Born in 1960? Expect a Big Social Security Cut

[ceciledian]

For those born in 1960, the unemployment arising from the COVID-19 pandemic will cause a decrease the Social Security benefit from 9-14%. Part of the benefits calculation uses the Average Wage Index for the year a person turns 60. The AWI for 2020 was projected at $55,642, now it’s expected to fall to $50,171.

Wages earned before turning 60 are adjusted to the AWI for the year a person turns 60. The higher the index the year you turn 60, the bigger the adjustment, and the lower the index...

This impacts your entire lifetime of benefits if you are one of the unlucky ones, ranging from $24k to $85k depending on earnings and life expectancy. Contact your congressional representatives and ask them to address this if you were born in 1960.

https://www.forbes.com/sites/bobcar...ome-current-and-future-retirees/#1d55a2825245

 

[Dtail]

I was born in 1960. Unbelievable.
See the below Bogleheads discussion below.

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=311036&start=50

 

[cyber888]

‘The indexing takes place for the year you turn age 60 and ends there. Those born in 1960 reach their 60th birthdays in 2020. Earnings after age 60 aren’t indexed.’

Im not sure what this means. So if you are 59 or 61 , u are not affected? It say .. you turn age 60 and ends there

 

[Leo1277]

Also born in 1960 - may have to have a serious word with my parents why they picked that year However, in the Bogleheads discussion, one can also find the following quote:

"The National Average Salary (or the National Average Wage) is the mean salary for the working population of a nation. It is calculated by summing all the annual salaries of all persons in work and dividing the total by the number of workers."

(Boldface by me). If that is the case, there may be at least some hope if the unemployed are not counted in the number of workers, at least for the time during which they were without work. This would be the reasonable way to count such an average - but of course you can't count on "reasonable" for anything coming out of Washington... But if the average is indeed calculated in this "reasonable" way, the situation may not be quite so dire, since those that didn't lose jobs may not have seen their salaries drop much on average, so the effect would be much smaller.

It seems we would need to have somebody study the details of the law or the SS regulation; I am not quite sure where to look myself, but perhaps others here have an idea?

 

[GalaxyBoy]

I was born in 1960 and DW starts Medicare this year. Double whammy.

We’re still not going back to w*rk.

 

[Dtail]

‘The indexing takes place for the year you turn age 60 and ends there. Those born in 1960 reach their 60th birthdays in 2020. Earnings after age 60 aren’t indexed.’

Im not sure what this means. So if you are 59 or 61 , u are not affected? It say .. you turn age 60 and ends there

All your prior earnings are reindexed to a formula using wage earnings at 60 years old. This is part of the formula used to payout future SS along with cola increases which is separate.
Thus if there are large wage decreases this year, one's future payouts will be decreased if one turns 60 this year.

It is more involved, but this is a start.
I know from other posts that @Perryinva understands these concepts quite well.

 

[Samething]

Isn't that awesome. Yep, born in 1960. Certainly not the best news I've received today.

 

[stepford]

On the plus side, the tax torpedo I was anticipating in 10 years just got significantly less severe...

 

[SecondCor521]

On the plus side, the tax torpedo I was anticipating in 10 years just got significantly less severe...

Probably 12 years now. RMD age raised to 72 by recent law.

 

[MarieIG]

Ouch!

 

[teejayevans]

Does unemployment affect wage index, I would think average wage index would be an average of people who are working as mentioned, but what about someone who was working part of the year?

 

[ER Eddie]

I was born in 1961. Retired last year. Will this affect me?

 

[Leo1277]

Does unemployment affect wage index, I would think average wage index would be an average of people who are working as mentioned, but what about someone who was working part of the year?

That is one of the big questions. If done by common sense (which is of course not a given with the SS Administration), they would somehow prorate by months employed or something like that.

However, depending on the specifics, there is a possibility of even the opposite effect: considering the unemployed are predominantly lower wage service type jobs, if they are not counted in the calculation, then it's quite possible the average over all employed would even go up. So this needs to be researched in detail.

 

[Dtail]

I was born in 1961. Retired last year. Will this affect me?

Only folks that were born in 1960, unless the economic fallout affecting the downward movement of average wages continues into next year.

 

[cathy63]

Does unemployment affect wage index, I would think average wage index would be an average of people who are working as mentioned, but what about someone who was working part of the year?

Here is some historical info on how AWI has been calculated over time: https://www.ssa.gov/OACT/NOTES/note133.html

And the specifics for 2018: https://www.ssa.gov/cgi-bin/netcomp.cgi?year=2018

From a quick skim, it appears that the salary data is the sum of box 3 on all W-2s and the divisor is the number of W-2s. A W-2 cannot tell you how many months someone was employed during the year, and it does not include unemployment compensation received, so those things cannot be taken into account.

