The COVID-19 pandemic has had dramatic immediate impacts on the lives of people around the world. Those on Social Security have had to close the hatches and make the most of what their benefits will allow them to pay, while many who are nearing retirement age have faced layoffs, involuntary licenses and other adverse events that have affected their income and have forced them to think about early retirement
The financial future of Social Security has also been affected by the coronavirus, as lower wages mean less payroll tax revenue to finance benefit payments. That could bring the day of reckoning for trust funds that provide most of the money going to recipients several years closer to the current estimated exhaustion date of 2035.
However, a large group of benefit recipients may see their Social Security benefits decrease long before that. As early as 2022, there could be millions of Social Security beneficiaries who receive far less in monthly payments than they expected.
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How Wage Levels and Unemployment Affect Your Social Security Benefits
There are lots of figures and calculations to determine what your monthly Social Security benefit will be. In general, the Social Security Administration analyzes your salary history throughout your career. Adjusts last year’s earned income for wage inflation to make the years more comparable, and then takes an average of the 35 highest earning years in her career. If you haven’t worked 35 years, SSA fills in the missing years with zeros to determine the average.
The next step is to take the resulting average monthly indexed income and run it through a formula. This formula determines what your monthly benefit would be if you took Social Security at full retirement age. Take it sooner and your payment will be reduced by a fixed percentage.
None of this could appear to be directly related to the COVID-19 pandemic. However, there are a few details you need to know about these calculations that put the whole process in context:
- SSA adjusts your pay for inflation last year based on two-year averages before you are eligible for Social Security benefits. For those turning 62 in 2020, for example, the SSA analyzes 2018 average salary figures to apply its indexing.
- The formula for determining your monthly benefit also takes into account the average salary levels of two years ago when determining how your average monthly income translates into monthly Social Security benefits. Technically, the salary index information is integrated into what are known as turning points, which are the income levels at which Social Security pays you less in fringe benefits for each additional dollar of income earned during your career.
Why is success 2 years away?
The average salary index used by the SSA is about to drop precipitously in 2020 if current conditions persist. This is largely because unemployment levels have risen so sharply. Even with average weekly earnings for workers who still have jobs that have increased during the coronavirus pandemic, the zero earnings that those who have been laid off and the reduced wages for those who have been temporarily laid off will likely have a much greater downward impact . Those 2020 salary figures won’t affect Social Security claimants at 62 in 2020 or 2021, but they will affect 62-year-old claimants in 2022.
Researchers from the Wharton School Pension Research Council projected that a 15% drop in average wages in 2020 would affect benefits by about 14%. That would translate to annual benefit cuts of $ 3,900 for a typical median wage worker. Those reductions would be permanent, with future cost of living adjustments that would only provide incremental increases from those initial low levels.
It is far from certain what the average salary will look like by the end of the year. However, even a minor decrease would still have a marked impact on the monthly checks people receive.
Prepare to act
If you’re turning 62 in 2022, now is the time to start lobbying your congressional representatives to address the potential one-year problem in the Social Security benefits formula. With the potential for wages to take a much bigger hit than they did in the 2008-2009 recession, asking for one-time relief is a reasonable strategy, even if consensus might be difficult to achieve in a heavily divided Washington.
