Congressional Inaction Could Cost Thousands in Social Security for Many, Says New Analysis From The Senior Citizens League

Share Article

The Social Security benefit formula that makes the critical calculation of an individual’s initial Social Security retirement benefit is sensitive to economic recessions and high unemployment. In years of deep economic recession and extraordinarily high unemployment, as was the case in 2020, benefits are susceptible to reductions for at or near retirement.

“In reality, no Social Security reduction is small, because the loss compounds over time,” says Johnson.

An estimated 4 million people who were born in 1960 face lower Social Security benefits caused by the COVID-19 caused recession and high unemployment, warns The Senior Citizens League (TSCL). “A flawed feature of the Social Security benefit formula could cause reductions, but Congress can prevent this from happening if it takes action soon,” states Mary Johnson a Social Security policy analyst for The Senior Citizens League. To prevent benefit cuts, Congress would need to enact legislation by the end of 2021, before the 1960 birth cohort turns 62 and individuals become eligible to claim benefits.

A feature of 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 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 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 if 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 percent, according to an estimate by Social Security’s Chief Actuary Stephen Goss. But the economy and wages have steadily recovered since that time.

An analysis by Johnson of 2020 employment and average earnings information from the Bureau of Labor Statistics (BLS) indicates that average wages were down about 4.37 percent. But BLS wage data can vary from the final wage data that employers report to the Social Security Administration. Adjusting for the difference, Johnson estimates that the AWI for 2020 may drop only slightly, by about 0.65 percentage point. “We are watching the information from the Social Security Administration,” says Johnson. “That’s where employers send the 2020 wage reports and the final 2020 AWI won’t be known until the end of 2021.”

Typically, wages tend to go up year over 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 percent 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 the reductions.

“In reality, no Social Security reduction is small, because the loss compounds over time,” says Johnson. “We are talking about benefits that people have paid for their entire working lives,” she notes. “It’s especially unacceptable when this problem can be prevented by Congress in the first place,” she says.

A new analysis of the 2009 dip in the AWI by Johnson indicates that individuals who born in 1949 and who retired at age 66 with full 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 in 1948. “But more troubling is the loss over time,” Johnson says. Assuming that an individual lives to age 90, retirees born in 1949 would lose roughly $6,297.00 in lifetime Social Security benefits—or even more, if their benefits are higher than average. This type of benefit reduction 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 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 http://www.SeniorsLeague.org for more information.

Share article on social media or email:

View article via:

Pdf Print

Contact Author

Shannon Benton
@Seniors_League
Follow >
The Senior Citizens League
Like >
Visit website