With a quarter to a third of the workforce unemployed for several months, and many companies cutting pay across the board, I don't see how this number cannot go down, even if people on the lower end get extra overtime hours and hazard pay.

 

[audreyh1]

I’m confused. But 1959 was OK I guess.

 

[SevenUp]

I’m confused. But 1959 was OK I guess.

See the Bogleheads thread linked earlier for more details - unless that thread itself is what caused the confusion.

Yes, a 1959 b'day is unaffected.

 

[augam]

not cool. Hope they address this somehow.

 

[NateW]

I was born in 1960 and DW starts Medicare this year. Double whammy.

We’re still not going back to w*rk.

Me too on both (I was born in 1960 and DW is going on Medicare this fall, as she is 5 years older than I). It's bad enough interest rates are effectively 0 right now and now this!

Not going back to work either, as we still have enough funds. A third of it is in cash, thus my displeasure with the current low interest rate environment.

 

[Ed B]

I am a 1960 model too. This is just great.

I am assume we have people on this message board that turned 60 during the worst of the 2008-2009 downturn. Any testimonials on how their social security was impacted?

 

[SevenUp]

I am assume we have people on this message board that turned 60 during the worst of the 2008-2009 downturn. Any testimonials on how their social security was impacted?

Not a testimonial, but the AWIs for 2007-2010 were

2007 $40,405.48
2008 $41,334.97
2009 $40,711.61
2010 $41,673.83

Someone born in 1949 who earned the SS maximum from 1980-2014 and took SS benefits starting at age 66 in 2015 received $2,663/mo. If the 2009 AWI had been the same as 2008, with all else the same, the monthly benefit would have been $2,700.

 

[jim584672]

If the average wage index is total wages / workers then what matters is are high paying jobs or low paying jobs disappearing? If low paying jobs are disappearing then the average wage would increase, even though the number of jobs is decreasing. I think they said the lowest paid jobs got hit worst, so the average should go up. But what do I know.

 

[SevenUp]

If the average wage index is total wages / workers then what matters is are high paying jobs or low paying jobs disappearing? If low paying jobs are disappearing then the average wage would increase, even though the number of jobs is decreasing. I think they said the lowest paid jobs got hit worst, so the average should go up. But what do I know.

Even if low paying jobs are now disappearing, they existed earlier in 2020 so a W-2 will be issued for them. Those W-2s will have very low wages, thus lowering the average.
See Average Wage Index (AWI).

 

[Perryinva]

Well it’s certainly not a Big Cut to SS as in the OP title. This obscure and seemingly random factor probably made SOME sense I suppose, when looked at a long term/10,000ft view from a “health of the economy” point of view, but still makes little sense to fix an entire lifetimes starting point on a seemingly random age. The AWI is used to change the multiplier of every single year counted towards ones benefit calculation. In essence, a running inflationary increase that adjusts all previous years to equalize the lifetimes earnings to today’s dollar and lifts the maximum amount of SS that can be claimed, AND how much the salary amount that is taxed can go up 2 years later. So expect a small or maybe reduction in the max SS premium for those w*rking in 2022.

However, I don’t see anyone experiencing a significant reduction in (projected) SS, more likely a smaller or no increase over what there would have been had there not been a lockdown. The larger your benefit above the 2nd bend point, the larger the reduction.

While those born in 1960 are the most affected, the reality is everyone born in 1960 and a few years later are all affected. Basically, if born in 1960, there is a smaller or nonincrease to ones SS (besides COLA) from then on. The die is cast. But if born in 1961 or 2 even, that smaller increase in multiplier is still there, and could in fact be even worse if there is any kind of wage recession the next year, as then two or 3 years years in a row could see lower increases, compounding the flattening of the increase curve.

The real irony is that if this bailout causes inflation down the road, then then those born in 1959 and earlier would see larger net increases in their SS checks (which compounds of course) so two people with identical MAX SS earnings and 35 years counted and claiming age date could see the 1959 born person having a $100/month (or more I suppose) larger check than his financial twin born in 1961, forever.

THAT is the claimed $25 to $80k lifetime reduction claimed in the original article. Though, I think their percentages are too high. And as mentioned in the Boglehead discussion, that effect is there from then on. It just gets lost in the long term smoothing of year after year changes, compared to the easily measured 1960 & 1961 cohorts.

But then, SS calculations never made much sense or were ever fair. I have made or exceeded max earned income earnings for 38 years plus 4 years under max. Lots of overtime that increased uncle sams coffers. Only 35 of those years count towards SS. 2020 will be my last year that exceeds max and because I am 62, and my AIME is fixed, last years and this years increase to my SS will be on the order of $20/month, for which I contributed around $18000 to FICA & Medicare for just those 2 years.Hard for me to get worked up over a smaller than projected increase for others that, say, ERed at 50.

 

[gwraigty]

Here's an interesting table that shows how the earnings are adjusted for indexing:

Benefit Calculation Examples For Workers Retiring In 2020