Dear Rusty: I started collecting SS when I turned 70 to maximize my income. One factor that is never mentioned is that the annual cost of living increase appears to be based on the previous year’s payment. I’ve talked to others who are about my age (77) and we talked about how much of an adder we will receive. Those who collected earlier always get much less than I do. So, it appears that the annual increase is based on previous year’s payment and not on the original payment from when I started collecting, so it has a compounding impact. Frequently the increase received by those who collected early covers the Medicare increase plus a small adder, whereas I have been getting a much larger increase. Can you comment? Signed: Wondering 

Dear Wondering: I’ll be happy to clarify this for you. The annual Cost of Living Adjustment (COLA) for next year is determined by comparing this year’s Consumer Price Index for the 3rd quarter (July-September) to the same period last year. If there is a difference (which there usually is), the percentage of difference becomes the COLA increase percentage for next year. The COLA is applied annually starting with everyone’s December benefit (paid in January). 

Everyone gets a different amount of COLA money because everyone’s Social Security benefit payment is different. Your COLA dollar increase is more than most of your friends because you waited until you were 70 to claim and, thus, have a higher benefit. Your friends who claimed earlier will have a smaller benefit and therefore get a smaller dollar amount as a cost of living increase. COLA is a percentage increase and, since the 2021 COLA increase was 1.3%, applying that percentage to each person’s SS benefit amount results in a different dollar increase for each. And you’re correct; since the percentage of increase is applied to your current benefit amount and not your original benefit amount, COLA increases are, indeed, compounded. 

To further complicate matters, Social Security’s “hold harmless” provision sometimes results in beneficiaries paying less than the standard Medicare premium amount. If someone is now paying less than the monthly Medicare premium ($148.50 for Part B (outpatient services)), any COLA increase awarded is used to bring their Medicare Part B premium up to (or closer to) the standard premium for that year. That means that sometimes the full amount of COLA dollars aren’t reflected in each person’s net Social Security payment, further confusing people when they see that their total SS payment didn’t increase by the announced COLA percentage. 

So, as you can see there are reasons why everyones COLA looks different, but your basic point is correct – COLA is applied to your current SS benefit amount, not the SS benefit you were awarded when you claimed.

Russell Gloor is an Association of Mature American Citizens certified social security advisor.  To submit a question, visit amacfoundation.org/programs/social-security-advisory or email ssadvisor@amacfoundation.org.