefits, and estimate the future benefits you can expect to receive.
How To Estimate Your Social Security Income
Two facts are knownSocial Security benefits are not guaranteed, and some changes will be necessary to keep the system solvent in the future as millions of baby boomers retire and begin to receive their Social Security benefits. Though these facts create uncertainty, its also true that the quality of your retirement depends on your planningand you must start planning somewhere.
A good starting point is to figure out the dollar amount of the retirement benefits to which all of your years of Social Security contributions entitle you under current law. There are four ways to do this:
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Use The Ssas Online Benefits Calculator
The SSA provides a variety of calculators to help you plan for all of the unique situations that come with retirement. Each of these calculators is connected to the mySocialSecurity website, SSA.gov. When you establish login credentials for mySocialSecurity, all the information related to your Social Security deductions and benefits is easily accessible online. You can even get the same statements online that you can request from your local field office.
When you use the calculators on this website, youll receive accurate estimates based on the number of credits you have and the amount of money youve contributed towards Social Security. One calculator allows you to estimate your monthly retirement benefits at different retirement ages. If you dont want to create a mySocialSecurity account, you can use the sites Quick Calculator, but the results are less specific.
Because these estimates are based on your contributions from Social Security payroll deductions, the SSAs online benefits calculators are some of the most effective ways to estimate your retirement benefits. The highly variable factors in the calculations involve annual cost of living adjustments based on inflation and laws that could change before your retirement date.
Factors That Can Affect Your Benefit
Early retirement – If you elect to receive retirement benefits early, your benefit is proportionately reduced. You can elect to receive retirement benefits as early as age 62, but for each month of early retirement, your total benefit will be reduced by 5/9 of 1 percent, up to 36 months, and by 5/12 of 1 percent thereafter. For example, if you elect to receive retirement benefits at age 62 and your full retirement age is 66, then you would receive approximately 25 percent less each month than you would if you retired at age 66.
Delayed retirement – By contrast, you receive more if you delay receiving retirement benefits past full retirement age. Late retirement may increase your average earnings and you also receive a special delayed retirement credit. This credit is figured as a percentage of your Social Security benefit and is in addition to your regular benefit, but doesnt affect your PIA.
The delayed retirement credit varies depending on when you were born and how many months or years after full retirement age you retire . For example, if you were born in 1944 , you will earn an extra 8 percent of your benefit for every year you delay retirement up to age 70. This means that if you delay receiving your retirement benefit until age 70, your benefit payment will be 32 percent larger than if you began receiving retirement benefits at age 66.
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Social Security Bend Points
The Social Security benefits formula is designed to replace a higher proportion of income for low-income earners than for high-income earners. To do that, the formula uses what are called bend points, which are adjusted for inflation each year.
Bend points from the year you turn 62 are used to calculate your Social Security retirement benefits. The example in the table below uses 2020 bend points. It works like this:
- You take 90% of the first $960 of AIME.
- You take 32% of the next $5,785 of AIME.
- You take 15% of any amount over that $5,785.
- You total those three numbers.
The result is your primary insurance amount, or PIA, the amount you will receive if you begin benefits at your Full Retirement Age .
Your PIA is rounded to the next lowest dime, and your benefit amount is rounded to the next lowest dollar.
Technically, your PIA is calculated and rounded to the next lowest dime, and then any inflation adjustments are applied. That number is then rounded to the next lowest dime. Next, any increase or decrease based on age is applied. That number is then rounded down to the next lowest dollar.
You can see current and historical bend points and the current years bend points on the Bend Formula Bend Points page of the Social Security Administrations website.
In the example in the table below, you can see how the AIME calculated in the previous step was plugged into the bend point formula to calculate the PIA.
How Are Social Security Payments Calculated
The SSA bases the Social Security entitlement on data gathered throughout your working life which is formed into an earnings record. This information is than used, with a three-part process, to calculate the size of payments:
Average Indexed Monthly Earnings The SSA uses your 35 best-paid years to calculate your AIME, which is essentially a snapshot of your historical earnings. The more you earn the higher your monthly entitlement can be, up to a maximum threshold of $142,800 .
Primary Insurance Amount Assuming that you wait until full retirement age before claiming Social Security, your PIA is the amount youll receive each month from the SSA.
Your PIA is comprised of
- 90% of the first $996 of your AIME
- 32% of any amount over $996 up to $6,002
- and 15% of any amount over $6,002
Age of claim If you decide to claim Social Security before you reach full retirement age the size of your monthly entitlement will decrease. This is done on a sliding scale, with more than a quarter of the payment size being lost if you claim at the age of 62. Alternatively, if you delay the payment until you are 70 you can add up to 30% to your payment amount.
Those who are considering early retirement should be aware that their Medicare benefits will not kick in until sixty-five, meaning that they will have to purchase insurance during the in-between period.
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Do You Expect To Live A Long Life
Many people live longer than they expect.
Because Social Security provides guaranteed income for life, it’s especially valuable to you when you reach age 80 and beyond. Claiming benefits at your full Social Security benefit age or later could be a good way to secure your monthly income during your later years. Your benefit increases the longer you wait to claim, up to age 70, and is adjusted annually with the cost of living. If you live into your 80s but claim at age 62 instead of your full retirement age or later, your total lifetime benefits will be lower by thousands of dollars.Calculate your expected longevity.
