Cost of Living Adjustments (COLA) are mostly overlooked in Social Security break even analysis according to leading math and Social Security expert Robert Muksian. His work has been widely published over the past decade. The conclusion is COLA is not a governmental guarantee. It is here to provide for those with longevity greater benefits. According the CPI COLA a $1 in 1975 in 2010 would be $4.25 or said another way a $2,000 monthly benefit thirty five years later would be yielding $8,500 a month. The maximum benefit in 2012 is $2,513 a month and if history repeated the same COLA growth over the next 35 years then the monthly benefit would be $10,680 a month in the year 2047.
James I. Mahaney and Peter C. Carlson wrote a significant work on Social Security and their chapter 7 was titled "Rethinking Social Security Claiming in a 401(k) World". I will only quote their conclusion of Chapter 7 . "Our research shows that individuals should not just look at the traditional break-even points when evaluating when to begin Social Security retirement benefits. Instead, optimizing their potential Social Security payments over the next several decades can provide retirees with significant financial peace of mind."
More is written on the unique nature of how it is tax advantaged and often overlooked as well. That delaying strategies can provide for much greater opportunities for the survivor spouse. To elect early is potentially harmful. Think of Social Security as another bucket to plan and utilize.
If you find this an interesting read and want more consider going to read "Unusual Social Security Claiming Strategies: Costs and Distributional Effects" written by Alicia H. Munnell, Steven A. Sass, Alex Golub-Sass and Nadia Karamcheva. They wrote this for the Center for Retirement Research at Boston College. They share their estimates of costs to the system and some reason for file and suspend as one of the effective strategies that has a large opportunity for retirees. This report in 2009 is very well done. One of the strategies they mention is now gone in 2012 it was called the "Free Loan" strategy and now limited to revoke or change in the first 12 months instead of the previous free loan period potential of 9 years.
The COLA adjustment for Jan 2012 is 3.6%. COLA's matter and they matter a lot more the longer the period considered. While COLA is not guaranteed it is still a good idea to run a break even with COLA included. How? Plug into an excel spreadsheet and use the formula's tab and grow the cash flow annually is one way. Another is to call on your financial friends to run the numbers. We have a more intensive calculator dealing with the Timing Strategies and how it affects you and your spouse in the following clink Social Security Timing.