If you were born in 1960, you are pretty much screwed.
The impact of the coronavirus on Social Security hasn’t caught the attention of those on Capitol Hill or in the media, and it may take a couple of years before voters born in 1960 catch-on. They will notice as soon as smaller checks start arriving.
The problem: the COVID-19 coronavirus is apt to infect the mechanics of the program through a statistic called “average wages.”
Keep reading. This problem involves smaller checks – if you were born in 1960.
It affects how much you get paid
To give you a bit of history, Congress changed Social Security decades back so that many of the system’s gears move without Congressional intervention. Instead of legislative action, these levers automatically adjust every year to changes in “average wages.” So, benefit levels grow; tax bases increase; unfunded liabilities spiral higher; and Congress sleeps.
Yes. Social Security is on auto-pilot, and generally that isn’t a bad thing. To illustrate, the amount of wages subject to taxation moved from $132,900 in 2019 to $137,700 in 2020 without any legislation passing Congress. “Average Wages” increased 3.62%; so did the bend points within the benefit formula; so did the records of your past earnings believe it or not.
In other words, this strategy allows Social Security to keep working while Congress does nothing. This explains a lot about why the program is in the shape that it is.
No one knows what is going to happen with average wages
Nonetheless, it makes a lot of sense to understand how the mechanics of a system work on which millions depend. Growth in “average wages” not surprisingly follows the average of what people make in total divided by the number of people working (see chart). As you might guess, the number of people who worked during 2020 is going to be quite large. The sum of what those people collect in wages over the year is apt to fall.
If that combination comes to pass, we are likely to see falling average wages (for only the second time in 40 years).
Why is this important?
Mechanically, this phenomenon hurts seniors in two ways. First, the history earnings on which benefits are based – your AIME – grow to lower amounts. Second, those lower career earnings figures pass through a less generous benefit formula.
Let’s look back at the last time this happened – in 2009. Instead of increasing by 4 percent as the experts had forecast, “average wages” fell by 1.5%. Doh!
So what happened? People born in 1949 paid a stiff price on their benefits.
|Someone Born In 1949||Break Points||Monthly Indexed Earnings||SS Check|
The cost of being born in 1949 to this guy was more than $1,100 per year (I adapted the “Case A Worker” in Social Security’s benefit calculation). That consequence came as a result of a modest 1.5% drop in “average wages.”
Data lag by two years. The wage data collected in 2009 fed into Social Security in 2011. People born in 1949 turned 62 in 2011, at which time Social Security determined the individual’s primary insurance amount – called the PIA.
The wage data collected this year will be introduced to Social Security in 2022. This figure will be compared to average wages from 2019, a relatively strong wage year.
What to do from here?
If you were born in 1960, you need to pay attention now, rather than waiting until a depleted check arrives.
For the rest of us, this possibility serves as a reminder that monitoring a system every 50 years is not a terribly sensible way to prepare for the future. It should sharpen the concern that in 11 Democratic debates for the president, moderators haven’t asked a single question.