The pandemic-related economic shutdown in 2020 sparked all sorts of fears, including, oddly enough, fears that those who turn 62 next year would be stuck with drastic cuts to their Social Security benefits.
Sure, it was very strange for a small fraction of baby boomers to suddenly become alarmed amid the COVID-19 crisis.
But it could have happened to one group, thanks to a quirky calculation. The AARP and others published articles last year warning that the disruption to the economy from the pandemic threatened to cause a serious decline in benefits for those turning 60 in 2020.
The reason? A key wage index that uses Social Security as part of its benefits calculation looked like it would fall during the 2020 economic slowdown.
In a July 2020 Congressional testimony, Social Security chief actuary Stephen Goss suggested that benefits could be 9.1% lower for life for this particular group.
Goss stated that a drop in the median wage index would financially harm more than 4 million retirees and disabled beneficiaries who will turn 62 in 2022.
Don’t always believe the headlines
Now, amazingly, there is good news for the baby boomers who were born in 1960. It didn’t turn out as horribly as the original headlines suggested.
The average wage index — which is calculated by Social Security to track wage growth in the overall economy — didn’t fall as it had once projected. Instead, the Social Security Administration recently posted that the national average wage index was up 2.83% in 2020 from 2019 — not down.
That’s quite a shift from an early projection that the wage index could fall 5.9% in 2020 from 2019.
“That means there wouldn’t be a reduction in benefits for people who turned 60 in 2020, those born in 1960. Here’s the good news,” said Mary Johnson, social security and health care policy analyst at The Senior Citizens League. an impartial group dedicated to protecting senior benefits.
For the past year, Johnson has heard of terrified people turning 61 this year.
“We got these really panicked emails saying, ‘Are my Social Security benefits going to be cut by 10%?’ ” she said.
The last thing many people getting closer to retirement want to hear is that they’re part of a cohort about to be unilaterally cut for something they have no control over.
However, things turned out better than those terrible projections.
What is this strange index?
The average wage index is based on the total amount of wages paid during a year divided by the number of people with incomes listed on W-2 forms.
The index — which no one normally talks about — is a measure Social Security uses to calculate future benefits for 60-year-olds, who can claim retirement benefits from age 62. The two-year gap is a normal part of the formula.
“For example, if a person turns 62 in 2022, then 2022 will be the person’s eligibility year,” according to the Social Security Administration.
“We always index a person’s income to the average wage level two years prior to the year of first eligibility.”
The formula is partly dependent on the growth of average wages in the economy, according to a think tank of the American Center for Progress.
The average wage index is, of course, a piece of the puzzle when it comes to calculating individual benefits. Other factors include: the total number of years you have worked, the wages you earn each year, and how old you are when you claim retirement benefits.
For example, Social Security takes into account how much money you’ve earned over the years by calculating your average indexed monthly earnings during your 35 best years of earnings.
Claiming at age 62, the earliest possible date, means you’ll get a much lower monthly payout than if you claim benefits at full retirement age.
Those who turn 62 next year and beyond face another problem as well.
Anyone born in 1960 or later has a full retirement age of 67. (If you were born on January 1, you would refer to the previous year.) At one time, that full retirement age was 65. But it is gradually shifting higher.
For those turning 62 in 2022 and beyond, the retirement benefit will be reduced by 30% — or $300 on a $1,000 monthly payment — if that group claims age 62 instead of 67. Every year you wait after 62 years, you get a higher payout.
Why was the prophecy out?
While the latest numbers represent good news, you have to wonder why so many people had to sweat in panic over the past year because of a bad forecast.
Yet economists not involved in the process see how things can go wrong.
“Economic forecasting isn’t easy in ‘normal’ times, and 2020 wasn’t nearly as normal,” said Charles L. Ballard, an economics professor at Michigan State University.
The general decline in economic activity, he said, could have been expected by many to drive down wages.
But it’s possible, Ballard said, that some predictions underestimate two things.
“First, the stimulus programs have boosted demand significantly,” he said.
“Second, a very large proportion of the jobs lost in March and April last year were low-wage jobs. If we cut a lot of low-wage jobs when calculating the average wage, the average wage goes up, even if nothing else happens. ‘ said Ballard.
The economic consequences did not affect all employees equally in 2020. Many with lower-paying jobs in restaurants, shops and elsewhere lost their jobs. But at the same time, many others were lucky enough to hold down better paying jobs by working remotely from home.
Richard Johnson, director of the Program on Retirement Policy at the Urban Institute, said total wages rose in 2020, while the total number of people receiving a salary or wage fell.
“We had some pretty strong wage growth for higher-income people,” Johnson said.
Johnson said the initial forecasts were not on track, in part because the economy generally recovered better than expected.
“People initially thought the recession would last longer and wages would fall further than they did,” Johnson says.
While wages were higher in 2020, he noted that growth was below average or what probably would have been if the economy had remained as strong as it was in early 2020 before the pandemic hit.
Johnson said Congress’ stimulus efforts in general have helped the economy, especially efforts to boost spending through Economic Impact Payments. But some might argue that while improved unemployment benefits helped individuals, it would also have discouraged some from working and contributed to a lower median wage index.
According to a statement from the Office of the Chief Actuary of Social Security, it had emerged last year that a prolonged recession related to the pandemic would lead to a cut in the average wage index for 2020.
“However, the recession did not materialize until the second quarter of 2020 and employment recovered significantly in the second half of 2020. For example, the duration of lost earnings for many workers in 2020 was shorter than previously expected.”
The agency also noted that job losses in 2020 were greater for lower-paid workers.
So the average wage index rose 2.8% from 2019 to 2020, according to the office, which was “just slightly less than the 3.5% increase projected in the 2020 Trustees Report before factoring in any effects of the pandemic and recession.” .”
Could there be problems ahead?
The concern now is the possibility that the next turbulent economic downturn could create a problem for others who are now younger.
This time, “future retirees dodged a bullet,” said Johnson of the Urban Institute.
But the problematic feature of the benefit formula remains – and a cut in benefits could happen down the road for other retirees.
It once happened to a group of workers who were born in 1949 and turned 60 in 2009. The average wage index fell that year during the Great Recession, but the decline was only 1.5%.
Johnson said that group of retirees eventually saw a reduction of about 4% — and that reduction lasts for the rest of your life.
“It doesn’t seem fair,” he said.
The solution could be quite simple, he said, if Congress required Social Security to use the value of the previous year’s average wage index when the index falls.
The Senior Citizens League would like to see legislation passed to allow retirees born in 1949 to recover their losses — and correct this flawed aspect of the Social Security benefits formula.
Should one group be affected just because they turn 60 in the wrong year when the economy is in a serious turmoil? It certainly makes no sense to me.
Many don’t expect Congress to address the issue immediately, especially since it’s gone for those born in 1960. But it’s certainly worth considering as part of a wider social security reform that lies ahead.
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