Multiple Stories have recently been released, including this one by the USA Today indicating that people who were born in 1960 might get the short-end of the stick when it comes to Social Security benefits.
The article points out that the reason for this is due to the COVID-19 pandemic, which has resulted in skyrocketing unemployment numbers and Social Security’s formula for calculating benefits. Below is a piece from the story that explains these benefits.
The formula used to calculate your Social Security benefits is really complex so it’s a little complicated to see the issue. But basically it boils down to the fact the formula relies on average wages in the U.S. in the year that you turn 60 to do two important things:
- Index your wages earned over your career to account for inflation.
- Determine what percentage of your average wage you receive in benefits.
After adjusting your wages for inflation, Social Security calculates your average monthly earnings in the 35 years when your income was the highest. This is called your AIME. Your standard retirement benefit equals 90% of AIME up to a first “bend point,” 32% between a first and second bend point; and 15% above the second bend point. The bend points are income-thresholds that change each year.
Sadly, when average wages in the U.S. are lower in the year you turn 60, this reduces your AIME and lowers the bend points. So you get hurt in two ways. The value of your earnings used to determine your benefit is lower and your benefits equal a smaller percentage of your average earnings.
This all sounds technical, but it could have a huge impact on the amount of income you get. In fact, research from The Wharton School at the University of Pennsylvania found that if average wages decline by 15% in 2020 due to the coronavirus, a middle-income worker who turned 60 this year would see a 13% reduction in annual Social Security benefits and could lose more than $70,000 in income over a lifetime because of it.
There are some clear solutions to the problem. First of all Congress needs to solve the Social Security solvency issue. In about 15 years Social Security’s reserves will be gone and Social Security will be paying out more than it takes in so full benefit payments won’t be possible. It is estimated that there will be about a 21 percent benefit cut if nothing is done by Congress to solve the problem. This has happened before and eventually Congress has acted, but legislators typically wait until the last minute to take action.
Secondly, Social Security could restructure its formula for paying benefits. Plain and simple, it is too complex and Americans do not receive the amount in benefits they should. This is likely not going to happen and changes at Social Security are rare. There have been different bills in Congress that would increase Social Security benefits, but those have no realistic chance of passing and becoming reality, at least until we see how the 2020 election plays out.
