Future Social Security beneficiaries turning 60 this year are in for a rude surprise: their monthly benefits may be lower than those born in previous years. Benefits for each age group are calculated based on the Average Wage Index (AWI) for the year they turn 60. Normally, average wages rise from year to year. But this year, because of the COVID pandemic, wages are likely to decrease by as much as 20%. Benefits for wage-earners in 2020 would then be as much as 15% lower than for workers hitting that milestone birthday in 2019. This incipient reduction is sometimes referred to as a “notch” in benefits for people born in 1960.
The notch for workers turning 60 this year is due to a glitch in Social Security law. Social Security benefits are based on the highest 30 years in a worker’s earning history. The Average Wage Index is applied to each year’s earnings in order to ensure that benefits are based on the dollar value of today’s wages vs. the year the wages were earned (which, for someone just turning 60, could date as far back as the late 1970s).
The AWI was introduced into the formula by the Social Security Amendments of 1977. The drafters of that legislation clearly did not anticipate that average wages would fall precipitously from one year to the other. In fact, since 1977, average wages have only declined one other time – at the height of the Great Recession in 2009. That dip was a relatively small 1.5% and “not big enough to catch people’s attention because the effects on benefits was negligible,” says Webster Phillips, NCPSSM’s chief Social Security expert.
Unfortunately, if no remedial action is taken, the benefit reduction for workers turning 60 in 2020 will be permanent. Their benefits will be lower than workers’ born before 1960 for life. Paul Van de Water of the Center on Budget and Policy Priorities provided a conservative estimate of the dollar-amount hit that this age cohort could take:
“If the average wage falls by (even) 5 percent in 2020… the retirement benefit of a 60-year-old worker with average earnings will drop by about $1,200 a year for each and every year of retirement.” – Paul Van de Water, Center on Budget and Policy Priorities
Of course, that worker’s annual cost-of-living adjustments (COLAs) would also be permanently reduced, causing further financial hardship. With 40% of seniors relying on for Social Security for all or most of their income – and many just skirting the edges of poverty on already modest benefits – a steep falloff in the AWI could cause retirees real financial distress.
“People shouldn’t suffer a large, permanent drop in their Social Security benefits just because they turn 60, become disabled, or experience the loss of a breadwinner around the start of a deep recession.” – Paul Van de Water, Center for Budget and Policy Priorities
In order to avoid unintentionally punishing people who turn 60 this year, Congress must take action before those workers begin claiming Social Security. (Sixty-two is the youngest age a worker can collect benefits; 67 is the Full Retirement Age for this age group.) Any change in Social Security law requires a 60-vote majority in the Senate.
Of course, the “notch” issue is only one of the challenges facing the program. Social Security will need a revenue boost in order to remain financially healthy for the remainder of this century. Retirees will need a benefit boost and a more accurate cost-of-living adjustment formula – simply to keep up with the increasing cost of essentials, from groceries to housing to health care. Seniors cannot afford benefit cuts – unintended or otherwise. Majorities in both Houses of Congress must summon the political will to increase revenues and benefits for the future. The best way to ensure that outcome is for voters to elect lawmakers in 2020 who are committed to just, equitable, and common-sense solutions that put the interests of American workers first.