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

(Kelly Hagen)

The average Social Security check is set to jump to nearly $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 qualify but haven’t signed up yet: Should they, too, claim before the end of the year so they can reap big benefits in 2023?

The answer depends a lot on your personal situation. Here’s what you need to know to make the right call.

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How the government applies 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 income over your 35 highest-earning years, adjusted for inflation. This is known as your Average Indexed Monthly Income (AIME).

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The government takes your AIME and puts it into the effective benefit formula 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. Take the results of steps 1 through 3 above and round down to the nearest $0.10.
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The formula for other years is very similar. The only thing that changes in the above example are the bend points – $1,024 and $6,172. The Social Security Administration maintains a list of bend points for all previous years.

The result of this formula tells you how much you will receive at your full retirement age (FRA). That’s 66 to 67 for today’s workers, depending on your year of birth. The government adds an 8.7% COLA for 2023, and it happens even when you claim. Whether you sign up in 2022 or wait until 2023 or later, you won’t miss out on that benefit increase.

When you sign up is still important, though

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

Claiming under your FRA reduces your benefits by the following amounts:

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  • 5/9 of 1% per month for up to 36 months
  • 1% per month 5/12 for any additional month on initial claim beyond 36 months

For those who sign up 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 past your FRA and they will increase by two-thirds of 1% per month until you reach your maximum benefit at 70. If your FRA is 67, that gives you an extra 24% per month, or 32% if your FRA is 66.

The best age to claim often comes down to your life expectancy and your financial situation. It makes sense to claim early 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 older, signing up early means settling for a smaller lifetime benefit. Delaying benefits may give you more money overall, but you should be comfortable paying all of your living expenses yourself until you’re ready to sign up.

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

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

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