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  • Writer's pictureChris Stein, CFP®

Glitch in COLA Haunts Retirees

We recently received an email question that asked us if it is true that people born in 1947 receive lower Social Security retirement benefits than others.  Believe it or not, it is absolutely TRUE!  As your mind starts to swirl wondering what it was about 1947 that caused Social Security to punish those who were born that year, I want to redirect you to the events of 2008 instead.  The lower SS retirement benefits is another side effect of the financial crisis/recession that peaked in 2008.


While there is no special provision in the SS formula that singles out 1947, the glitch comes by way of the method in which SS calculates your Primary Insurance Amount (PIA), and then how they apply Cost of Living Adjustments (COLAs) to that PIA.  I will remind you quickly that your PIA is calculated in the year you turn 62.  For those born in 1947, they turned 62 in 2009.  In the year you turn 62 SS looks back upon your entire work record and adjusts all those earnings for inflation.  Specifically they are adjusted for WAGE inflation, not by the CPI, which we usually look at to determine price inflation.  This adjustment is called “indexing” for inflation.  SS then picks your 35 highest “indexed” annual earnings and averages them to determine your AIME, or Average Indexed Monthly Earnings.  From the AIME another formula is used to determine your PIA.  A little known fact about this process is that SS does not “index” your earnings after you turn age 60.  This means your wages at 60 and 61 do not get the benefit of any inflation adjustment.  This is the start of the issue I am describing that affects those born in 1947.

The Glitch

In 2008 the economy was acting very abnormally, and along with it we saw strange swings in prices for goods and services.  Using the normal SS method for determining a COLA adjustment based on inflation, the SS Administration decided in October 2008 that there would be a 5.8% COLA starting in January 2009.  Right after this determination prices dropped substantially and essentially erased the inflation that seemed to exist back in October.  Since SS had already implemented the 5.8% COLA it was too late to fix it, so those over age 62 in 2008 received a 5.8% increase in benefits even though there really turned out to be little or no inflation in 2008.  Those people then saw no COLA adjustment in 2010 and 2011 as it took until 2012 for prices to climb back above the October 2008 figures.  So for those born before 1947 it all evened out in the end.  They received too much COLA in 2009 then got ZERO for two years and then COLAs returned.  But those born in 1947 and to a certain extent to those born in 1948 they received the ZERO COLAs in 2010 and 2011 but MISSED out on the 5.8% bump in 2009.

Bad Timing

This issue boils down to bad timing.  The formula used to calculate retirees PIA combined with how they apply COLAs after you turn 62 creates a little window of “opportunity”, or more accurately a window of “penalty”, that allows a lightning strike event like 2008 to affect one small group.  The extent of the “penalty” will vary by individual but it is estimated that the benefits for those born in 1947 is permanently reduced by about 5% compared to those born in 1946.  Those born in 1948 are affected by about half that amount and those after 1948 are affected a very small amount.  There is really no “fix” planned for this and there has not been much written in the popular press about this since about 2010.  Since Congress is really the only entity that can “fix” this glitch I do not expect any action on this since it does not appear to be capturing any of the attention from those in Washington D.C.

Thanks to our reader for the question, and thank you again for visiting our blog.

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