House panel looks at COVID-19 impact on Social Security

Americans who were born in 1960, near the tail end of the baby boom, have long known that their Social Security benefits would be a little less valuable than those of the older members of their generation. After all, they are the first group whose members will have to wait until 67 to claim their full retirement benefits, while older boomers could do so at 66.

Now, the COVID-19 pandemic and resulting recession are threatening to reduce their future benefits even further. More than 5 million people who turn 60 in 2020 may suffer an added loss because a decline in the average wage index for this year could reduce their future Social Security benefits for the rest of their lives.

“Due to the COVID-induced recession and job losses, aggregate wages are expected to be substantially lower in 2020 than they were in 2019,” Rep. John Larson, D-Conn., chairman of the House Ways and Means subcommittee on Social Security, said during a recent hearing on the impact of the pandemic on Social Security and its beneficiaries.

“Because of how Social Security benefits are calculated, this will reduce Social Security benefits for their lifetimes for everyone born in 1960, creating a ‘notch’ — that is, lowering benefits for one group of retirees,” Larson explained.

Benefits for those born in a particular year are calculated based on the average wage index, or AWI, for the year they turn 60. Normally, average wages rise from year to year, but this year, because of the COVID pandemic, average wages are likely to decline by as much as 10%. As a result, future Social Security benefits for people who turn 60 in 2020 could be as much as 5.9% lower than those for workers 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 to ensure that benefits account for growth in wages across the economy. The AWI is also used to update the dollar values in the formula that is 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 his or her life compared to someone born just one year earlier, unless Congress steps in to correct the problem, Larson said. Depending on how quickly wages rebound, people who turn 60 next year might experience similar reductions in their lifetime benefits.

Larson introduced the Social Security COVID Correction and Equity Act earlier this month to ensure that the AWI used to calculate Social Security benefits never drops below the previous year’s level to avoid any benefit cuts. The bill, which has 45 Democratic co-sponsors, would also temporarily increase Social Security benefits by about 2% for the remainder of the pandemic, along with making some other temporary changes targeted at helping low-income beneficiaries and other vulnerable populations.

This proposed legislative change would protect benefits for workers who were born in 1960 from declining. Those workers who become newly eligible for benefits in 2022, when they turn 62, would be at least at the same level as similar workers who became newly eligible for benefits in 2021, rather than seeing a decline of 5.9%.

A similar bill, Protecting Benefits for Retirees Act, was introduced in the Senate on July 2, although the Senate version would not expand Social Security benefits.

“It is imperative that the House acts before the August recess to include a fix to prevent the COVID notch cuts and correct these inequities in the next COVID legislative package,” Larson said during his subcommittee hearing. However, there’s no indication whether this Social Security formula fix will make it into the next installment of pandemic relief, which is likely to include an extension of unemployment benefits and additional help for ailing businesses at a cost of $1 trillion or more.

The national average wage index has declined only one other time, in 2009 as a result of the Great Recession. But the drop was much smaller, and Congress did nothing about it. This year’s potential drop has garnered much more attention on Capitol Hill.

Because wages for a given year are not fully reported until well into the following calendar year, the AWI for 2020 won’t be known until late next year, and it will not be used for Social Security benefits calculations until 2022, Stephen Goss, chief actuary for the Social Security Administration, explained during the hearing. So even if the notch correction doesn’t make it into the next economic relief bill, there may still be time to fix the formula before it would affect benefits for people born in 1960.

Check out Mary Beth Franklin’s Retirement Repair Shop podcasts.

The post House panel looks at COVID-19 impact on Social Security appeared first on InvestmentNews.

As our second lead editor, Cindy Hamilton covers health, fitness and other wellness topics. She is also instrumental in making sure the content on the site is clear and accurate for our readers. Cindy received a BA and an MA from NYU.

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