Social Security COLAs

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Topic Author
stoneholm
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Joined: Sun Feb 15, 2015 1:43 pm

Social Security COLAs

Post by stoneholm »

I have a dumb question – if I retire early (before reaching 62), does the amount of social security I’ll draw at 62 (or 67 or 70) go up from inflation between the current calculation I get today from the social security website and when I start drawing it? I.e., do the COLAs/inflation adjustments apply in the interim even though I’m not drawing it yet. I believe they do, but can’t find my notes on why I think that, and would just like to confirm that. (Note that I recognize that by stopping work early I am going to have a lower calculation thanks to having some of my 35 work years treated as zeros; instead my question is really about the COLAs).

Thanks in advance!
mptfan
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Re: Social Security COLAs

Post by mptfan »

I am not a social security expert, but my understanding is that the SS COLA applies to your benefits starting in the year that you turn 62, whether you apply for benefits at 62 or not. Thus, the COLA is meant to adjust your benefits to generally keep up with inflation (as defined by the CPI-W), and does not kick in until you turn 62. Before age 60, your annual earnings are indexed to determine your benefits based on the annual increase in the National Average Wage Index (AWI). I don't believe there is any index adjustment for wages reported during the age of 60 and 61.
Last edited by mptfan on Fri Feb 20, 2015 3:32 pm, edited 6 times in total.
Beth*
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Re: Social Security COLAs

Post by Beth* »

The estimates in your social security statement are based on today's dollars. If the cost of living as measured by social security goes up, those estimates will go up.

You can see this if you have statements from previous years. This is what my estimates show for the amount of money I will receive at full retirement age assuming I continue earning at my current earnings rate (I am above the social security cut-off for contributions so my earnings rate has stayed constant for all these statements):

2014 Statement: $2,396 a month
2013 Statement: $2,324 a month
2012 Statement: $2,255 a month

As I said, my earnings have remained constant at the social security maximum so what is reflected in the increase in the estimates is the change in cost of living which impacts how social security calculates benefits.
Topic Author
stoneholm
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Re: Social Security COLAs

Post by stoneholm »

Great - thank you very much!
JW-Retired
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Re: Social Security COLAs

Post by JW-Retired »

There isn't any way you can miss out on the cola. The reference quantity SSA applies the annual cola to is your PIA (primary insurance amount), aka full retirement age benefit amount. The cola gets applied to recalculate everyone's PIA every year whether or not they have claimed SS benefits. Usually, your SS benefit will be your PIA times a factor resulting from any early or delayed claiming (range from 0.75 to 1.32). If you are drawing spousal it will be spouse's PIA that gets colaed.

This means everyone's current benefit or to-be-taken-later benefit increases with the annual cola.
JW
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mptfan
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Re: Social Security COLAs

Post by mptfan »

Beth* wrote:The estimates in your social security statement are based on today's dollars. If the cost of living as measured by social security goes up, those estimates will go up.

You can see this if you have statements from previous years. This is what my estimates show for the amount of money I will receive at full retirement age assuming I continue earning at my current earnings rate (I am above the social security cut-off for contributions so my earnings rate has stayed constant for all these statements):

2014 Statement: $2,396 a month
2013 Statement: $2,324 a month
2012 Statement: $2,255 a month

As I said, my earnings have remained constant at the social security maximum so what is reflected in the increase in the estimates is the change in cost of living which impacts how social security calculates benefits.
I don't believe this is correct. If the cost of living future estimates as measured by social security goes up, then the present value estimates of your future benefits in today's dollars will go DOWN, not up. That is because a larger future inflation assumption leads to a smaller present value number.

Assuming your earnings remained constant at the social security maximum for the last several years, the reason why your estimated future benefits have increased each year is because each estimate is one year closer to the time that you will receive your benefits, so there is one less year to reduce the present value estimate, so the present value estimate gets a bit larger each year.
Last edited by mptfan on Fri Feb 20, 2015 1:31 pm, edited 1 time in total.
2retire
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Re: Social Security COLAs

Post by 2retire »

According to the interview recently done by Morningstar with the chief actuary of the Social Security Administration.

http://news.morningstar.com/articlenet/ ... ?id=684071

The COLA adjustment doesn't start until your 62'nd birthday. Everyone aged 62 and above gets the COLA adjustment, whether or not they have claimed or suspended their benefit.

