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Social Security Administration
The COVID-19 pandemic has had profound economic consequences for millions of Americans—including some ripple effects that have not even been felt yet.
One little talked about issue is that 3 million workers who are turning 60 this year will very likely see a significant reduction in their lifetime Social Security benefits. This is expected due to a nationwide decline in the Average Wage Index because of the economic crisis.
Also read: Today’s older workers may see the first cuts to Social Security benefits
“ Benefits for these retirees would be significantly lower in each and every year of their lifetimes, as benefits in later years are determined by the initial amount a person receives, indexed for inflation. ”
Fortunately, it’s not too late to fix the problem. Democratic Rep. John Larson of Connecticut, the chair of the House Ways and Means Subcommittee on Social Security, has introduced legislation to ensure that this cohort of 60-year-olds will not have lower benefits than the cohort that is a year older.
Congress should pass Larson’s legislation as soon as possible.
How benefits are determined
The initial benefits of Social Security retirees are determined, in part, by the growth of average wages in the economy, as measured by the Average Wage Index. Because of the pandemic, average wages are very likely to fall in 2020 compared with 2019.
As a result, the initial benefits of those workers who turn 60 in 2020—who are first eligible to retire in 2022—would fall significantly relative to projections made earlier this year. Moreover, benefits for these retirees would be significantly lower in each and every year of their lifetimes, as benefits in later years are determined by the initial amount a person receives, indexed for inflation.
The benefit drop would be significant enough between 2019 and 2020 that workers who turn 60 in 2020 would have substantially lower lifetime benefits than workers who turned 60 in 2019, even if they had essentially the same earnings histories, creating a “notch.”
Average wages expected to drop 5.9%
Under the latest projections of the chief actuary of the Social Security Administration, average wages in the economy are likely to fall by about 5.9% between 2019 and 2020, based on what we know thus far. Using this estimate, an average earner in the economy who turned 60 in 2020 would suffer a reduction of $1,428 per year in inflation-adjusted benefits for the rest of their life relative to an average earner who turned 60 in 2019. For those who earned substantially more than the average earner, the loss would be much higher.
People who would receive retirement benefits based on the earnings records of their spouses would also receive lower initial and lifetime benefits. Beneficiaries who are the children and dependents of retirees would also see benefit reductions as well.
In addition, 1 million disabled worker beneficiaries who will become initially eligible for benefits in 2022 would also receive lower initial and lifetime benefits, as would their spouses and dependents. Finally, some individuals who would receive survivor benefits and their dependents would have their benefits reduced.
Alicia Munnell: A drop in Social Security’s Average Wage Index could hurt 4 million people
How to fix the problem fairly
The good news is that there is ample precedent for fixing this problem. As mentioned earlier, benefits to Social Security recipients after the first year of receipt are indexed to a measure of inflation—the CPI-W. However, Congress has ensured that in years when the CPI-W falls, benefits do not go down. The same principle should apply for determining Social Security initial benefit levels.
Congress must provide specifically that in the future, the Average Wage Index used for the benefit computation is not allowed to decline from one year to the next, even if the actual Average Wage Index falls.
But for retirees, this change must be applied in such a way that it only affects the initial benefit computation for workers who turn 60 in the year that the actual Average Wage Index falls, but not in a way that would reduce the benefits of workers born in other years. The legislation that Chairman Larson introduced does exactly this: it fixes the problem without lowering the benefits of workers in other cohorts.
Another drop in the Average Wage Index could be a real possibility as early as 2021, and would affect the next cohort of retirees, those who turn 60 in 2021. Unless this is fixed, it will continue to be a problem for as long as the economic crisis lasts. But Chairman Larson’s proposal would prevent the problem from recurring. New legislation would not be needed if the Average Wage Index were to fall again, during this pandemic or anytime thereafter.
The Average Wage Index problem could be fixed anytime between now and 2022, when workers who turn 60 in 2020 first become eligible to retire.
But Congress should not wait that long. Until this problem gets fixed, it will cause significant anxiety for workers who are eligible to retire in 2022 because they will not know if their benefits are going to be significantly lower.
Moreover, many of these workers will be trying to decide when to retire. The amount of benefits they can expect to receive each year of their retirement will be an important factor in that decision.
It would be unfair to these workers to leave them with uncertainty. Fortunately, the problem can be fixed legislatively, and Congress should act as soon as possible to make that happen.
Alan Cohen is a senior fellow at the Center for American Progress, working primarily on Social Security and federal budget issues. Cohen was nominated by President Barack Obama and confirmed by the Senate in 2014 to be a member of the Social Security Advisory Board, and served for the subsequent two years.
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