The deep recession and two unprecedented years of a lack of annual cost-of-living adjustments (COLAs) are taking a huge toll on the Social Security of new retirees, even if they haven’t yet started benefits. A ground - breaking study by TSCL, is the first to examine the impact that the downward trend in wage growth is having on the initial Social Security benefits of “early ” Baby Boomers, who were born from 1949 through 1951. The study also calculated the impact that two years without COLAs, and low inflation thereafter, would have in lifetime benefits for average earners.
The drop in initial benefits is so pronounced that a new inequity in benefits is forming. Initial retirement benefits for average earners born in 1949, and who turn 62 in 2011, will tend to be lower than the benefits received by other retirees with the same earnings born just one year before them. “If average wages continue to fall, people born in 1950 and thereafter may also be affected by the benefit inequity,” says study co-author Mike Watson.
The study also projected the long-term loss in benefits that Baby Boomers will experience due to two years of no annual COLA, and low inflation thereafter, even if they have not yet filed a claim for benefits. That will occur because in addition to adjusting benefits annually to prevent an erosion of buying power, COLAs are also used in calculating the initial retirement benefit. Under the benefit formula, the Social Security Administration calculates a retiree’s “primary insurance amount” (PIA) at age 62. Then the PIA is adjusted using the COLA until the worker files a claim for benefits, which may not be until age 66 or even 70.
COLAs compound like interest and grow over time. Thus Baby Boomers who have already turned 62 prior to the no COLA years will take the full brunt in the loss of compounding. The table below illustrates:
Lifetime Social Security Benefits of Average Earners
|Year of Birth||62 Year Old Retiree||66 Year Old Retiree|
Surveys indicate that the majority of retirees report they will depend on Social Security for at least half of their income. Nevertheless Congress is expected to consider proposals that would cut Social Security benefits, including COLAs and boost, perhaps by thousands of dollars a year, what seniors will have to pay for their Medicare.
TSCL believes that legislation is need to protect the Social Security benefits of retirees from drops due to extreme economic conditions. TSCL supports legislation that would guarantee a minimum COLA and is working for similar protections in the Social Security benefit formula.