Social Security Secrets: What the latest COLA increase means for your clients

The 2021 cost of living adjustment was recently announced by the SSA as 1.3%. But what does this mean for clients?

COLA has always seemed straightforward to me in terms of benefit calculations. After working at LifeYield for 3+ years, this actually couldn’t be further from the truth.

While studying recently for my Social Security Claiming Strategies certification, I discovered a few caveats regarding COLA and Social Security benefits that I felt could really benefit our clients. Here’s the recap.

What is COLA?

Cost of living adjustments are Social Security benefit increases based on the percentage change in the Consumer Price Index for Urban Wage Earners and Clerical Workers. They were first introduced in 1950 in an attempt to counteract the effects of inflation.

This is why I believed that adding COLA to Social Security calculations were cut and dry. Luckily, I was able to discover the importance of how to calculate the inflation on a client by client basis.

Will clients get a guaranteed COLA increase every year?

No. COLA’s are not guaranteed every year by the SSA. For example, in 2009, 2010, and 2015, no COLA was declared. This means that clients that were eligible during those years were not granted any COLA increase.

If there is an increase announced, it will be applied to benefits effective in the December payment of that year and received by the worker in January.

When are COLA’s added to a PIA?

In years that COLAs are granted by the SSA, they are applied to a worker’s Primary Insurance Amount (PIA) beginning in their first year of eligibility for benefits at age 62. Once a client applies for benefits, their PIA is then calculated and increased based on the COLAs granted from the first month of their eligibility through the month that they apply (also known as the month of entitlement).

COLAs declared by the SSA (from the year a client turns 62 up to the date that they apply) are automatically added to their base benefit amount and later subject to an increase determined by the age that they choose to file for benefits.

What does this mean for clients?

If your clients have the financial ability to delay filing for their benefits until they max out on Delayed Retirement Credits (DRCs) at age 70, their benefit will be increased by 8% each year they delay filing past their Full Retirement Age (FRA). They are also entitled to potentially 8 years of COLA increases (if granted each year from their age of entitlement – age 62 until age 70).

If your clients choose not to delay as long as possible, COLA increases after they reach age 62 are still automatically added to their Social Security record and have the potential to increase their benefits each year until they apply. While COLA may not be guaranteed to increase every year, it is a key factor that should undoubtedly be considered and mentioned when advising clients on the right filing strategy.