Washington, DC) – About 4 million people who turn 61 this year could be facing a deep hit to their Social Security benefits when they retire, warns The Senior Citizens League (TSCL). “This is caused by a flaw in the Social Security benefit formula,” states Mary Johnson a Social Security policy analyst for The Senior Citizens League. “To prevent benefit cuts, Congress would need to fix this flaw by the end of 2021 before this group turns 62 and are eligible to start benefits,” she says.
The feature in 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. Known as the average wage index (AWI), it is susceptible to permanent benefit reductions when beneficiaries turn 60 in a year of extraordinarily high unemployment as was the case in 2020.
The initial retirement benefits of people who turned 60 last year, could be permanently reduced by almost 10 percent according to an estimate by Social Security’s Chief Actuary, Stephen Goss. Without timely remedial action from Congress, people born in 1960 could wind up with Social Security benefits that are 9.1 percent lower than others with identical earnings and retirement histories born just one year prior to them (1959). If this estimate proves to be correct, an age 62 starting benefit of $1,565.00 per month would instead be $1,422.60, a difference of more than $142.00 per month. Over the course of a 25-year retirement, retirees with this benefit level would receive about $55,727 less in benefits.
Due to the COVID-19 caused recession, wages and earnings have plummeted to lower levels in 2020 than in 2019 and “that appears to be dragging down the AWI,” says Johnson. So far, though, estimates from Social Security and the Congressional Budget Office vary on how low the AWI might dip or even if it will dip into negative territory. “We are watching the information from the Social Security Administration,” says Johnson, because that’s where employers send the 2020 wage reports. The final AWI won’t be known until the end of 2021.
In calculating the initial retirement benefit, the Social Security Administration uses the 35 years of highest years of earnings. The first step is to adjust those earnings using the AWI to maintain the value of earnings in today’s dollars. In addition, the AWI 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.
Typically, wages tend to go up year over year. But in 2020, the COVID-19 recession and sudden high unemployment, have caused both the number of people who are working, and wages, to plummet. This may be pulling the AWI down into negative territory” says Johnson who is in the process of collecting wage and employment data for 2020.
This type of benefit reduction is unusual and known as a “notch” in benefits, and those affected are called “notch babies.” The most recent year the AWI has been negative occurred in 2009 when it was (-1.5%).
Legislation was introduced in the last Congress to remedy the 1960 notch reductions— “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 potential notch but also provide permanent protection from this sort of recessionary reduction for future retirees as well.
With 1.2 million supporters, The Senior Citizens League is one of the nation’s largest nonpartisan seniors’ groups. Its mission is to promote and assist members and supporters, to educate and alert senior citizens about their rights and freedoms as U.S. Citizens, and to protect and defend the benefits senior citizens have earned and paid for. The Senior Citizens League is a proud affiliate of The Retired Enlisted Association. Visit www.SeniorsLeague.org for more information.