Social Security benefits and inflation

By Kevin Theissen

Inflation is all over the news and affects all of us. This includes older Americans that rely on their Social Security benefits. It’s important to know how Social Security keeps up with inflation and how the cost-of-living adjustment (COLA) is calculated.

Social Security is a source of predictable, inflation-adjusted lifetime income available to retired Americans. It seems complicated for many to know how and when to maximize their inflation-adjusted benefits. Regardless of claiming strategy, you can be assured that all primary insurance amounts (PIA) are raised with the COLA.

The ideal claiming strategy is to claim at an age that will provide the highest possible benefit, and this would be age 70 for retirement benefits and full retirement age (FRA) for spousal benefits. This will also maximize the dollar amount of the COLA. The COLA is based on the Consumer Price Index (CPI), which measures price increases of goods and services from year to year. This year, inflation is higher than in other years because of supply chain issues caused by Covid, commodity shortages, and other factors. It is not known how long such conditions will continue. The Federal Reserve Board is taking action to fight inflation by raising interest rates. The current inflation has the unusual factor of very low unemployment rate so we will have to wait and see what effect the Fed’s actions have.

Estimated benefits are calculated for each person the year they turn 62 and once the PIA is calculated, it is adjusted each year for the COLA. Workers under 62 can be assured that benefits rise with wages while people are earning (before age 60) and with prices while they are spending (after age 62).

Deciding when and how to claim and understanding adjustments to Social Security for inflation has always been complex. It may not be easy but if you spend the time to understand it, you’ll find it is a pretty good system and Americans are fortunate to have it in our later years.

Kevin Theissen is the owner of HWC Financial in Ludlow.