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After more than four months, the COVID-19 pandemic continues to ravage the American population and economy. Its impact on seniors has been especially dire, but things could soon get even worse for Americans who are on their way to becoming seniors. As Michael Hiltzik writes in the Los Angeles Times, “Anyone turning 60 this year could face a lifelong reduction in Social Security benefits.”
How Are Social Security Benefits Calculated?
In short, Social Security payouts are based on someone’s earnings through age 59. These earnings, Hiltzik writes, are “adjusted to account for growth in economy-wide wages.” This is done with the help of an average wage index.
This system usually works effectively, allowing benefits to grow throughout periods of prosperity. COVID-19 and its massive economic impact have, however, exposed a glitch that could cost millions of Americans thousands of dollars each month for the rest of their lives.
COVID-19 and Social Security
Andrew Biggs, a former Social Security analyst, was among the first to point out COVID-19’s potential impact on Social Security payouts. In an essay published by the University of Pennsylvania’s Wharton School, he notes that, “a fall in national average wages in [the year a person turns 60] reduces Social Security’s indexed measure of all of [this person]’s past earnings.” If his estimates are correct and average wages drop by 15%, Americans born in 1960 could see their future Social Security benefits cut by $3,900 each year. For some individuals, this could mean total losses of more than $70,000.
This isn’t the first time that extraordinary economic conditions have threatened Social Security benefits. In 2009, the early days of the Great Recession brought average wages down by 1.5%. This was in spite of predictions that they would be raised by 4% throughout the year. As a result, economic journalist Brenton Smith writes, “People born in 1949 paid a stiff price on their benefits.” He notes that 2009’s 1.5% drop was only a “modest” change to average wages. While no one knows for sure, it’s very likely that the COVID-19 pandemic could change them more dramatically.
Why is the year someone turns 60 more important than the year they turn 62? The Social Security Administration takes two years to apply new wage data. That means that 2020’s data will go into effect in 2022 when it’s compared to data from 2019.
A Call to Action
Though Biggs is affiliated with the conservative American Enterprise Institute, he calls on Congress to take fairly bold action. More specifically, he offers up three potential fixes for Social Security’s average wages glitch:
- Introduce ad hoc benefit increases for seniors who are affected by this year’s drop in wages. “A flat benefit supplement of $125 per month,” he writes, “would restore very low wage workers’ benefits to approximately the amounts projected for that group in 2019.”
- Alter Social Security’s typical benefit formula so that 2020’s data is weighed differently. For example, Biggs suggests basing the average wage index on payroll figures from Q1 alone. He notes that this was standard practice prior to 1977.
- Eliminate average wage indexing altogether and introduce a new inflation-based formula.
Hiltzik echoes other commentators in calling for a different fix. They ask that Congress update Social Security’s policies to ensure that the wage index can never lead to reduced benefits. There is already some precedent for such a change. Social Security policies hold that payroll taxes cannot drop alongside wages and that cost-of-living adjustments will never lead to lower benefits — even when the consumer price index drops.
“That’s the best option for Congress,” Hiltzik concludes, “and one that should be inserted into the next coronavirus relief bill.” Another such bill is waiting for approval in the Senate and it will certainly see amendments if it passes. Could the government use this opportunity to safeguard Social Security benefits for Americans born in 1960?