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ASK RUSTY: Social Security Matters

Dear Rusty: What determines the amount of the cost of living increase for Social Security as compared to the cost of living increase for Congress? Last year Social Security got less than 2 percent, while Congress got a 10 percent cost of living increase. Why the double standard? What items are used to determine the cost of living increase? Signed: Inquiring Mind

Dear Inquiring Mind: I’m happy to explain how the annual Cost of Living Adjustment (COLA) for Social Security is computed and, although it’s outside the realm of Social Security I usually deal with, how members of Congress get raises in their pay.

The normal COLA formula affecting Social Security uses the Consumer Price Index for Urban Wage Earners and Clerical Workers, known simply as the “CPI-W.” The CPI-W measures changes to consumer prices in several categories such as food, housing, transportation, etc., as computed monthly by the U.S. Bureau of Labor Statistics.

The formula to compute COLA each year compares the average CPI-W for the third quarter of the current year to the average CPI-W for the third quarter of the previous year. If there is a sufficient difference, that difference (expressed as a percentage) becomes the COLA increase percentage for next year. If there is no difference (or only a tiny difference) no COLA increase is awarded because no inflation has occurred from one year to the next, but there have only been 3 years since 1975 that no COLA has been given. The 2021 COLA increase was 1.3% and the 2022 COLA increase will be 5.9%, the latter reflecting high inflation we’ve experienced this year.

Increases to Congressional salaries are different. Although there is a statute allowing for automatic salary increases for members of Congress, that law can be overruled by legislation which suspends those automatic increases. Through such superseding legislation, Congressional pay has been frozen since 2009. The last salary increase received by members of Congress was 2.8% in January 2009, when each general member’s annual salary became $174,000. Congressional salaries have not increased since that time so, with dollar amounts adjusted for inflation, pay for members of Congress effectively declined by 17% between 2009 and 2020. But don’t feel sorry for them. They have plenty of other perks to sustain them, and Representatives who already collect Social Security get the standard COLA increase to their SS benefit (as we all do).

While Congressional salaries have been frozen for years, there has been much recent debate about whether the CPI-W is an accurate measure of inflation for elderly Americans who rely on Social Security benefits. A commonly heard argument is that instead of the CPI-W, a separate Consumer Price Index known as the “CPI-E” (Consumer Price Index for the Elderly) would more accurately measure inflation for seniors and, thus, should be used to compute COLA for Social Security beneficiaries. Studies have shown that the CPI-E would provide a slightly improved COLA for SS beneficiaries, but there are other formulae being considered too. It remains to be seen whether future legislation will change how COLA is computed.

Should I Take My Widower Benefit Now?

Dear Rusty: I lost my wife 7 years ago. I was told that I could possibly collect 30 to 35% of her benefit as a widower benefit when I turned 60. I will be 61 soon. Would it make sense to pursue this if it is true? I am still working full time. Would this affect my ability to collect Social Security on my own account once I retire? Signed: Working Survivor

Dear Working: Survivor benefits for a widower can be paid as early as age 60 if you have not remarried prior to that. But collecting a survivor benefit before you have reached your full retirement age (your “FRA”, which is age 67) creates some other considerations you should be aware of:

— Your survivor benefit will be based upon the SS benefit your wife was entitled to at her death. Taken at your FRA you’d get 100% of the SS amount your wife was entitled to at her death, but if taken any earlier than your FRA the survivor benefit will be reduced.

— Taken before your FRA, your survivor benefit will be actuarially reduced according to the number of months prior to your FRA it is claimed. The reduction amount is 4.75% less per full year earlier than your FRA, and that is a permanent reduction. If you take your survivor benefit at age 61, you’ll get 71.5% of the SS benefit your wife had earned up to her death.

— Since you’re not yet receiving your own SS retirement benefit, you can take your survivor benefit first and allow your personal SS retirement benefit to grow. Assuming your personal SS retirement benefit will be more than your survivor benefit, you can switch from your survivor benefit to your SS retirement benefit at any time after you are age-eligible to do so (age 62). You can also, if you wish, choose to continue your survivor benefit up until your personal SS retirement benefit reaches maximum at age 70. At age 70 your own benefit will be 24% more than your FRA benefit amount.

— If you claim the survivor benefit before your FRA and you are still working, you’ll be subject to Social Security’s “earnings test” which limits how much you can earn before SS takes away some of your benefit. The earnings limit for 2021 is $18,960 (the 2022 limit is $19,560) and if your earnings from work exceed that amount, SS will take back benefits equal to $1 for every $2 you are over the limit.

So, although you can claim a survivor benefit from your deceased wife now (and allow your own SS benefit to grow), practically speaking you may not be able to get a survivor benefit if you are working full time and earning considerably more than the annual earnings limit. In other words, the penalty for exceeding the earnings limit may entirely offset the survivor benefit you are entitled to. If you’re over the earnings limit by only a small amount, you’ll only lose benefits for the number of months needed to repay what you owe. And for clarity, in the year you attain FRA the earnings limit goes up by about 2.5 times and the penalty is less ($1 for every $3 you are over the limit), and once you reach your full retirement age there is no longer a limit to how much you can earn. To avoid the earnings test, you could also choose to wait until your FRA to maximize your survivor benefit and then wait until age 70 to claim your maximum SS retirement benefit.

Regardless of when you claim your survivor benefit, your own SS retirement benefit won’t be affected. Your SS retirement benefit, which will replace your smaller survivor benefit, will be based solely on your lifetime earnings history and the age at which you claim it.

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