C.O.L.A. – Not Zero, But Not Bubbling Over

Like bubbles rising to the top of a newly uncorked bottle of champagne the cost of living adjustment (COLA) for 2021 retirement benefits will climb by 1.3%, according to the Social Security Administration. However, this is below the average COLA of 1.5% for Social Security benefits over the last decade so think of it more like a warm can of soda. It is important to note that this average includes years in which there was no COLA increase and another that was limited to just 0.3%. In contrast, the 2000’s decade had a higher average cost of living adjustment of 2.7%, despite also having no COLA increase in 2009.

How does the Social Security Administration determine COLA?
Inflation adjustments are based on increases in the CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers) released by the Bureau of Labor Statistics.  According to the Social Security website the average retired worker’s monthly benefit would increase from $1,523 to $1,543 beginning in January 2021, or only $20 per month more.
But do not ignore the bubbles, even if small.  While a 1.3% increase in benefits may not seem like a significant amount it is important to recognize the power of an inflation-adjusted stream of income.  For workers who wait to collect benefits until Full Retirement Age, which is based on year of birth and runs between 66 and 67 years old, the maximum monthly benefit is $3,011*.  For a married couple where each spouse paid into the system over the course of their careers that equates to more than $72,250 annually – likely more than many would guess.  The present value of those payments, assuming a life expectancy of approximately 18 years (mortality rates used by Social Security for someone currently aged 66) would be over $1M!  Let’s remember that while corporate or state pension benefits are also a valuable component for families that receive them, they are rarely adjusted for inflation and lose purchasing power over time. 

How can you Optimize Benefits and What about the future of Social Security?
For those who are skeptical about the future viability of the Social Security system we will be the first to acknowledge that Congress needs to make a series of adjustments to ensure the program lasts for decades to come. In fact, these potential adjustments would call for a separate article.  However, when it comes to longevity risk, income is an important part of the equation, which presents us with an interesting dilemma: should we take benefits early or wait?  Each year someone can delay electing benefits helps to increase those inflation-adjusted monthly payments. For someone whose full retirement age is 66 the Social Security Administration will increase benefits by 8% each year she waits.  Waiting to receive benefits until age 70 would produce a 32% increase over four years.  Using our prior example of a $3,011 maximum benefit at full retirement age, waiting until 70 would increase the monthly benefit to $4,096 (or $98,314/yr. for a married couple). Of course, this must be balanced with individual cash flow needs and life expectancy.  Choosing the right claiming strategy can be complex and should be evaluated on a case by case basis.
With the Federal Reserve signaling they may allow inflation to run hot, above their 2% target, taxpayers must pay attention to future years’ COLAs as we emerge from the economic burdens caused by the coronavirus pandemic.  Here’s hoping for a bubblier future.

For further questions about Social Security and how to think about optimizing benefits please do not hesitate to contact your wealth advisor.
*Source: SSA.gov

Important Disclosure: This email is limited to the dissemination of information pertaining to Withum Wealth Management (“Withum Wealth”) and general economic market conditions. Nothing contained herein should be construed as personalized advice, or an offer or solicitation to buy or sell any securities. Past performance is not indicative of future results, and there is no guarantee that the views and opinions expressed in this commentary will come to pass. Withum Wealth is neither a law firm nor an accounting firm, and no portion of this commentary should be construed as legal or tax advice. You are advised to consult with separate legal or tax advisors with respect to any legal or tax advice. Withum Wealth does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to WWM’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Withum Wealth is an investment adviser registered with the SEC. For information pertaining to the registration status of Withum Wealth, please refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). For additional information about Withum Wealth, including fees and services, send for our written disclosure statement as set forth on Form ADV Part 2A.