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.