The coronavirus continues to confound policymakers in its impact on public health, social structures and the economy. Now Social Security advocates are starting to come to grips with its unheralded impact on millions of older workers.
Simply put, anyone turning 60 this year could face a lifelong reduction in Social Security benefits because of a quirk in the program's benefit formula that makes them vulnerable to this year's economic slump.
That's almost certain to happen unless Congress takes action by enacting a one-time fix. The damage could be felt by somewhere between 3 million and 5 million workers and their families.
People shouldn’t suffer a large, permanent drop in their Social Security benefits just because they turn 60, become disabled, or experience the loss of a breadwinner around the start of a deep recession.
Paul Van de Water
Without the fix, preferably in the next coronavirus relief bill, "Social Security benefits will be significantly lower for workers who turn 60 this year and will be eligible for early retirement benefits in 2022," wrote Paul Van de Water of the Center on Budget and Policy Priorities in the latest siren call about the situation. "Those becoming eligible for disability or young survivors benefits in 2022 will also see lower benefits."
The earliest notice about the problem seems to have come from economics writer Brenton Smith on the FedSmith.com website, who raised the alarm on March 27.
Conservative commentator Andrew Biggs, a former Social Security official, followed up with a paper published by the Wharton School of the University of Pennsylvania in April and an op-ed warning in the Wall Street Journal in May.
As Biggs calculated, the glitch could cost retirees with median lifetime earnings some $3,900 a year in benefits, to the end of their days. That would be equivalent to more than 20% of today's average annual Social Security benefit.
Based on his own assumptions, Biggs places the gap at about 13% of what the 2019 Social Security trustees report projected for workers born in 1960, who will be turning 60 this year. Either way, it's a sizable hit.
Biggs performed a valuable service by sounding the alarm, though his proposed fix won't be endorsed by many in the Social Security advocacy community. More on that in a moment.
The problem is basically technical. Here's a straightforward (I hope) explanation.
Social Security benefits are calculated based on a worker's career-average earnings, producing what's known as the average indexed monthly earnings. As Van de Water explains, workers' earnings through their age 59 are then adjusted to account for the growth in economy-wide wages, using an “average wage index.”
Under normal conditions, this is the right way to set benefits: It adjusts them higher as average wages rise, and since wages tend to rise faster than prices by about 1% a year over time, that allows benefits to reflect long-term economic advances.
The problem comes if overall wages suffer a steep drop. That's likely to happen as a consequence of the months-long economic lockdown prompted by the coronavirus and of residual layoffs and furloughs through the end of the year. Van de Water posits a drop of at least 5% in average wages in 2020; Biggs bases his calculation on a drop of 15%.
As Biggs explains succinctly, referring to the year workers turn 60, "a fall in national average wages in that year reduces Social Security’s indexed measure of all of his past earnings. This produces a lower calculation of career average earnings, and thus a lower Social Security benefit." The shortfall affects the worker's benefits for life.
This situation is obviously unfair to anyone happening to turn 60 this year. So what to do about it?
Biggs proposes scrapping wage indexing entirely, substituting an inflation index (that is, based on price increases rather than wage increases) coupled with some other formula adjustments.
That's unpalatable for Social Security advocates, who value wage indexing because it helps maintain parity of benefits and therefore the relevance of Social Security for newly retiring workers, and because the wage glitch kicks in only rarely.
But the current problem, which is derived from extraordinary conditions, isn't unprecedented. Smith notes that it last happened in the recession year of 2009, when instead of rising by more than 4% as the Social Security Administration had expected, the average wage fell by 1.5%. Workers born in 1949 anod therefore turning 60 in 2009, "paid a stiff price in their benefits" that may have come to $100 a month or more, Smith writes.
Van de Water and other Social Security experts propose a simpler solution to the problem: Have Congress mandate that changes in the wage index can never result in lower benefits than the year before.
There are two precedents for that. The maximum annual earnings subject to the Social Security payroll tax never falls even when wages fall (this year, it's $137,700, up from $132,900 last year).
And cost-of-living adjustments to annual benefits can never result in lower benefits from one year to the next, even if the consumer price index on which they're based falls.
That's the best option for Congress, and one that should be inserted into the next coronavirus relief bill so the issue doesn't get neglected. The retirement benefits of millions of Americans hang in the balance.
Social Security, as Franklin Roosevelt observed at the time of its creation, was designed to help Americans face the "hazards and vicissitudes of life."
That phrase aptly defines the current economic landscape. As Van de Water writes, "People shouldn’t suffer a large, permanent drop in their Social Security benefits just because they turn 60, become disabled, or experience the loss of a breadwinner around the start of a deep recession."