The Social Security Donut Hole
Many of you have heard that the Social Security Cost of Living Adjustment (COLA) will be 8.7% effective with the December 2022 payment to be received in January 2023. What you might not have heard is that the latest wage inflation is actually higher at 8.9%.
What are the differences between the two numbers. Wage inflation will adjust the earnings that you report each year to Social Security. This means that income earned in 1990 as adjusted by wage inflation might be equal or greater than income earned in 2022. The 8.9% wage inflation is applied to all of your earnings which means that your final social security payment should be 8.9% higher.
However, wage inflation no longer applies to you once you reach age 60. Therefore, if you were born in 1963, you get the benefit of the 8.9% wage inflation. If you were born before that date, you get no benefit.
The COLA is applied to your benefits starting in the year you turn 62 even if you have not started to collect social security. Each year, your benefit will be adjusted upwards by the COLA adjustment.
Notice we said that wage inflation stops in year 60 and COLA does not begin until age 62. This what we call the Donut Hole. For people who are 60 or 61 in 2022, they receive no benefit from either inflation factor. When inflation was low, this was probably not a big deal, but now that inflation is higher the affect will be much greater.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
Can you believe I will be 62 on December 31, 1962? Born last day of 1960. Will I get the COLA?