The Social Security cost of living adjustment is seemingly straightforward. But, like most provisions within Social Security, nuances within the system can cause confusion. A great example of this is how the rules about the Social Security cost of living adjustment affects spousal benefits.
To understand this calculation, and how to do it properly, requires a broad understanding on how the spousal benefit is calculated.
What A Spousal Benefit Really Is (and is not)
A spousal benefit is often thought of as one-half of the higher earner’s primary insurance amount (the benefit an individual can receive at their full retirement age).
That sounds easy enough, but the actual calculation is a little more complex — a “spousal benefit” can be two separate benefits rolled together. The two components are reduced based on the age of entitlement to each portion of the benefit.
To calculate the cost of living adjustment correctly, start by finding out how much benefit is the “spousal” payment. Luckily, a simple formula can help you to figure it out quickly:
- Take one-half of the higher earner’s primary insurance amount, then
- Subtract the lower earner’s primary insurance amount
The remainder is the spousal payment.
Here’s an example. Suppose John is the higher earning spouse. John has a primary insurance amount of $2,000. One-half of that is $1,000.
Then, let’s assume Mary, his spouse, did not have a benefit of her own. In that case, the spousal payment is $1,000.
While that scenario can happen, “dual entitlement” cases are more common. Dual entitlement is when both spouses have their own benefit, and one is much higher than the other.
Let’s look at another example to illustrate dual entitlement. Suppose Michelle is the higher-earning spouse with a primary insurance amount of $2,000. Half of that is $1,000.
Then, suppose Tim, her spouse, is the low earner. His primary insurance amount is $400. In this instance, the spousal payment is $600.
At full retirement age, Tim would still receive a payment of $1,000 ($400 from his own payment and $600 from the spousal payment).
How the Cost of Living Adjustment Applies to Spousal Benefits
Understanding that a lower-earning spousal benefit can consist of two individual pieces is important when talking about the cost of living adjustment (COLA).
You can’t assume your benefit payment will increase by the announced Social Security COLA. Instead, the COLA is applied to your primary insurance amount first, then it’s adjusted based on increases for filing later or reductions for filing early.
Let’s walk through an example of how it would work in a spousal benefits case.
First, let’s go back to the example with John and Mary. John has a primary insurance benefit of $2,000, and Mary didn’t have a benefit of her own.
The COLA increases the primary insurance amount of John, the higher-earning spouse. Then, one-half of the spousal payment is based on the new, increased amount.
Suppose the annual COLA was 3%. In that case, the $2,000 would increase to $2,060. This means the spousal benefit would be based on one-half of that amount, or $1,030. If Mary, the lower-earning spouse, had filed early, this new spousal payment would be reduced for the early filing reductions.
The same thing happens for Tim and Michelle, the couple with dual entitlement. In that example, Michelle, the higher earning spouse, has a benefit of $2,000, and Tim, the lower earning spouse, has his own benefit of $400.
The lower earning spouse is still entitled to a total benefit of $1,000, but $400 would come from their benefit and $600 would come from a spousal payment.
In this case, the COLA would be applied to each of these benefits separately. For example, for a 3% COLA increase, the $400 would increase to $412 and the spousal portion increase to $618. Added together, the benefit is still $1,030, just as it was for the other example we used.
Are Separate Calculations Really Necessary?
So, at this point you might be thinking, “If the result is the same, why can’t I just add the cost of living adjustment to whatever benefit I’m receiving?”
Well, you can if you’re looking for a ballpark figure. Doing it that way will get you really, really close, but there are slight differences between the actual cost of living adjustment and the amount your benefit increases.
For example, the first two steps require you to adjust the full retirement age benefit first and then apply the reductions for filing early (or increases for filing later). But, after that, you round the amount down to the next lower dime, subtract your Part B Medicare premiums, and finally round that result down to the next lowest dollar to get the final benefit amount.
Understanding the mechanics of how spousal benefit is calculated can keep you from scratching your head if the COLA is 3%, but your benefit only increases by 2.9%.
Knowing When to File for Social Security
Deciding the right time to file for Social Security isn’t an easy decision. If you’re struggling with knowing when to file, I want to help. Schedule a free 15-minute consultation with my team of Registered Social Security Analysts — no strings attached.
They know the system inside and out and can show you how to build a plan that gets every dollar in Social Security benefits that you deserve.