Application of COLA to a Retirement Benefit

General
A COLA increases a person's Social Security retirement benefit by approximately the product of the COLA and the benefit amount. The exact computation, however, is more complex.

Each Social Security benefit is based on a "primary insurance amount," or PIA. The PIA in turn is directly related to the primary beneficiary's earnings through a benefit formula. It is the PIA that is increased by the COLA, with the result truncated to the next lower dime.

Example
If the initial PIA is $1,089.50 and it is increased by a 5.8-percent COLA, the new PIA would be $1,152.60 after truncation to the next lower dime.

Early or delayed retirement affects your benefit amount
If you choose to retire before your normal retirement age, your benefit will be lower than your PIA. On the other hand, if you choose to retire after you attain your normal retirement age, your benefit will be higher than your PIA.

Steps leading from the PIA to the benefit amount

1. A factor is applied to the PIA to account for early or delayed retirement, with the result truncated to the next lower dime
2. Any offset to the benefit, such as payment of the Medicare Supplementary Medical Insurance (SMI) premium, is subtracted
3. Finally, the resulting amount is truncated to the next lower dollar

Summary
When a COLA occurs, the PIA is increased as described above, and the steps required to calculate the new benefit amount are repeated with the new, higher PIA. Due to the rounding, possible offsets, and final truncation in these steps, the increase in the new monthly benefit amount over the previous amount may differ somewhat from the COLA.