Claiming at your full benefit age could still make sense for you.
We understand it’s difficult to make predictions. You may want to plan for the possibility that you may spend 20 or more years in retirement. On average, a woman reaching age 65 today will live to age 87, and a man will live to age 84. Waiting to claim as long as you can could still make sense for you if you are married, are the higher earner in the household, and want your surviving spouse to keep the highest monthly benefit after you die. Remember, you can claim at any point between age 62 and 70. Each additional month that you wait to claim gives you a permanent increase in your monthly benefit which becomes more valuable as you age.Calculate your longevity.
There’s a good chance that you’ll live into your 80s and beyond.
Theres A Social Security Spousal Benefit
Marriage is rewarded when it comes to Social Security. One spouse can take whats called a spousal benefit, worth up to 50% of the other spouses Social Security benefit. For example, if your monthly Social Security benefit is worth $2,000 but your spouses own benefit is only worth $500, your spouse can collect a spousal benefit worth $1,000 bringing in $500 more in income per month.
Just as the benefit based on your own work history is reduced if you claim it early, the same is true for a spousal benefit. That 50% figure is the maximum amount that only a spouse who is at least full retirement age is eligible for. Taking the spousal benefit early at, say, age 62, reduces the amount to as little as 32.5% of the higher earners benefit. If you take your own benefit early and then later switch to a spousal benefit, your spousal benefit will still be reduced.
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Hi Richie, Once she takes her retirement benefit, your wife is eligible for her retirement benefit plus her excess spousal benefit. Her excess spousal benefit is half of your full retirement benefit less her retirement benefit with the difference reduced if she started her spousal benefit before full retirement age.
It sounds like her excess spousal benefit is negative, which they then set to zero. So unfortunately, it looks like you folks owe SSA three months of spousal benefits that you weren’t supposed to receive.
Sorry, for the bad news. But, you can run MaxiFi Planner. I’m sure you’ll find moves outside of Social Security that will more than make up for this loss. Best, Larry
Is Your Previous Answer Correct?
Hi Larry, Is my wife’s benefit based on my PIA at FRA or is it based on the COLA increased amount if she applies two years later for spousal benefits on my record? I read online that my wife should receive a higher benefit based on the my current benefit with COLAs. But shouldn’t it be based solely on my PIA at FRA of 66 years and six months? Thanks, Matt
Hi Matt, I’ll give you an example to explain how it works. Let’s say Bill started drawing his benefits five years ago at his full retirement age . Bill’s PIA at that time was $2,000, but his PIA has risen to a current amount of $2,200 as a result of cost of living increases.
Will My Wife Get A Higher Payment Once I Retire?
How To Obtain Your Benefits Estimate
Using your actual earnings record, you can estimate your retirement benefit online with the Retirement Estimator calculator on the Social Security Administration website at ssa.gov. You also can create different scenarios based on current regulations that show how different earnings amounts and retirement ages will affect it. The site also includes other benefit calculators to help you estimate disability and survivor benefits. Make sure to sign up to view your Social Security statement, which includes a detailed record of your earnings, as well as estimates of retirement, survivor, and disability benefits. If youre not registered for an online account and are not yet receiving benefits, youll receive a statement in the mail every year, starting at age 60.
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How Much To Save For Retirement
Naturally, the next question becomes: how much should a person save for retirement? Simply put, its an extremely loaded question with very few definite answers. Similar to the answer to the question of whether to retire or not, it will depend on each person, and factors such as how much income will be needed, entitlement for Social Security retirement benefits, health and life expectancy, personal preferences regarding inheritances, and many other things.
Below are some general guidelines.
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Who Is Eligible For Social Security Benefits
Anyone who pays into Social Security for at least 40 calendar quarters is eligible for retirement benefits based on their earnings record. You are eligible for your full benefits once you reach full retirement age, which is either 66 and 67, depending on when you were born. But if you claim later than that – you can put it off as late as age 70 – youâll get a credit for doing so, with larger monthly benefits. Conversely, you can claim as early as age 62, but taking benefits before your full retirement age will result in the Social Security Administration docking your monthly benefits.
The bottom line: Youâre eligible for Social Security Benefits if youâve paid into the system for at least a decade, but your actual benefits will depend on what age â between 62 and 70 â you begin to claim them.
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The Ugly News: The Social Security Trust Fund May Be Depleted More Quickly
The aging population has put the Social Security program in hot water. Last year, costs exceeded income by $56 billion, and that trend will continue indefinitely, setting the Social Security trust fund on pace to be depleted by 2035, according to the board of trustees.
Of course, that depletion date is only an estimate, and it is based on a great many assumptions. So the board of trustees actually modeled three different scenarios — one high cost, one low cost, and one intermediate — to compensate for error. Those three scenarios put the trust fund depletion date at some point between 2031 and 2069, but none of the scenarios accounted for an 8.7% COLA.
The board of trustees estimated the 2023 COLA would land between 3.92% and 5.14%. That means Social Security benefits will rise more sharply than anticipated next year, which could accelerate the depletion of the trust fund.
On the bright side, government officials still have time to solve that problem. And even if the Social Security trust fund does run dry, payroll tax will still cover 80% of scheduled benefits in 2035.
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Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs. The Motley Fool has a disclosure policy.