How to apply Cost of Living Adjustments to your benefits – Social Security Increase in 2023 Part 1

In January 2023, everybody who received Social Security benefits got an 8.7% increase in their monthly benefit. Even people who had not claimed their benefits yet, but are able to, received an 8.7% increase in their benefit. I will discuss more on how that works in Part 2 coming soon. They received that 8.7% increase because of a Social Security feature called the Cost Of Living Adjustment or COLA. That 8.7% growth was the biggest COLA increase in 40 years.

COLA Started in 1975

Social Security added the COLA feature in 1975 to help people receiving their benefits keep up with inflation. Inflation has to do with the rising cost of goods and services, like groceries, gas, cars, and houses. The prices for those items usually increase every year. The Consumer Price Index (CPI) tracks the rate of price increases on all of those products and more. The rate of increase is stated in percentage terms. The percentage increase for the CPI in a particular year, is the same COLA percentage growth recipients will receive for the next year.

For example, in 2022 the CPI increased by 8.7%. That is the same Cost of Living Adjustment percentage increase everybody receiving Social Security benefits got starting in 2023. In 2021, the CPI increased by 5.9% and everybody receiving Social Security saw their benefits increase by that same percentage in 2022.

Every year, in October, Social Security announces the COLA increase for the upcoming year. So in October of this year, Social Security will announce the COLA percentage increase for 2024.   

The COLA percentage increase is one thing, but you can’t spend percentages, you spend dollars. Everybody would like to receive the biggest dollar increase possible in their monthly Social Security benefit every year. Everybody gets the same COLA percentage increase. But if you want to get the biggest dollar increase or raise in your Social Security benefit every year for the rest of your life, you want to apply the COLA percentage increase to the biggest benefit possible. If you want to get the smallest dollar increase in your benefit every year, you would apply the COLA percentage increase to the smallest benefit possible.

An Example

For example, someone born in October 1961 can claim their benefit in a couple of months at age 62. On their Social Security benefit statement, it says if they claim at age 62, they will receive $1,750 per month. That is the smallest benefit they can receive. If they wanted to receive their biggest benefit, then they would wait until age 70 to claim. On their Social Security benefit statement it says that if they claim at age 70 they will receive $3,100 per month.

Now, let’s look at what kind of dollar increase they will receive with a COLA of 4%. Applying that increase to their age 62 benefit results would grow their total monthly benefit to $1,820 ($1,750 + $70). Applying that same increase of 4% to their age 70 benefit, would grow their benefit by $124 or up to $3,224 per month ($3,100 + $124).

The difference between the monthly benefit increase is $54 ($124 – $70). They would receive $54 more each month that year if they applied the 4% Cost of Living Adjustment increase to their age 70 benefit of $3,100 opposed to applying that same 4% COLA increase to their smaller age 62 benefit of only $1,750. Keep in mind that this is only for one year. Each year, the age 70 benefit will get even bigger than the age 62 benefit. And applying the same COLA percentage increase will make that difference grow even bigger, a lot bigger, over time. 

If you want to get the biggest pay raise in your Social Security benefit every year, delay claiming your benefit as long as possible, ideally until age 70. If you want to get the smallest pay raise every year, claim your benefit at age 62.