If you turn 60 years old in 2020, your Social Security benefit may get hit with a double-whammy. People turning 60 this year are at the tail end of the Baby Boom generation, and the first Americans ever required to wait until age 67 to receive full Social Security benefits. Older Boomers have been able to claim full benefits at age 66.
But the other Social Security shoe may be about to drop. COVID-19 pushed the American economy into recession and quarantine keeping large numbers of people from working and earning a full year’s salary. For the 5 million people who turn 60 in 2020 it may mean a decline in Social Security benefits for the rest of their lives.
The Social Security Administration calculates benefits based on the average wage index (AWI) for the year a person turns 60. Normally, your average wage rises each year. But in 2020, because of the COVID pandemic, average wages may go down by as much as 10%. That means Social Security benefits for people turning 60 this year could be almost 6% less than people 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. The AWI is also used to update the dollar values in the formula 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 their lives unless Congress steps in to correct the problem. Depending on how quickly wages rebound, people who turn 60 next year might experience similar reductions in lifetime benefits.
Bills have been introduced in both houses of Congress that would adjust the formula and avoid a drop in benefits for those who turn 60 in 2020.
The Social Security COVID Correction and Equity Act was introduced in the U.S. House of Representatives in July 2020 to make sure that the AWI used to calculate Social Security benefits never drops below the previous year’s level, thereby avoiding benefit cuts for those born in 1960. If passed, the Act also includes a provision to temporarily increase Social Security benefits by 2% for the rest of the pandemic.
The Senate introduced its own version of a COVID Social Security relief bill in July, the Protecting Benefits for Retirees Act. The Senate bill is not as far reaching as the House version.
There’s only one other time that the average wage index (AVI) declined. Not surprisingly, it was 2009 during the Great Recession. The decline in the AWI was much smaller than the current one and Congress took no action.
Wages in any given year are not fully reported until well into the next calendar year, so we won’t know what the 2020 average wage index will be until September, when the Social Security Administration does its annual recalculation of benefits. Those numbers won’t be used to calculate SSA benefits until 2022, when those born in 1960 turn 62, which is the earliest age a person can receive SSA benefits. Hopefully, by that time, the benefits calculation formula will be corrected for the last of the Boomers.