A “flawed feature” of the Social Security benefit formula could result in an estimated four million people who turned 60 in 2020 getting lower Social Security benefits if Congress does not act before the end of the year, according to a Social Security policy analyst with the Senior Citizens League.
Analyst Mary Johnson said people who were born in 1960 will be affected because “a feature of the Social Security benefit formula that makes the critical calculation of an individual’s initial Social Security retirement benefit—which is linked to the year that workers turn age 60—is sensitive to economic recessions and high unemployment.”
And due to the last year’s high unemployment and drop in wages because of widespread work stoppages, the average wage index (AWI) used to calculate benefits will likely go negative, said Johnson.
Johnson explained that the first step in calculating benefits is to adjust an individual’s earnings using the AWI to convert past earnings into today’s dollars. The AWI, she noted, is also used to “adjust earnings levels that determine the portion of their average monthly earnings that people are allowed to keep as their benefit.”
But if the AWI turns negative, which is not uncommon during an economic downturn, as in 2020, it could cause permanent damage, Johnson said. She noted that during the height of the crisis last year, Social Security chief actuary Stephen Goss had estimated a reduction as high as 9.1% for people who were born in 1960. “But it has not dropped as dramatically as feared,” because there has been steady recovery since then, she noted.
Johnson said based on data from the Bureau of Labor Statistics (BLS), her analysis showed that the average wages were down about 4.37%. She said the drop in AWI for 2020 could be as low as .65 percentage points based on her estimates of adjusting for the difference, but the final AWI for 2020 will not be known until the end of 2021, when employers report final wage data to the Social Security Administration, she said.
The only other time Johnson said she recalls the AWI going negative was at the peak of the 2008-2009 recession. “The 2009 AWI dipped by 1.51% and retirees who were born in 1949 were affected,” she said, adding that the reductions in benefits were considered small and Congress chose not to take action to prevent it.
But Johnson said, “no Social Security reduction is small because the loss compounds over time. We are talking about benefits that people have paid for their entire working lives,” she said. “It’s especially unacceptable when this problem can be prevented by Congress."
Her analysis of the 2009 dip in the AWI showed individuals who were born in 1949 and who retired at age 66 with full benefits lost about $1,915 through the end of 2021 due to the reduction in the AWI in 2009. “Their benefits today are about $24 per month lower than what they otherwise would have received had they been born in 1948. But more troubling is the loss over time,” Johnson said.
Congress, Johnson said, will need to enact legislation by the end of 2021, before the 1960 birth cohort turns 62 and individuals become eligible to claim benefits, to prevent the reductions in benefits. She noted that a couple of bills—the Social Security COVID Correction and Equity Act by Rep. John Larson (D-Conn.) and the Protecting Benefits for Retirees Act by Senators Tim Kaine (D-Va.) and Bill Cassidy (R-La.) – were introduced in the last Congress to remedy the problem, but they were not acted on and will need to be reintroduced in the Biden Congress, she said.