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

(Kailey Hagen)

The average Social Security check will skyrocket to about $147 next year, thanks to a historic cost of living adjustment (COLA) of 8.7%. This is exciting news for seniors who are already claiming benefits, but for those who are eligible but haven’t signed up yet, it raises a question: Should they claim before the end of the year so they too can enjoy a substantial benefit increase in 2023?

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

Image source: Getty Images.

How does the government apply COLA to Social Security benefits?

The first time you apply for Social Security, the state calculates your primary insurance amount (PIA). It does this by looking at your average monthly earnings over your 35 highest-earning years, adjusted for inflation. This is known as your average indexed monthly earnings (AIME).

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The government takes your AIME and puts it into the benefit formula that’s valid for the year you turn 62. The benefit formula for those born in 1960 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 over $6,172 by 15%.
  4. Add up the results from steps 1 to 3 above and round to the nearest $0.10.
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The formula for other years is quite similar. The only thing that has changed are the inflection points of $1,024 and $6,172 in the example above. The Social Security Administration maintains a list of inflection points for all previous years.

The results of this formula tell you how much you will receive in your full retirement age (FRA). This is between 66 and 67 for today’s employees, depending on your birth year. This is what the government has added 8.7% COLA for 2023 and it will happen whenever you request it. Whether you sign up in 2022 or wait until 2023 or beyond, you won’t miss this benefit increase.

It’s still important when you sign up

Enrolling in 2022 may be a wise choice for some, but it’s more about their FRA and personal circumstances than the 8.7% COLA. If you follow the steps discussed above, you will know what kind of benefit you can expect from your FRA. But if you choose not to enroll at that age, there’s an extra step in your benefit calculation.

Claiming under your FRA will reduce your earnings by:

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  • 5/9% of 1% monthly up to 36 months
  • 5/12 of 1% per month for any additional month if requested more than 36 months early

For those who enroll immediately at age 62, this means a 25% discount if your FRA is 66 and a 30% discount if your FRA is 67.

On the other hand, you can defer benefits past your FRA and they grow at two-thirds of 1% per month until you reach your maximum benefit at age 70. If your FRA is 67, this gives you an extra 24% per month. or 32% if your FRA is 66.

The best claiming age usually depends on your life expectancy and financial situation. If you have a terminal illness or are having trouble paying your bills without Social Security, it usually makes sense to file a claim early. But for those living in their 80s or later, signing up early may mean settling for a smaller lifetime benefit. Delaying benefits can save you more money overall, but you should be comfortable paying all of your living expenses on your own until you’re ready to sign up.

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

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If you need help figuring out your estimated earnings at various starting ages, create a My Social Security account. There is a calculator out there that can estimate your benefits between 62 and 70 per month. Weigh all your options before deciding how to proceed. This shouldn’t take long, and even if you decide to make a claim before 2023, you’ll still have plenty of time to do so.

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