Social Security COLA: What Clients Don’t Know Could Lead to a Claiming Mistake

I've gotten calls from advisors whose clients want to claim benefits early to avoid missing out. Here's what I tell them.

There’s nothing quite like a whopping 8.7% Social Security cost-of-living adjustment (COLA) to get clients tuned into the value of this program.

Advisors and individuals have been calling to ask about this largest COLA since 1980 (14.3%) and 1981 (11.2%). Ever since the first hints of a possible double-digit COLA surfaced this summer, people have been anxious that they’ll miss out if they haven’t already claimed benefits.

Key to understanding Social Security when a client hasn’t yet claimed is how COLAs are applied between ages 63 and 70. Let’s look at how to connect those dots when it comes to COLA.

What to Tell Clients

It’s quite distressing to hear clients are willing to upend their retirement income plans to ensure they get this year’s COLA. Claiming earlier than planned is a problem. They should not risk their overall plan for short-term assumed gain.

Clients over age 62 who haven’t yet claimed will not miss out on the COLA.

COLAs, including the 2023 COLA, automatically apply each year after one’s “official” primary insurance amount (PIA) is calculated at age 62. Clients do not need to claim early to get the benefits of the annual COLA.

What’s Driving So Much Anxiety?

As retirement gets closer, clients want the most they can get from Social Security. Those who haven’t claimed have a case of FOMO (fear of missing out).

The best steps financial advisors can take is to address the issues that may be causing anxiety. We’ve had a pile-up this year:

It is no wonder clients are anxiety-ridden. So, when there is even a glimmer of good news, everyone wants in. There are two pieces of good news for 2023: Social Security is up, and Medicare Part B premiums are down.

Clients Already Receiving Social Security

Older clients already receiving Social Security payments will get their first increased payment in January. On average, they should see about $140 more per month. Clients at the high end of benefits could see an increase approaching $300 per month.

Couple that good news with a $5.20 per month lower standard Part B premium, and this is the best news your retired clients have had in a long time.

Even clients who claimed early at 62 or 63 and locked in permanently lower payments will get a nice bump.

Those claiming spousal benefits or survivor benefits, and any children getting family benefits, will also see a larger than usual benefit increase.

Clients Waiting to Claim Are Now Reconsidering

The clients to worry about are those seriously considering claiming several years earlier than planned — all because they want in on the high COLA. They do not have to claim early to get the win here. Social Security benefits are calculated to include any COLAs, regardless of when a client claims.

In fact, Social Security applies all COLAs by simple accumulation between ages 63 and 70 for those waiting to claim. Adjusting for the annual COLA is already part of the formula. Total cost-of-living adjustments will be applied to the calculated PIA at the point a client claims.

An Example

Any client born in 1954 reached full retirement age in 2020. If they wait to claim until age 70 (in 2024), all COLAs between 2017 and 2024 will be applied. If the client’s PIA is $3,200 and they claim in 2024, monthly payments would be about $5,470 (using a placeholder 4% COLA in 2024). Between COLA and delayed retirement credits, that’s a 71% increase over their original calculated PIA.

Bottom Line: Reduce Anxiety, Keep the Plan Intact

Make sure you’re connecting the dots in Social Security’s benefit formula. COLAs are applied on an accumulated basis. There is no need for clients to claim benefits now unless it’s part of their holistic retirement income plan. Clients will not lose the new COLA, but they should lose some of that gnawing anxiety.

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