Social Security AWI vs. COLA (Using The Wrong Numbers Could Cost You)

Using The Wrong Indexing For Social Security Projections Could Cost You Thousands

After expenses, Social Security is the most important part of almost every American’s retirement planning. So, its critically important to get it right when doing your future projections.


Probably the biggest mistake I see people making is using Cost of Living Adjustments (COLA) instead of Average Wage Index (AWI).  Now, you may not be familiar with these terms, but if you’re running projections you must know the difference. 

So, let’s explain. Social Security uses

the national average wage indexing series to index the earnings of individuals for benefit computation purposes.”


 “Such indexation ensures that a worker’s future benefits reflect the general rise in the standard of living that occurred during his or her working lifetime.”

Sounds like the Cost of Living Adjustment doesn’t it? But it’s not. 

The AWI number is what is used to adjust your benefits annually while you are under the age of 60.  Once you become 60 years old your annual increases will be based on the COLA number.

Since 1975, when COLA’s were used instead of legislative action to determine CURRENT retirees Social Security adjustments, the AWI has averaged 4.3% a year increase; COLA 3.6%.  Thus AWI has increased by .70% more each year than the Social Security COLAs. 

Now, let me explain how this affects you.  If you are under the age of 60 today and are using the COLA number to project your future benefits you are most certainly under calculating your future Social Security benefit

For instance, if you made $25,000 in 1975, again when COLA’s began, and used the COLA numbers for your annual increases, your $25,000 salary would be the equivalent of $125,000 in 2019.  Yet using the AWI instead, your $25,000 salary would be equivalent to $162,000 today. That, my friends, is $37,000 more under the AWI than the COLA; a 30% increase!

Let me give you an example.  I was born in 1970. My earliest year of eligibility for Social Security benefits is 62, in 2032. Let’s say my statement in 2019 from the SSA shows my benefit will be $2,000 a month, IN TODAY’S NUMBERS.  Of course, $2,000 a month is not what I’ll actually get. That $2,000 amount will be increased to reflect inflation. And here’s where the rubber hits the road. 

What type of inflation? The Cost of Living Adjustment? NO!  Until I turn 60 my Social Security benefit will be adjusted by the Average Wage Index.  If I didn’t know this and used the COLA to anticipate my inflated benefit I’d be giving myself a .70% cut in my annual benefit increase.  Don’t do this!

Make sure when you’re running your own Social Security projections you know what the heck you are doing!  If not, you could force yourself to stay in that crappy, old job out of ignorance of your TRUE Social Security benefit. 

And this is what is so frustrating to me. Most people, it seems, heck most professional advisors, simply have no clue how Social Security works at all.  They look at your statement you get today and if your statement says you’ll get $2,000 a month at Full Retirement Age, they’ll use $2,000 in their retirement projections.  This is worse than wrong, this is negligent. 

And, on top of that, they’ll assume you’ll pay tax on 85% of your benefits as well.  So, they’ll have you making $24k a year in Social Security at your FULL RETIREMENT AGE and they’ll say $20,400 is taxable as income. 


As stated before, that $2,000 a month that your benefit statement shows right now will increase at an inflated amount. What that inflated amount is matters. Again, use the Averaged Wage Index amounts until you are 60, then use the COLA amounts every year thereafter. 

I hope this makes sense.  

See the video I did below for more info. You simply can not overlook how to calculate FUTURE Social Security projections.  If you don’t get this right, you simply are not going to get a true estimate of your benefit and thus your shooting blindly in the dark.  I don’t think I need to tell you, shooting blindly in the dark is NO Way to plan for retirement. 

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