General Social Security

The Social Security COLA: How Your Adjustment Is Calculated and Applied

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If you receive Social Security benefits, you might notice that your payments include a cost-of-living adjustment each year.

The cost-of-living adjustment, or Social Security COLA, increases your monthly benefit amount to help your income keep up with inflation. Without the COLA added to your payments, the purchasing power of your benefit would erode as the prices of the things you routinely buy increased over time. 

The annual Social Security COLA amount is normally announced in mid-October. Many people anxiously await the announcement to see how much (if any) that their benefit amount will increase in the coming year. 

If you await the announcement but feel like the process of coming up with each year’s COLA feels mysterious, I want to cover how the Social Security administration calculates these annual cost-of-living adjustments and then applies them to your benefit. 

That way, not only will you know how to look at the data for yourself and avoid a surprise when the announcement comes out, but you’ll also have a better grasp on what the increase means in terms of dollars to your benefit. 

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What Is SSI?

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SSI is a federal needs-based program that provides monthly payments to those who are disabled, elderly or blind and have a low income.

SSI is an acronym for Supplemental Security Income.

SSI is not a Social Security benefit. This is often confused since the SSI program is administered by the Social Security Administration. The SSI program is funded by general tax revenues that are paid in through federal income taxes. Social Security benefits are funded through payroll taxes and are not tied to a means test.

To receive SSI you must be:

  • Age 65 or older
  • Blind
  • Disabled

To qualify for SSI you must have income below certain levels and resources (things you own) under certain levels.

Generally speaking, your income must be below the Federal Benefit Rate (FBR) which is set at $783 for single individuals and $1,175 for married individuals. The income requirements can be a little tricky since not all income is counted.

Your resource limit is $2,000 for singles or $3,000 for couples. Like the income limit, there are resources that are not counted.

Here are a few links from the SSA that will help you learn more about SSI.

https://www.ssa.gov/pubs/EN-05-11000.pdf

https://www.ssa.gov/benefits/ssi/

https://www.ssa.gov/pubs/EN-05-11000.pdf

https://www.ssa.gov/oact/cola/SSI.html

What Is My Full Retirement Age

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67. If you were born in 1960 or later. If you were born before 1960, your full retirement age may be slightly different.

  • For those born between 1943 and 1954, the full retirement age is 66.
  • For those born in 1955, the full retirement age is 66 and 2 months.
  • For those born in 1956, the full retirement age is 66 and 4 months.
  • For those born in 1957, the full retirement age is 66 and 6 months.
  • For those born in 1958, the full retirement age is 66 and 8 months.
  • For those born in 1959, the full retirement age is 66 and 10 months.
  • For those born in 1960 or later, the full retirement age is 67.

Knowing when you reach full retirement age is critical to understanding how your benefit will be reduced or increased for filing early or later. This is because your benefit is increased (for filing after full retirement age) or decreased (for filing before full retirement age) on a monthly basis.

Chart showing how social security benefits are adjusted for filing age

When considering the right age to file for your own Social Security, you should consider the 10 factors that must be a part of this decision. Check out my article How To Determine the Right Age to Collect Social Security.

What Is The Max Social Security Benefit?

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$3,011.

It’s important to note that this “maximum” benefit is for individuals who file at their full retirement age (FRA) in 2020. If you file earlier your benefit will be less than the maximum. If you file later your benefit will be more than the maximum.

Here’s how this breaks down for 2020:

  • If you file for benefits at 62, the maximum benefit is $2,265.
  • If you file for benefits at age 70, the maximum benefit is $3,790.

To receive the max Social Security benefit you need to have real earnings that were at or above the maximum taxable earnings for at least 35 years.

If you want to learn more about the maximum Social Security benefit, check out my article or video.

Can You Opt Out Of Social Security?

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Yes. If you meet the qualifications.

You must be either a member of the clergy or a member of a recognized religious sect (ex. Amish & Mennonite).

There are some differences in the rules for these groups but either way you have to agree to language that you are opposed to “any public insurance that makes payments in the event of death, disability, old age, or retirement; or that makes payments toward the cost of, or provides services for, medical care.”

You cannot opt out solely for economic reasons.

For ministers, you have to submit Form 4361 by the due date (including extensions) of your income tax return for the second tax year in which you had at least $400 of ministerial earnings.

Fortunately, if you’ve already paid in enough FICA/SECA taxes through other work to qualify for benefits, you’ll still be able to receive them.

Members of certain recognized religious sects (ex. Amish, Mennonite) will use Form 4029. One of the key differences for a member of a religious sect is that you must waive all rights to future benefits. This means that even if you have already paid in enough taxes to qualify for benefits, you WILL NOT receive those benefits.

The IRS Form for religious sect members requires you to acknowledge [in bold print], “I waive all rights to any social security payment or benefit under Titles II and XVIII of the Social Security Act. I understand and agree that no benefits or other payments of any kind under Titles II and XVIII of the Social Security Act will be paid based on my wages and self-employment income to any other person. I certify that I have never received benefits or payments under the above titles, nor has anyone else received these benefits based on my earnings.”

Needless to say, opting out is a BIG step that you need to take with a lot of care and planning. Remember, this is not just a future retirement benefit you’re opting out of, but a benefit if you become disabled, benefits for your family if you die, and benefits that will pay for your healthcare (Medicare).

Check out my article and IRS Publication 517 for more information.

Here are a few other links that may help:

SSA Website
Are members of religious groups exempt from paying Social Security taxes?

Continuing to Work While Collecting Social Security

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Continuing to Work While Collecting Social Security

Retirement isn’t always final. Often, individuals will retire and file for Social Security and later decide they’d like to continue working for a while longer. When this happens, it typically leads to a few questions about the impact to their Social Security benefit.

One of the most common questions is, “what happens if you file for Social Security, but keep working? Could your benefits increase?”

I’ve also heard, “what if I’m making less in my ‘post-retirement’ job, could my Social Security benefit decrease?”

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Should You Take Retroactive Social Security Benefits?

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retroactive social security benefits

There are some cases where you can receive retroactive Social Security benefits, usually delivered via a one-time lump sum payment when you file for your retirement benefit.

Overall, this can sound like a great deal. It might feel like a little extra, and the lump sum means you can do what you want with that money right away instead of waiting for it to come to you in monthly payments.

But are retroactive Social Security benefits truly a good thing? Here’s what you need to know to make this decision for yourself.

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Social Security Family Maximum Benefits: The Complete Guide

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On paper, the Social Security system has a generous payment to beneficiaries of someone who retires, dies, or becomes disabled. But what catches many people by surprise is that there’s a limit to these payments.

The Social Security family maximum benefits rule may stop you from getting the full amount you might expect.

This article takes a very deep dive into the issue to explain both the common, well-known rules around the Social Security family maximum benefits — and the more obscure rules that cause benefits to be capped to a range of 150%-188% of a retired, deceased or disabled individual’s full retirement age benefit.

We’ll also go over the calculation, and teach you how to determine what kinds of benefits to expect in your own situation.

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