Bad News for Anyone Turning 60 This Year
Table of Contents:
- Calculating Social Security Benefits
- A Flaw in the Formula
- How Big Is the Problem?
- How Should Congress Respond?
Though the COVID-19 pandemic continues to ravage the American populace and economy, it is unclear whether more federal relief is incoming. Congress has already passed the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act, but Republicans in the Senate (including Majority Leader Mitch McConnell) have repeatedly dismissed the bill. Advisors to the President, however, have hinted that taxpayers should expect something in the near future.
Whatever the next relief bill looks like, commentators including Michael Hiltzilk of the Los Angeles Times argue that it must take steps to address an incoming Social Security crisis. Without an update to the program’s usual formula, Hiltzik writes, “Anyone turning 60 could face a lifelong reduction in Social Security benefits.” COVID-19 has already hit seniors especially hard. If Congress doesn’t act soon, certain seniors could feel the pandemic’s impact for the rest of their lives.
Calculating Social Security Benefits
Social Security payouts vary from person to person and they’re calculated with the help of a complicated formula. Simply put, each individual’s Social Security benefits are determined by applying the “average wage index” to their earnings through age 59. Typically, this formula is dependable, accounting for rising wages and periods of economic growth. COVID-19’s unprecedented toll has, however, exposed a potentially costly flaw.
A Flaw in the Formula
Unemployment has reached staggering levels throughout the COVID-19 crisis and the situation should, inevitably, lower average wages considerably. This could be very bad news for anyone born in 1940 and reaching eligibility in 2022. Hiltzik quotes Andrew Biggs, a former analyst with the Social Security Administration, “a fall in national wages in [the year a person turns 60] reduces Social Security’s indexed measure of all his past earnings.” This results in reduced Social Security payouts every month throughout their retirement years.
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How Big Is the Problem?
Hiltzik notes that — while it’s certainly extraordinary — Social Security’s current predicament isn’t exactly unprecedented. Average wages took a 1.5% dip in 2009 as America suffered through the lingering effects of the 2008 Financial Crisis. Anyone born in 1949 paid the price, some losing $100 or more in monthly benefits.
Average wages could fall far more than 1.5% this year. Hiltzik and Biggs suggest that we can expect them to drop by as much as 15%. If you were born in 1960, you could miss out on $3,900 each year and tens of thousands more throughout your retirement.
How Should Congress Respond?
Biggs outlines three potential solutions:
- Take an ad hoc approach and offer supplements to affected workers. Biggs writes, “a flat benefit supplement of $125 per month would restore very low wage workers’ benefits to approximately the amounts projected for that group in 2019.”
- Before 1977, the annual average wage index was based on Q1 data alone. Biggs suggests that returning to this method for one year could keep benefits from going down.
- Introduce a new benefits formula based on inflation rather than the average wage index.
Hiltzik proposes an alternative. He calls on Congress to change the way Social Security approaches the average wage index, ensuring it can never bring down benefits. Policies already dictate that annual cost-of-living adjustments cannot lead to reduced benefits — no matter what happens to the consumer price index in a given year.
COVID-19 has also hastened calls for Congress to take action on the Senior Health Planning Account Act. This bill would create new opportunities for seniors to invest the proceeds from life settlements and, potentially, encourage more seniors to sell their insurance before surrendering or lapsing. The virus promises to remain the primary political issue throughout the rest of 2020. Stay tuned for updates from both Congress and the campaign trail.