High unemployment during the COVID pandemic of 2020 could cause an estimated 4 million people who were born in 1960 to face permanent reductions to their Social Security benefits, due to a flawed feature of the Social Security benefit formula. Congress can prevent this from happening, but only if it takes action in time. To prevent benefit cuts, Congress may need to enact legislation by the end of this year, before the 1960 birth cohort turns 62 and first become eligible to claim Social Security retirement benefits.
The benefit reduction would be caused by a feature of the Social Security benefit formula that is sensitive to economic recessions and high unemployment. The first step in calculating benefits is to adjust the individual’s earnings using the average wage index (AWI) in order to convert the value of past earnings into today’s dollars. The AWI is also used to adjust the earnings levels that determine the portion of their average monthly earnings that people are allowed to keep as their benefit.
The AWI, however, is susceptible to causing permanent benefit reductions when it turns negative, which can happen in years of deep economic recession and extraordinarily high unemployment, as was the case in 2020. Last year, concerns were high that the reductions could be as high as 9.1%, according to an estimate by Social Security’s Chief Actuary Stephen Goss. But since then the economy and wages have steadily recovered and the dip in the AWI, if any, is not expected to be so deep.
Employment and average earnings information from the Bureau of Labor Statistics (BLS) indicate that average wages were down about 4.4% in 2020. But BLS wage data can vary from the final wage data that employers report to the Social Security Administration. Adjusting for the difference, the AWI for 2020 may drop only slightly, by roughly 0.65 percentage point. We are closely watching for the new AWI for 2020 from the Social Security Administration, but that final number won’t be known until the end of the year.
Only one other time in recent years, in 2009 at the peak of Great Recession job losses, has the AWI ever gone negative. The 2009 AWI dipped by 1.51% and retirees who were born in 1949 were affected. Although the problem was known at the time, the reductions to benefits were considered small and Congress took no action to prevent those reductions.
In reality, no Social Security reduction is small, because the loss compounds over time. The problem is especially unacceptable when this problem can be prevented by Congress in the first place. Individuals who were born in 1949 and who retired at age 66 with average benefits have 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 one year earlier. Even worse is the loss over time. Assuming that an individual lives to age 90, retirees born in 1949 would lose an additional $6,297 in lifetime Social Security benefits—or even more, if their benefits are higher than average. This type of benefit reduction is known as a “notch” in benefits, and those affected might be referred to as the “1949 notch babies.”
Legislation was introduced in the last Congress to remedy the new benefit reductions affecting people born in 1960— “The Social Security COVID Correction and Equity Act,” introduced by Representative John Larson (CT-1), and the “Protecting Benefits for Retirees Act,” introduced by Senators Tim Kaine (VA) and Bill Cassidy (LA). The Senior Citizens League strongly endorses legislation that would fix not only this notch but also provide permanent protection from this sort of recessionary reduction for past and future retirees as well.