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.

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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