The “Secret” Social Security Payraise

Good to Know

One of the beauties of Social Security Retirement benefits is the cost-of-living adjustment (COLA). The COLA is simply an increase to a covered worker’s benefit to maintain their purchasing power. A covered worker is a worker from whose compensation Social Security taxes have been withheld. The long-term average annual COLA is 2.2%, but it can be as low as 0% or as high as inflation.1 The COLA adjustment for will begin in January 2022 and is expected to be the highest in four decades at approximately 6%.

Before explaining the secret, we need to understand key terms such as Average Indexed Monthly Earnings, Primary Insurance Amount, and Claiming Age Adjustments. Here’s the relationship between those terms:

  • The higher the Average Indexed Monthly Earnings, the higher the Primary Insurance Amount,
  • The higher the Primary Insurance Amount, the higher the retirement benefit, and
  • The longer2 the covered worker waits to claim benefits, the higher the retirement benefit paid.

Average Indexed Monthly Earnings

The first step in determining how much a retiree receives as a retirement benefit starts with Average Indexed Monthly Earnings (AIME). The Social Security Administration calculates a covered worker’s AIME based upon their highest 420 months (35 years) of earnings. “Indexed” means prior month’s earnings are adjusted (increased) to reflect annual increases to the national average wage over the years.

Planning Insights

  • A covered worker maximizes their AIME by having at least 420 months of earnings.
  • AIME increases when a low or zero earnings month is replaced with a higher earnings month.

Primary Insurance Amount

The next step in determining a covered worker’s retirement benefit is calculating their Primary Insurance Amount (PIA). The PIA is the retirement benefit amount received by a covered worker who claims retirement benefits at their normal retirement age (65 to 67 depending upon the year of birth).

AIME is part of the PIA calculation, but the covered worker’s retirement benefit is not equal to their AIME. The AIME is reduced to determine PIA. These reductions are referred to as “bend point reductions.”

For example, assume your clients Bill and Jack reached their normal retirement age in 2021 and claimed Social Security Retirement benefits in 2021. Their AIMEs were $1,500 and $10,000 respectively. The bend point reductions3 are reflected in the chart below.

Reductions in AIME to Determine PIA Bill Jack
Average Indexed Monthly Earnings $1,500 $10,000
Bend Point Reduction   -442  -7,442
Primary Insurance Amount $1,058 $2,558

Jack’s retirement benefit, when claimed at normal retirement age (PIA), was reduced by 74% vs. his AIME; Bill’s was reduced by 29%.

Claiming Age Adjustments

We noted that a retiree receives 100% of their PIA when claiming Social Security Retirement benefits at their normal retirement age. But what happens if they claim before their normal retirement age (early) or defer claiming until after their normal retirement age?

Claiming early—the earliest a covered worker can claim retirement benefits is generally age 62. A covered worker claiming at age 62 would have their retirement benefit permanently reduced by as much as 30%. For example, if a covered worker’s PIA equaled $2,000, their monthly retirement benefit payment would fall to as little as $1,400 by claiming at age 62. That’s a reduction of over $7,000 annually for life.

Deferred claiming—the covered worker could choose to delay the claiming retirement benefits. A covered worker waiting until age 70 to claim Social Security Retirement benefits would receive as much as a 32% increase in their benefit. For example, a worker with a $2,000 PIA and a 32% deferred claiming credit would see their monthly benefit increase to $2,640. That’s an annual increase of almost $7,700 for life.

Planning Insights

  • The claiming age decision is the most crucial and controllable financial decision many individuals will make during their lifetime. The decision should be made in consultation with a CFP® certificant, CPA, or attorney experienced in these matters. Relevant factors in the decision include health, family history of illness, other resources available, marital status, ages of the spouses, PIA differences between the spouses, and much more.
  • A covered worker should consider waiting to claim Social Security Retirement benefits until at least normal retirement age (ideally until age 70) if prudent based upon relevant factors.

The Secret

You or your client may receive a higher retirement benefit than projected by Social Security (see My SSA Account).

For example, assume a covered worker plans to delay claiming until age 70 and is currently age 62. The projected Social Security retirement benefit payable at age 70 will NOT include increases from wage inflation during the eight years from age 62 to age 70.  What does this mean for retirement planning? The actual benefit paid annually could be as much as $2,000 higher than the estimate. For a client living until age 90, that adds about $46,000 to lifetime income.  Even if the client claims benefits at age 67 instead of age 70, that adds almost $35,000 to lifetime income.



The information presented herein is provided purely for educational purposes and to raise awareness of these issues; it is not meant to provide and should not be used to provide Social Security, retirement, tax, legal, insurance, investment, compliance or financial advice. There are variations, alternatives, and exceptions to this material that could not be covered within the scope of this blog.

1 Social Security uses the CPI-W inflation measure.
Every year a covered worker delays claiming from age 62 through age 70 will increase the monthly retirement benefit paid to the covered worker by a compounded 6% to 8%.
3 See