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Paid to Wait

Richard Connor

ARE YOU IN YOUR 60s and worried about rising consumer prices? It’s worth understanding how inflation affects Social Security benefits—especially its impact on those who postpone claiming their monthly check.

Social Security benefits jumped 5.9% in 2022, thanks to the annual cost-of-living adjustment. This inflation increase was based on the Bureau of Labor Statistics’ CPI-W. This was the largest adjustment since 1982, and it affected nearly 64 million retirees. The increase took effect in January. Based on current inflation, another significant increase is also predicted for 2023.

Several other Social Security limits also rose in 2022. For workers, the maximum amount of earnings subject to the Social Security payroll tax climbed to $147,000. For those in their 60s, the earnings limit—the amount of earned income that folks receiving benefits can collect before their Social Security check is reduced—also increased.

This earnings limit kicks in if you’re younger than your full retirement age (FRA), which is age 66 or 67, depending on the year you were born. Social Security defines full retirement age as the age when you’re eligible for an unreduced retirement benefit. For people younger than their FRA in 2022, the earnings limit increased to $19,560. For people who reached their full retirement age in 2022, it rose to $51,960. If your earned income is above these thresholds, your benefit is reduced.

Interestingly, these values didn’t rise by the same 5.9%. The maximum income subject to payroll taxes increased 2.94%, the pre-FRA earnings limit rose 3.16% and the FRA year earnings limit rose 2.85%. The increase in these values is based not on CPI-W, but on changes to the National Average Wage Index, which increased 2.83% for 2020, the latest year for which data are available.

Although my wife and I are now eligible for Social Security, we’ve decided to postpone claiming benefits so we earn delayed retirement credits (DRCs). These credits are the method that Social Security uses to increase retirees’ benefits when folks claim Social Security later than their FRA. The DRCs you earn are added to your primary insurance amount—the sum you could receive as of your full retirement age—thereby increasing your benefit.

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How much is the increase? You earn a credit for each month you delay, starting with the month you reach your FRA and ending with the month you reach age 70. If you were born after 1942, you receive two-thirds of 1% for each month you wait, equal to 8% a year.

DRCs for the years before you turn 70 are credited to your account in January of the following year. In the year you reach age 70, DRCs are also credited to your account in the month you turn 70.

My full retirement age is 66 and six months. If I delay claiming until I’m 70, I will receive 42 months of delayed credits, or 28% in total. Result: My benefit at age 70 will be 128% of my primary insurance amount—my benefit as of my full retirement age. My online Social Security account confirms this calculation.

You can claim your retirement benefits as early as 62, but Social Security will reduce your benefit for each month you claim before you reach your FRA. The early retirement reduction is different than the DRC calculation. The reduction is 5/9th of 1% for each month before FRA, for the first 36 months. If the number of months is greater than 36, your benefit is further reduced by 5/12th of 1% per month for each additional month beyond 36 months.

I’m currently age 64 and eight months, or 20 months from reaching my FRA. If I started my retirement benefit today, my benefit would be reduced by about 11%. My benefit would be 89% of my primary insurance amount. I also checked this one using my Social Security account.

How does Social Security handle the combination of cost-of-living adjustments and early or delayed retirement for seniors who haven’t yet claimed benefits? Any inflation increase is applied to your primary insurance amount, with that amount also adjusted to reflect any early or delayed retirement months. Once again, by checking my online account, I confirmed that Social Security applied 2022’s inflation increase to my primary insurance amount. I compared my 2022 primary insurance amount with the 2021 amount. Sure enough, it was 5.9% larger.

Even better, such cost-of-living adjustments have a compounding effect on your primary insurance amount. DRCs, however, don’t compound. Instead, those credits are fixed at eight percentage points per year more than your primary insurance amount. Still, the total credit for delaying—which could be as much as 28% for me if I delay until age 70—is applied to your inflation-increased primary insurance amount. In other words, delaying benefits, coupled with the annual inflation adjustments, could mean a much larger monthly check—and a nice piece of protection against rising consumer prices.

Richard Connor is a semi-retired aerospace engineer with a keen interest in finance. He enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. Follow Rick on Twitter @RConnor609 and check out his earlier articles.

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Albert Collins
Albert Collins
5 months ago

recent studies suggest a reduction to 80% of SSN benefits/pay – if I take at 62 then my hope is I would be grandfathered in at that rate with COLA’s included for future years. i understand my FRA is 67 but if rates are reduced to 80% then not sure why i would wait.

