Born in 1960? Expect a Big Social Security Cut

[gwraigty]

Here are the amounts of the AWI from 1951 through 2018:

National average wage indexing series, 1951-2018

You can see the amounts increased every year from 1951 through 2008. The number decreased in 2009. In 2010 things got back on track with an increase even over 2008. If I understand this right, based on that, anyone who turned 60 in 2009 would be getting lower comparable SS benefits than someone who turned 60 in 2008, assuming equal work history and wages. They just may not have known it, unless it made the mainstream news back then and they paid attention to it.

 

[SevenUp]

If I understand this right, based on that, anyone who turned 60 in 2009 would be getting lower comparable SS benefits than someone who turned 60 in 2008, assuming equal work history and wages.

You do. See post #21 for one example.

 

[gwraigty]

The AWI is used to change the multiplier of every single year counted towards ones benefit calculation.

<snip>

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.

The numerator for the multiplier calculation is based solely on the average wage in the year someone turns 60. DH and I were born in 1963, so the average wage for 2023 will apply to us for that calculation. From the link I posted earlier: Benefit Calculation Examples For Workers Retiring In 2020

The indexing factor for a prior year Y is the result of dividing the average wage index for the year in which the person attains age 60 by the average wage index for year Y. For example, the case-A indexing factor for 1980 is the average wage for 2018 ($52,145.80) divided by the average wage for 1980 ($12,513.46).

Two people with identical work history and wages both retire at age 60. Person A turned 60 in 2008. Person B turned 60 in 2009. Average wage for 2008 is $41,334.97. Average wage for 2009 is $40,711.61. Person B is getting less base initial SS because the 2009 numerator is smaller through no fault of his/her own. It results in a multiplier that's slightly smaller than the multiplier for Person A. You're right that COLAs will always be less, compounding the issue.

Person C, also with identical work history and wages, retires in 2010 at age 60, when the average wage is $41,673.83. S/he's getting an even better multiplier than Person A and Person B!

It's not that simple, because no one has identical work history and wages. Thanks to OP for making us aware of this. BTW, I wouldn't count on anything being done to mitigate this. Congress didn't do anything to mitigate the "notch baby" issue, which adversely affected my grandfather. My grandmother always felt bitter about it. An easily readable history of that is here:

The Commission on the Social Security "Notch" Issue

The Commission does not disputeCindeed, it confirmsCthe factual allegations that benefits for many in the "Notch" years tend to be lower than benefits for many of those born in the years just before the "Notch" period and somewhat lower than for some born later. In light of these findings, the perception of those in the "Notch" years that they have been unfairly treated is entirely understandable. Nonetheless, the Commission finds that such is not the case.

There is a significant difference in the benefit levels between those in the "Notch" years and those born in earlier yearsCparticularly those born in the few years just preceding the "Notch" period, and especially for those who worked well beyond age 62. This is the result of a conscious decision by Congress to amend the law in 1977 to reduce initial benefit levels for future retirees starting with those who would reach age 62 in 1979.

Congress made this decision because of a very serious flaw in the benefit computation method that had been a part of the 1972 lawCa flaw that was causing initial benefit levels to increase very rapidly. Without such action, the very viability of the Social Security program would have been undermined.

Important points to note are that the commission admits that mistakes were made in the computation that resulted in people born before 1917 and after 1921 getting more SS than originally intended. They wouldn't reduce SS payments for those already collecting, but they cut future benefits for those who were already 60. Also, remember that file and suspend was eliminated with only 6 months notice for anyone who wasn't yet 62.

Based on these histories, I wouldn't think that an adjustment will be made if the average wage for 2020 is much lower than normal due to the pandemic, or that any consideration will ever be given to those so close to being able to collect SS when they do make adjustments that adversely affect future retirees.

 

[SevenUp]

Another somewhat detailed discussion is Graph of how SS benefits can change with decreases in 2020 national wages for one born in 1960 - Bogleheads.org.

 

[Cobra9777]

Well, this sucks. DW was born in 1960 and I was born in 1961.

If the NAWI decrease is similar to 2008-2009 (or only slightly worse), I wouldn't expect any Congressional intervention. But obviously if 2019-2020 drops in the 20%+ range, and then quickly recovers in 2021, then I think there will likely be some "corrective action" of some sort.

I don't think anyone can sit back and say, "well, that formula worked exactly as intended for a global pandemic." With all the stimulus money flying around haphazardly, offsetting this obviously-connected impact doesn't strike me as excessively controversial.

I had no idea the formula was so sensitive to a single year. I'm very glad that people are looking at this and highlighting potential issues.

 

[camfused]

Born in 1959. Wahoo...finally did something right.

When will the AWI be announced for 2019?

 

[audreyh1]

Did someone already post this SS AWI table which goes though 2018?
https://www.ssa.gov/oact/cola/awidevelop.html

 

[SevenUp]

When will the AWI be announced for 2019?

