Understanding How Social Security Cost-of-Living Adjustment Works
Social Security is not a flat rate. How much you receive in retirement benefits depends upon several factors, including your income history, age at retirement, and inflation adjustments. In a recent article, Marca.com did a good job of explaining the formula the Social Security Administration (SSA) uses to calculate benefits.
It’s important to first understand that you need to have earned at least 40 credits during your working life to qualify for Social Security retirement benefits. This year, every $1,730 in wages or self-employment income equals one credit, and you can earn up to four credits per year.
The next step is to calculate your Average Indexed Monthly Earnings (AIME). This is done by taking your 35 highest-earning years (adjusted for inflation) and averaging them. If you worked for less than 35 years, the SSA will include zero-earning years, which can reduce your benefit amount.
The AIME is then used to determine your Primary Insurance Amount (PIA). That’s the base benefit you would receive at full retirement age (FRA). The article explains that for individuals turning 62 this year, the PIA formula includes 90 percent of the first $1,226 of AIME, plus 32 percent of AIME over $1,226 and up to $7,391, plus 15 percent of AIME over $7,391.
It’s also important to note that your claiming age and the annual cost-of-living adjustment (COLA) impact the amount of your monthly retirement benefit.
The Seniors Trust is committed to improving the financial well-being of older Americans through the passage of the Social Security Expansion Act. It will give retirees an immediate benefits increase of about $200 a month, a fair annual COLA, increased minimum benefits, and ensure the long-term solvency of the Social Security program.
