Q & A

Ask Rusty – About Including “COLA” in Benefit Projections

Dear Rusty:  In your reply to “Confused Senior” about when to claim Social Security benefits, I noticed that you did not take into account any compounded annual increases in benefit payments. While these are not guaranteed and are dependent upon the economy, they do affect the difference in total amount that can be drawn between eligibility age, full retirement age, or age 70. Would you please address this? Signed: Stickler for Details

Dear Stickler: Thanks for your feedback on that article. You are correct, of course, that I did not include Cost of Living Adjustments (COLA) in my response to the question asked, and that was intentional. I seldom include future COLA in these calculations because doing so would mean introducing a speculative factor, and I don’t like uncertainties when it comes to claiming Social Security. It’s not that I can’t include COLA, but it’s usually easier for people to grasp the straight (guaranteed) mathematical computation without adding a variable factor which could result in an inaccurate future benefit projection. 

Historically, COLA increases have ranged from 0% to 14% because COLA is tied to inflation — a variable determined by annual changes to the national Consumer Price Index (CPI). If you remember the very high inflation years of the late 70s and very early 80s, those are the years when the highest COLA increases were granted. More recently (but before 2021) inflation has been held to its lowest level in recent history and, accordingly, COLA increases have been quite small. No COLA increases at all were granted in 2009, 2010 and 2015, and the increase in 2016 was a paltry 0.3%. The average COLA increase over the last 10 years (2011 – 2020) was 1.7%, and the average over the last 20 years has been 2.2%. I’ve done these computations both ways – including a 2% average COLA increase and not including any COLA increase – and the resulting breakeven point for claiming at age 70 vs. full retirement age doesn’t significantly change. 

For clarity, most early projections now suggest that high inflation in 2021 will cause the 2022 COLA increase to exceed 6%, far above the average over the past 20 years, further emphasizing the speculative nature of predicting COLA. Although the actual future benefit predictions would be somewhat different with a COLA projection added, those amounts would be conjecture (and “not guaranteed,” as you have said). Excluding COLA from such analyses, however, does provide guaranteed amounts and I prefer to use solid numbers rather than speculative ones. If it turns out that COLA improves their benefit amount and break-even age that will be icing on the cake, but they’ve made their claiming decision based on solid information and guaranteed future benefit increases. 

Other feedback from that same article suggested I should have also evaluated an option to claim benefits early and invest them, rather than waiting longer to get a guaranteed higher Social Security benefit. Just like trying to predict COLA, predicting investment growth introduces a variable that I’m not comfortable using when advising about Social Security benefits. For that type of speculative advice, it would be prudent to seek counsel from a certified financial planner. 

Comments On This Topic

  1. I applied for SS when I turned 62 in November of 2019. I am no getting a bill from SS stating that they overpaid me by approximately $7000.00. I only collected 2 months… maybe 3 I am not totally sure. This was the first year collecting. I thought there was a first year exempt rule???? I am not sure why they are taking my total earnings for 2019 when I did not collect for the entire year. I am certainly not in a position to refund $7000.00. Help!!!

    • Mary,
      All of your 2019 income earned before you started your Social Security does not count toward the earnings limit (the earnings limit applies to all those who work while taking early Social Security benefits). There is, indeed, a “first year rule” which exempts earnings received prior to starting SS benefits, but that same rule also subjects you to a monthly earnings limit for the remaining months of your first calendar year collecting. For 2019, the monthly earnings limit was $1470. So, if your benefits started in November 2019 and you worked and exceeded the monthly limit in both November and December of 2019, you became ineligible for SS benefits for those two months. Then, starting in 2020, you were subject to the 2020 annual earnings limit, which was $18,240, and if you exceeded that Social Security would take back benefits equal to $1 for every $2 you are over the limit. So, it appears as though your earnings after you started benefits in November 2019 have exceeded Social Security’s earnings limits for those collecting SS benefits before they have reached their full retirement age, and that has resulted in you getting an Overpayment Notice for $7000. If that is the the case, you have no recourse but to make repayment arrangements directly with Social Security. Your Overpayment Notice offers you the option of either repaying SS in one lump sum, or having your SS benefits withheld until they recover what you owe. But if both of those options create a financial hardship for you, you can call Social Security at 1.800.772.1213 to make special repayment arrangements which are less financially painful. In the latter case, they will be asking for a considerable amount of information from you to confirm your financial status. But the unfortunate bottom line is this: if you exceeded Social Security’s 2019 monthly earnings limit in November/December and also the 2020 annual earnings limit, and that resulted in an overpayment notice from Social Security, you will need to make repayment arrangements directly with the Social Security Administration.
      Russell Gloor
      National Social Security Advisor
      The AMAC Foundation

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