An intriguing working paper authored by Andrew Biggs issued by the American Enterprise Institute posits that the financial impacts of the Coronavirus could significantly reduce the Social Security benefits of persons who turn 60 this year; that is, of persons born in 1960. See “American Enterprise Institute: How the Coronavirus Could Permanently Cut Near-Retirees’ Social Security Benefits.”
Biggs explains that, in calculating a worker’s Social Security benefit, Social Security initially indexes the worker’s earnings each year to economywide earnings as of the year the worker turns age 60. This indexing, referred to as the Social Security Average Wage Index (AWI), is key to Biggs’ supposition that persons born in 1960 may experience significantly reduced Social Security benefits. After indexing earning to age 60, Social Security then takes the average of the worker’s highest 35 years of earnings (including any earnings after age 60, which are not indexed) and divides that amount by 12 to produce a monthly figure referred to as the Average Indexed Monthly Earnings (AIME).
Finally, Social Security calculates the worker’s Primary Insurance Amount (PIA), which is the benefit payable at the worker’s Social Security Normal Retirement Age (NRA)–age 67 for workers born in 1960. For workers who turned age 60 in 2018, Social Security determined that the PIA would be 90% of the first $960 in AIME, 32% of AIME between $960 and $5,785, and 15% of AIME between $5,785 and $9,875 (the maximum average monthly earnings subject to payroll taxes in 2018). These amounts, which replace a larger percentage of income for low earners than high earners, are increased annually to coincide with average wages in the economy.
But here’s the important part. Both the AIME (Average Indexed Monthly Earnings) and PIA (Primary Insurance Amount) are indexed to the Social Security Average Wage Index (AWI), which is calculated in part by dividing the aggregate national payroll earnings each year by the number of workers who receive IRS W-2 forms. In 2019, the Social Security Trustees projected that the AWI for 2020 would be $56,396. However, Biggs notes that the Trustees’ projection was made before our country was invaded by the Coronavirus.
Biggs posits that the 2020 AWI is likely to be much lower than the amount projected by the Trustees because of the many Covid-19 related layoffs and furloughs. As a result, the AWI for workers who turn 60 in 2020 and their PIA will be permanently locked in at a lower amount. Biggs estimates that the lifetime loss of benefits for these workers in present value will equal $24,647 for low earners, $70,193 for medium earners, and $148,030 for high earners.
Biggs suggests some options policymakers might wish to consider to address the forecast benefit cuts for Social Security recipients who turn 60 in 2020. One is to legislate an ad hoc increase for those persons. Another is to temporarily alter the Social Security benefit formula to reduce the effects of the expected decline in the AWI for 2020. A third option would be to move away from wage indexing the benefit formula and, instead, target the level of real earnings received by workers over their careers adjusted by inflation. However, Biggs notes that a similar Social Security inequity occurred in the 1970s, but, despite lobbying, the affected individuals were unable to obtain redress. Still, our 1960 cohorts have ammunition in the form of the Internet and numerous social media channels. So, their lobbying efforts could very well prove successful. Time will tell.
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