Prior to age 62, only your earnings history matters.
mptfan
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Re: Social Security COLAs

Post by mptfan »

JW Nearly Retired wrote:There isn't any way you can miss out on the cola. The reference quantity SSA applies the annual cola to is your PIA (primary insurance amount), aka full retirement age benefit amount. The cola gets applied to recalculate everyone's PIA every year whether or not they have claimed SS benefits.
I don't think this is correct, or perhaps I am mis-interpreting what you wrote. It is true that social security applies an indexing factor to your earnings from each year when determining your PIA, which is then used to determine your full retirement age benefit amount, but it is not true that they use the annual COLA to determine the indexing factor. The indexing factor is determined by the change in the national average wage index each year.

http://www.ssa.gov/oact/cola/AWI.html
Last edited by mptfan on Fri Feb 20, 2015 1:29 pm, edited 1 time in total.
furwut
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Re: Social Security COLAs

Post by furwut »

2retire wrote:
Prior to age 62, only your earnings history matters.
Just to be clear a CPI adjustment is factored into your prior earnings so inflation, to the extent it's correctly measured by CPI, is not a risk.

CORRECTION: mptfan is right. The adjusting factor is AWI not CPI. Wonder how closely the two track?
Last edited by furwut on Fri Feb 20, 2015 1:33 pm, edited 1 time in total.
mptfan
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Re: Social Security COLAs

Post by mptfan »

furwut wrote:
2retire wrote:
Prior to age 62, only your earnings history matters.
Just to be clear a CPI adjustment is factored into your prior earnings so inflation, to the extent it's correctly measured by CPI, is not a risk.
This is not true. Your prior earnings are adjusted based on changes in the national average wage index, not the CPI. See the link in my post above.
Topic Author
stoneholm
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Re: Social Security COLAs

Post by stoneholm »

thanks again -those linked items definitely clear up the mystery, I highly recommend them to anyone else trying to figure it out:

http://news.morningstar.com/articlenet/ ... ?id=684071

http://www.ssa.gov/oact/cola/AWI.html
mptfan
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Re: Social Security COLAs

Post by mptfan »

furwut wrote:CORRECTION: mptfan is right. The adjusting factor is AWI not CPI. Wonder how closely the two track?
Since you asked.... over the 10 years ending in 2013, the CPI-U averaged 2.3% per year and the NAWI averaged 2.8% increase each year. (Note that SS used the CPI-W, not the CPI-U to determine the annual COLA, but the two numbers are usually close)
JW-Retired
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Re: Social Security COLAs

Post by JW-Retired »

mptfan wrote:
JW Nearly Retired wrote:There isn't any way you can miss out on the cola. The reference quantity SSA applies the annual cola to is your PIA (primary insurance amount), aka full retirement age benefit amount. The cola gets applied to recalculate everyone's PIA every year whether or not they have claimed SS benefits.
I don't think this is correct, or perhaps I am mis-interpreting what you wrote. It is true that social security applies an indexing factor to your earnings from each year when determining your PIA, which is then used to determine your full retirement age benefit amount, but it is not true that they use the annual COLA to determine the indexing factor. The indexing factor is determined by the change in the national average wage index each year.

http://www.ssa.gov/oact/cola/AWI.html
In trying to keep it simple I was using "cola" loosely to represent the yearly adjustment. Wage index or official CPI-W as the case may be.
JW
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mptfan
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Re: Social Security COLAs

Post by mptfan »

JW Nearly Retired wrote:In trying to keep it simple...
The social security benefit formula is not simple. ;)

The annual increase in the AWI (wage inflation) is generally higher than the annual increase in the CPI (price inflation). So by using the AWI to index earnings, instead of the CPI, the result is lower indexed annual earnings and therefore a lower benefit.
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