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

(Kailey Hagen)

The average Social Security check is set to rise about $147 next year, thanks to a historic 8.7% cost-of-living adjustment (COLA). That’s exciting news for seniors already claiming benefits, but it raises a question for those who are eligible but haven’t enrolled yet: Should they claim before the end of the year so they also get a significant benefit boost in 2023 can enjoy?

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 the COLA to Social Security benefits

When you first apply for Social Security, the government calculates your primary insurance amount (PIA). It does this by looking at your average monthly earnings over your 35 highest earning years, adjusted for inflation. This is known as your Average Indexed Monthly Earnings (AIME).

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The government takes your AIME and puts it into the benefit formula that is in effect for the year you turn 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 above $6,172 by 15%.
  4. Total the results of steps 1 through 3 above and round to the nearest $0.10.
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The formula for other years is quite similar. The only thing that changes are the inflection points — $1,024 and $6,172 in the example above. The Social Security Administration maintains a list of inflection points for all previous years.

The results of this formula tell you how much you will get at your full retirement age (FRA). That’s anywhere from 66 to 67 for today’s workers, depending on your year of birth. This is what the government adds the 8.7% COLA to for 2023, and it happens regardless of when you claim. Whether you sign up in 2022 or wait until 2023 or beyond, you won’t miss out on that benefit boost.

However, when you sign up still matters

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

If you claim under your FRA, your benefit will be reduced by the following amounts:

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  • 5/9 of 1% per month up to 36 months
  • 5/12 of 1% per month for any additional months if more than 36 months are claimed early

For those who enroll immediately at 62, this 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 beyond your FRA and they will grow by two-thirds of 1% per month until you reach your maximum benefit at 70. This gives you an extra 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. Claiming early often makes sense if you have a terminal illness or if you’re struggling to pay your bills without Social Security. But for those living into their 80s or beyond, signing up early may mean settling for a smaller lifetime benefit. Delaying benefits can give you more money overall, but you have to be comfortable paying all of your living expenses on your own until you’re ready to file.

This is what you should focus on when deciding whether to join Social Security before 2023. Either way, you’ll get your COLA, but the choice you make can have far-reaching consequences for your retirement finances.

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If you need help figuring out your estimated benefit at different starting ages, create a my Social Security account. There is a calculator that can estimate your benefit on each month between 62 and 70. Weigh all your options before deciding how to proceed. It shouldn’t take long, and even if you decide to claim before 2023, you’ll still have plenty of time left to do so.

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