A reader asks if his Primary Insurance Amount (PIA) will be adjusted for inflation while he delays his Social Security benefit to age 70.
With the current inflation rate, I was wondering about my Primary Insurance Amount (PIA) at my Full Retirement Age (FRA) and if it will grow through Cost of Living Adjustments (COLAs) during that time to make up for inflation. I’m thinking of delaying claiming beyond my FRA at 67 to age 70. I know I will be increasing 8% per year non-compounded over those three years to end up with 24% more than my PIA. But will my PIA increase with compounded inflation over those three years?
Many areas of Social Security seem straightforward at face value but are a lot more confusing when you dig more deeply and try to really understand how they work. One of them is how inflation affects retirement benefits, so yours is an excellent question.
Here are some of the inner workings of Social Security. Your Primary Insurance Amount, or PIA, is a separate number from the retirement benefit that you actually get paid. The only time your PIA and your benefit amount are the same is when you are claiming at what we call your Full Retirement Age (or FRA) – not claiming early, not claiming late. However, the benefit itself is adjusted by several things: claiming early, claiming late, and any accumulated Cost of Living Adjustments (COLAs) that have happened since you turned age 62.
So let me explain a little more plainly. When you turn 62, Social Security determines your official PIA, which is the initial estimate of your retirement amount at your FRA. They set it at that point, even though you cannot collect your total PIA amount at that time. To calculate your PIA, they take a snapshot of your earnings record and apply indexing to all those past earnings based on the wage inflation rates that happened over the years. (We have discussed that process before, and you can Google to understand how that works.)
To use some numbers, let's say your PIA comes up to $1,500. That will be your FRA benefit without any adjustments for inflation, early or late claiming. That number is established when you're 62 because that's your first "age of eligibility," as they call it. It's the earliest that you can claim your retirement benefit under standard conditions, and they have to do the calculations to be ready for you to walk in the door at any time and claim.
Now, we all know that if you claim early, say at 62, your benefit will be reduced. If your FRA is at age 67, your PIA of $1,500 will be reduced by 30%. But what if you delay claiming? You mention waiting not just to your FRA but to age 70. And you're correct. For every year that you delay past FRA, your benefit increases by 8%. (Social Security calculates monthly, but we tend to talk about this yearly.)
The confusion comes here: these increases and decreases (such as the 30% reduction or the 8% increase) aren't changing your PIA. Your PIA "is what it is." Nothing changes that unless you have earnings recorded after the age of 62 that might increase that number. Each year, if you have earnings, they factor that into your earnings record and grant you the adjustments if they increase your PIA.
Let's assume there are no adjustments to keep things simple, and your PIA is still established as $1,500 in our example. (The only exception is WEP, which we won't get into today.) So what is being adjusted if you claim early or late? It's the benefit or the amount they actually pay you. That amount is calculated based on your PIA plus the relevant adjustments (early or late claiming and any COLAs after you first became eligible at 62).
So here's the timeline. You turn 62, Social Security establishes the PIA as $1,500, and you wait until age 67. Your PIA is still $1,500, but what COLAs have been credited to people since you were 62? Social Security applies those to the benefit they will pay you, so you'll be paid more than the $1,500. If you wait beyond age 67 and take advantage of those 8% yearly increases – say you wait until 70. They won't increase your PIA itself, but they will apply 8% simple growth to your benefit for the three years, or 24% of the $1,500. So you will receive $1,860 because of delayed retirement credits. But let's also look at all the COLAs that have been applied since you became eligible at age 62. They will be granted as well.
Your question is timely because of the high-inflation environment we're experiencing. You might be thinking that, if you delay, you'll get the 8% per year. But if you don't get the COLAs in that same period, the 8% delayed credits could be no big deal. Of course, we won't know until October what this year's COLA will be, but it was 5.9% last year, and we're seeing inflation higher than in the past 15 years or so, so it could be even more significant. But without that, would it be worth waiting?
Don't worry; you get both.
So, no, the adjustments don't affect the PIA itself – the locked-in amount they use as the basis of your benefit. But when Social Security does the benefit calculation, they will give you the advantage of those COLAs plus any delayed retirement credits you may have earned by waiting beyond your FRA.
You have nothing to worry about. If your analysis said that it made sense to wait until age 70 for the 24% higher benefit for the rest of your life – and for your spouse, if you leave your benefit for her since it is larger than her benefit – waiting until 70 still makes sense. That holds true even in a high-inflation environment because you will get those COLAs and the delayed retirement credits.