You might wonder why you have to wait for the SSA to tell you the new amount when you could simply multiply your current payment by 8.7%. That’s not how it works, however. Some payment increases will be higher than 8.7%, and some will be lower.
The reason is that the COLA is applied to your primary insurance amount (PIA) rather than your current benefit — and the two are not always the same. According to the SSA, the PIA is the benefit you would get if you elect to begin receiving retirement benefits at your normal or full retirement age. At this age, the benefit is neither reduced for early retirement nor increased for delayed retirement.
The PIA formula sounds like something you’d study in a college calculus course. It’s based on the sum of “three separate percentages of portions of average indexed monthly earnings,” the SSA said on its website. The portions depend on the year a recipient reached age 62, became disabled before age 62, or died before attaining age 62.
The age you start collecting Social Security retirement benefits is an important consideration in terms of your COLA. As Motley Fool reported, not everyone waits until their full retirement age (FRA) — which is currently 66 or 67, depending on when you were born — to start collecting. If you wait until your FRA to claim your benefits, your PIA and monthly payment might be the same.
However, if you claim your benefits at a different age, the SSA runs another calculation to adjust the PIA up or down for those who claim early or late. People who claim benefits before their FRA typically get lower payments, while those who wait until they are 70 get the highest possible payment.
In some cases, you might get a higher COLA than 8.7% because Medicare Part B premiums will go down in 2023. These premiums are deducted from your Social Security payment, so you’ll have less taken out in 2023 than in 2022 if you have already signed up for Medicare. This means your COLA might be above 8.7%.
However, your COLA could be less than 8.7% if you have already started collecting Social Security but plan to sign up for Medicare for the first time in 2023. Because the Part B premium will now be withheld from your monthly Social Security payment, it could eat into some of the 8.7% COLA.
This might also be the case if you switch from Original Medicare to a Medicare Advantage (MA) plan in 2023 and elect to deduct the MA costs from your Social Security payment.