Jonathan Clements
Admin
Jonathan Clements
5 months ago
Reply to  Albert Collins

Any politician who wants to get reelected would never vote for a benefits reduction for those in or near retirement age. It would be political suicide. All this talk of a sharp reduction in benefits for those in or near retirement is, I believe, nothing more than scare tactics designed to generate clicks — and shameful at that because it frightens folks into making bad decisions.

OldPrinter
OldPrinter
5 months ago

As clear an explanation that you provided, I am still a bit confused about the particulars in exactly what to expect.

“DRCs for the years before you turn 70 are credited to your account in January of the following year. In the year you reach age 70, DRCs are also credited to your account in the month you turn 70.”

For example, My Social Security site states that at 67 one would get $3300/month if one applied in ANY month of 2022. Apply in January of 2022 one gets $3300. Apply August 2022 one gets $3300/month. Apply January 2023 the payment raises to 3450/month. What happened to the 8 months of 2022 that were not accounted for the DRC? Would it then be resolved the following January with a larger check? And if that is the case, would the amount shorted September-December in the previous year be resolved?

Governmentease is hard for most people to fully wrap one’s head around.

Last edited 5 months ago by OldPrinter
corrupt
corrupt
5 months ago

I initially planned to wait until FRA to start drawing, but decided to start at 65 instead based on 3 factors:

  1. Life expectancy in my family is not great. All grandparents and my dad did not reach the break even point (mom [92 Y/O] is still around, but in no condition to do anything with her SS… Alzheimer’s is a terrible thing).
  2. The break even point will be delayed even further if only 75% or so of benefits are paid starting in 2033-2034
  3. Rather than pay Medicare Pt. B out of pocket, it’s just easier to have it taken out of my SS.
mytimetotravel
mytimetotravel
5 months ago
Reply to  corrupt

Why do you care about the “break even” point? What matters with SS is how much income you get each month, not how much you get in total. SS is the best COLA-protected annuity going – actually the only one.

Paying Medicare before you start SS is trivial.

Humble Reader
Humble Reader
5 months ago

For me the decision to wait until 70 was a no brainer. The goal was to maximize the amount of risk-free annual income in retirement, not to assure that I received the most that I could over a lifetime. My FRA was 66. I will have added four more high earned income years to my record when I start my benefit early next year. As someone who only has 2 legs on my retirement stool I consider Social Security an inflation-protected annuity. I suppose that someone who also has a defined retirement benefit could risk taking the money sooner and investing it. But for me that would be too risky. Thanks to my waiting and the recent cost of living increase our combined benefit will be just over $70,000. We have been tracking our expenses in detail for the last several years and know that this will be more than enough to cover all of our non-discretionary spending. That means we have flexibility in how much we will draw from our retirement accounts since that would only be used for discretionary spending. With any luck, when I start my RMD at 72 or 73 some part of that will be moved to our brokerage account, to be spent only if needed.

John M
John M
5 months ago

Great article. I don’t agree however with the assertion that DRC’s don’t increase with inflation. The percentage is always 8%, yes… but your primary insurance account increases with inflation, and the DRC is calculated as a percent of that. Therefore the DRC calculation captures the inflation adjustment. If your DRC was $100 in 2021, then in 2022 it is $105.90. Nominally, the DRC amount increased in 2022 by the 5.9% inflation adjustment.

Rick Connor
Rick Connor
5 months ago
Reply to  John M
Lehman Brown
Lehman Brown
5 months ago
Reply to  Rick Connor

Thanks Rick, this article cleared this up for me.

Rick Connor
Rick Connor
5 months ago
Reply to  John M

John,
Thanks for the kind words. The reason I said that the DRC’s don’t compound is that is what I found when I researched the specific process that the SSA uses to calculate your benefit if you delay claiming past FRA. The inflation adjustment compounds because the next year’s inflation adjustment is applied to the previously adjusted PIA. When you claim your benefit is the inflation adjusted PIA, which is then adjusted up by the number of DRCs. This example by Dr. Larry Kotlikoff may explain it better.
https://maximizemysocialsecurity.com/how-are-colas-and-drcs-applied

mytimetotravel
mytimetotravel
5 months ago

I waited until 70 to claim, and am happy with my decision. (Of course, it helped that I was able to draw a spousal benefit against my ex-husband’s account after I reached FRA.) Since my company pension has no COLA, I wanted the maximum inflation protection I could get. If I were told I will drop dead tomorrow I would still consider it the right decision, as it reduces my concerns about longevity (which in my case is a more likely outcome).

steveark
steveark
5 months ago

What always surprises me is how “everyone” says that Social Security doesn’t pay enough to live on. My benefit at age 70 (in four years) plus the half of my FRA benefit that my wife will begin to claim at the same time add up to over $71,000 in today’s dollars. That is plenty to live on for most people. In our case we also have a several million dollar diversified portfolio so we will supplement Social Security from our investments but the fact is living on a partially tax free inflation adjusted seventy-one thousand dollars a year would not be difficult at all. There is a big range of benefits under the program and if you are on the high end of the scale, Social Security is better than almost any pension out there.

