Bills have been introduced in both the House and Senate that would
adjust the formula to avoid a drop in benefits for those who turn 60 this year
July 22, 2020 By Mary Beth Franklin
Americans
who were born in 1960, near the tail end of the baby boom, have long known that
their Social Security benefits would be a little less valuable than those of the
older members of their generation. After all, they are the first group whose
members will have to wait until 67 to claim their full retirement benefits,
while older boomers could do so at 66.
Now, the
COVID-19 pandemic and resulting recession are threatening to reduce their
future benefits even further. More than 5 million people who turn 60 in 2020
may suffer an added loss because a decline in the average wage index for this
year could reduce their future Social
Security benefits for the rest of their lives.
“Due to
the COVID-induced recession and job losses, aggregate wages are expected to be
substantially lower in 2020 than they were in 2019,” Rep. John Larson, D-Conn.,
chairman of the House Ways and Means subcommittee on Social Security, said
during a recent hearing on the impact
of the pandemic on Social Security and its beneficiaries.
“Because
of how Social Security benefits are calculated, this will reduce Social
Security benefits for their lifetimes for everyone born in 1960, creating a
‘notch’ — that is, lowering benefits for one group of retirees,” Larson
explained.
Benefits
for those born in a particular year are calculated based on the average wage
index, or AWI, for the year they turn 60. Normally, average wages rise from
year to year, but this year, because of the COVID pandemic, average wages are
likely to decline by as much as 10%. As a result, future Social Security
benefits for people who turn 60 in 2020 could be as much as 5.9% lower than
those for workers who turned 60 in 2019.
Social
Security benefits are based on the highest 35 years of salary in a worker’s
earnings history. The average wage index is applied to each year’s earnings to
ensure that benefits account for growth in wages across the economy. The AWI is
also used to update the dollar values in the formula that is used to calculate a
worker’s full retirement age benefit.
As a
result of this formula glitch, a median wage earner who turns 60 this year
could lose $1,400 to $2,000 a year in Social Security benefits for the rest of
his or her life compared to someone born just one year earlier, unless Congress
steps in to correct the problem, Larson said. Depending on how quickly wages
rebound, people who turn 60 next year might experience similar reductions in
their lifetime benefits.
Larson
introduced the Social
Security COVID Correction and Equity Act earlier this month to
ensure that the AWI used to calculate Social Security benefits never drops below
the previous year’s level to avoid any benefit cuts. The bill, which has 45
Democratic co-sponsors, would also temporarily increase Social Security
benefits by about 2% for the remainder of the pandemic, along with making some
other temporary changes targeted at helping low-income beneficiaries and other
vulnerable populations.
This
proposed legislative change would protect benefits for workers who were born in
1960 from declining. Those workers who become newly eligible for benefits in
2022, when they turn 62, would be at least at the same level as similar workers
who became newly eligible for benefits in 2021, rather than seeing a decline of
5.9%.
A similar
bill, Protecting
Benefits for Retirees Act, was introduced in the Senate on July
2, although the Senate version would not expand Social Security benefits.
“It is
imperative that the House acts before the August recess to include a fix to
prevent the COVID notch cuts and correct these inequities in the next COVID
legislative package,” Larson said during his subcommittee hearing. However,
there’s no indication whether this Social Security formula fix will make it into
the next installment of pandemic
relief, which is likely to include an extension of unemployment
benefits and additional help for ailing businesses at a cost of $1 trillion or
more.
The
national average wage index has declined only one other time, in 2009 as a
result of the Great Recession. But the drop was much smaller, and Congress did
nothing about it. This year’s potential drop has garnered much more attention
on Capitol Hill.
Because
wages for a given year are not fully reported until well into the following
calendar year, the AWI for 2020 won’t be known until late next year, and it
will not be used for Social Security benefits calculations until 2022, Stephen
Goss, chief actuary for the Social Security Administration, explained during
the hearing. So even if the notch correction doesn’t make it into the next
economic relief bill, there may still be time to fix the formula before it
would affect benefits for people born in 1960.
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