Social Security Checks Going Up by 5.9%, 1960 Cohort Misses Out

By Elaine Floyd, CFP®

As everyone has heard by now, the Social Security cost-of-living adjustment for 2022 will be 5.9%. Everyone currently on Social Security will receive a letter in December telling them what their new benefit will be starting in January. Those who haven’t started benefits yet will also have their PIAs raised by the COLA. Make sure your clients understand that they do not need to claim benefits now to get the COLA. (We’ve received a number of questions about this.)

There are two cohorts who will not get the 5.9% COLA. They are the people born in 1960 and 1961. As you may remember, in your study of how the PIA is calculated from our workshop or FA Guide, a person’s PIA is officially calculated at age 62. At that time, earnings are indexed for inflation based on increases in the average wage index. But because of the lag time in calculating the index itself, only the earnings up through age 59 are indexed. When the person’s average indexed monthly earnings (AIME) is calculated, earnings for age 60 and 61 are taken at nominal value. Once the person’s PIA is calculated in the year they turn 62 (using bend points that have been adjusted for the average wage index as of two years prior), the COLA kicks in. Each year thereafter the PIA is raised by the COLA, whether or not benefits have started.

Think of it this way (roughly): While a person is working, their (future) Social Security benefit rises with their wages. After they retire and start spending, their benefit rises with prices. To be more precise, before age 60 their benefit rises with wages, after age 62 it rises with prices. Wages generally rise faster than prices, so this is a good setup for future beneficiaries. And although there have been complaints about basing the Social Security COLA on the CPI-W, this year it worked out. The things that skewed the index upward, primarily used cars, are not in the typical retiree’s budget.

The 1960 and 1961 cohorts are missing out on recent rises in BOTH wages and prices, because their earnings for ages 60 and 61 are indexed at “1” (nominal value) and their PIA hasn’t been calculated yet so it won’t get the COLA. Adding insult to injury, the wage index for 2020, the one that determines the indexing factors and bend points for the 1960 cohort, was up just 2.83%; usually it’s up around 4%. So their initial benefit is lower than it might have been under normal (non-Covid) circumstances, AND they’re missing out on the CPI anomaly that is giving everyone else a nice raise in 2022.

A person born in 1960 who had maximum earnings since age 22 will have a PIA of $3,357.60. This is 2.9% higher than the 1959 maximum earner’s PIA. At least it’s not lower, which is what some people feared. Their first COLA will be the one announced next October, showing up in January 2023 checks.

We tell you this for your own understanding of how all this works, not so you can point out to your clients born in 1960 and 1961 how unfair the system is and get them all riled up. I have a feeling it will all come out soon enough. The best result would be legislation to stabilize benefit computations across cohorts. There is no reason why one cohort should have a lower (or higher) benefit due to vagaries in economic data from year to year. The Social Security 2100 Act: A Sacred Trust (PDF) addresses the index used for the COLA, but it does not address the cohort inequities that we are seeing with the 1960 and 1961 cohorts. There have been other situations like this. The 1947 cohort missed out on the 5.8% COLA announced in 2008 for 2009. There were miscellaneous opinion pieces calling for legislation to reduce the cohort inequities, but, as always, nothing was done about it.

Here’s the SSA 2022 COLA Fact Sheet (PDF).

As director of retirement and life planning for Horsesmouth, Elaine Floyd helps advisors better serve their clients by understanding the practical and technical aspects of retirement income planning. A former wirehouse broker, she earned her CFP designation in 1986.


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