mytimetotravel
mytimetotravel
5 months ago
Reply to  steveark

According to this article – https://www.cnbc.com/select/heres-how-much-the-average-social-security-check-is/ – the SS administration states that the average benefit for a retired worker this year is $19,896. Try living on that. And if you were female you’d likely be on the low end.

parkslope
parkslope
5 months ago
Reply to  steveark

I agree. Our combined SS income increased by $4,930 this year to just under $89,000, so we are glad that we both waited until 70 to claim. That, and our ability to increase rents on our four investment properties have made it possible for us to leave our other investments untouched.

R Quinn
R Quinn
5 months ago
Reply to  steveark

Did you earn the max for SS payroll taxes? The great majority of Americans earn nowhere near the maximum taxable wage base. I earned the maximum all my life and have been collecting SS for nearly twelve years – plus the COLAs – and our combined monthly benefits are not near $71,000.

parkslope
parkslope
5 months ago
Reply to  R Quinn

According to SS, the maximum benefit for someone who waits until 70 is $50,328 ($4,194/month). The maximum at FRA is $40,140 ($3,345/month). $50,328 +.5 * $40,140 = $70,398.

William Perry
William Perry
5 months ago

Thank you RIchard for a concise summary of the financial claiming factors regarding SS benefits based upon your age relative to your full retirement age. I waited until age 70 to claim my benefit based on my earnings record and I am happy with my decision and my 32% DRC increase. I agree that the claiming decision is unique to each person, their financial situation, risk tolerances, expectations and marital status. I expect the when to claim decision will continue to be one of the great debates because of the unknowable length of life. While I found I was questioning my own claiming decision the most during my FRA to age 70 period the manner spousal survivor benefits are calculated drove my decision to wait. For me, I feel like the money I did not receive during the deferral period was equivalent to the purchase price of a guaranteed, inflation adjusted joint life annuity which under current tax law is at least partially federal tax exempt. From reading your many Humble Dollar articles I am certain you will make an informed decision and that is a worthy goal we can all agree upon.

Ormode
Ormode
5 months ago

For some, the main problem is figuring out what the IRMAA brackets are going to be, so you know how much income to take this year. Unfortunately, your income for 2022 will be used to calculate IRMAA in 2024, and the brackets for 2024 won’t be announced until November of 2023. They use CPI-U instead of CPI-W, and the calculations are completely different.

Taking a conservative assumption of 8% this year and 4% next year, I am trying to keep my 2022 MAGI under $128K. Your numbers may be different, but it pays to check. An income $1 over the limit can result in thousands in extra premiums.

An
An
5 months ago
Reply to  Ormode

I monitor this Harry Sit article 2022 2023 2024 Medicare Part B IRMAA Premium MAGI Brackets that he periodically updates as inflation data becomes available every month. By late Oct/early Nov he will have solid 2024 IRMAA numbers that I use to finalize my 2022 income.

R Quinn
R Quinn
5 months ago
Reply to  Ormode

The IRMAA difference for a couple earning above $182,000 – the first IRMAA bracket – is $68 a month each and for single the first IRMAA bracket is $91,000. Not sure what your $128k goal is.

Ormode
Ormode
5 months ago
Reply to  R Quinn

As a single retiree, I’m trying to stay in the bottom bracket – paying $68 a month extra is not too bad, but paying $260 a month extra sure is!
Next step after $91K this year is $114K. Apply an 8% increase for this year, and a 4% increase for next year, and you’re at $128K.

Last edited 5 months ago by Ormode
R Quinn
R Quinn
5 months ago

Take versus delay seems to be the never ending debate and gamble.

Most conventional wisdom says delay if you can as you will appreciate the higher monthly income when you may need it most in later years – if you live long enough.

Forty-two months of benefits invested could be a nice chunk of change too if they started at FRA. That’s the route I took. Today the tax-free interest which is still reinvested generates monthly income equal to half my net SS benefit – after taxes and Medicare deductions.

Still not sure I made the wise move, but it appears good to me.

parkslope
parkslope
5 months ago
Reply to  R Quinn

One of the great things about SS is the ability to claim at different ages.

The combination of a bull market and low inflation no doubt made your decision a wise one–at least up to this point. Do you think you would make the same decision if you had just reached your FRA in today’s environment?

R Quinn
R Quinn
5 months ago
Reply to  parkslope

Good question. I honestly don’t know.

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