October? See Federal Register :: Cost-of-Living Increase and Other Determinations for 2020

 

[Samething]

Born in 1959. Wahoo...finally did something right.

When will the AWI be announced for 2019?

How nice for you.

 

[teejayevans]

But they adjust SS based on inflation, is that a different number?
If not it should even itself out, in other words person born in 1960 will get a bigger inflation boost than a person born in 1959.

 

[Dtail]

But they adjust SS based on inflation, is that a different number?
If not it should even itself out, in other words person born in 1960 will get a bigger inflation boost than a person born in 1959.

The adjustment each year through 60 y.o. I believe is on the AWI and then thereafter it is adjusted by a COLA.

 

[Perryinva]

Dtail is correct. Through age 60 it is AWI PLUS COLA that makes up the increases. After that, all increases are COLA only. My point about subsequent years, was that just as in 2008 through 2010, the amount the AWI increased is less in 2010 than it would have been had there not been a recession, so may the same thing happen in 2021. I forget what year/age the age 60 AWI is compared to in order to get the multiplier, but if that year had a large increase, then the reduced AWI has an even larger impact in comparison to the previous. So yes, the 2010 recipient gets more than either the 2008 or 9 recipient, but not as much as originally predicted, depending. . No doubt though, you are correct that at least it WAS an increase and that the 1960 cohorts will see a larger decrease than 2008 did, if no change is made to the AWI calculation. I also never realized that the AWI increased every year except those two. I would have assumed it dropped during other recessions as well. I think there was no increase in the multiplier when the SS premium was reduced for 2 years (maybe 2010/11?) too.

 

[Perryinva]

But they adjust SS based on inflation, is that a different number?
If not it should even itself out, in other words person born in 1960 will get a bigger inflation boost than a person born in 1959.

Yes, it is a totally different number. Why would they even up? Everyone gets the same COLA adjustment each year, regardless. The 1960 and 1959 persons get the exact same percentage, but the 1960 person gets a smaller amount before COLA, so after COLA, the 1959 person gets a larger dollar amount, all things being equal. That is why this is making the news, as the COLA compounding will increase the difference in actual dollars over time.

 

[teejayevans]

Yes, it is a totally different number. Why would they even up? Everyone gets the same COLA adjustment each year, regardless. The 1960 and 1959 persons get the exact same percentage

I was thinking they referred to same reference point.

So the same thing can happen with inflation rate?
Let’s say there was massive inflation for 1 year (assume 100% for easy math), but that inflation occurs a year before you take SS, the person in the previous year will get a 2X bump, but the current year won’t. In other words, the next year is based on that year’s rate alone, not the cumulative inflation since 1935 for example. If it was based on a reference point, it would be equal, but the look back is only since last year, then timing is everything.

Another question, is the inflation increases only if you are getting SS, if I wait till 70, am I missing out on all the inflation increases from 62-69?

 

[Perryinva]

No, you are not. The COLA increases apply every single year you are paying in to SS, as well as if you stop paying in and delay filing. If you were to check your SS projection online prior to age 62, every single month, you would have noticed that the projection increased twice a year, once when the new AWI was applied, and once when the COLA was applied, which coincided with SS adding another years earnings to your record, which may also have increased your projection. .

At age 62, assuming you already have 35 top years in, and are no longer w*rking, all future increases are just based on COLA. If you are still working past age 62, and haven’t filed, then those earnings only increase your SS IF they replace a lower indexed amount. All earnings after age 60 have a multiplier of 1 and are compared to your frozen indexed earlier years, which is what this thread is all about. So people that were high income for their entire careers (high meaning above the SS limit every year) usually see zero increase in SS benefit and are basically just contributing to the SS solvency for no personal gain. (Just another example of income based means testing)

So that is one reason why early SS projections appear so far off, though the main reason is that future benefits are always posted in todays dollars (whenever “today” Is) which is quite difficult for most people to relate to. So your age 35 SS prediction for filing at FRA may have been shown as say $1500/mo. Most people automatically conclude “Wow, what the heck am I going to do with only $1500 in 32 years!” However, that projection is based on what your current earnings are, w/o inflation, until FRA. When you do finally reach FRA, (assuming you have 35 years paying in at approx the same inflated rate) your actual check turns out to be, say $3000, which would be approximately the inflated amount of the original $1500.

At age 62, your reduced benefit might be shown as $2000/mo, and your projected age 70 benefit as $3600. If you delay until 70, your actual check will/should be higher because of inflation compounding (if there is no inflation from age 62 to 70, then there would be no increase) and could be, say $4000 when you get there. SS does not project inflation in their predictions.

 

[Dtail]

Did someone already post this SS AWI table which goes though 2018?
https://www.ssa.gov/oact/cola/awidevelop.html

There was a decrease in 2009, which would follow the same concept for this year.

 

[Gumby]

Thank you Perryinva, for your excellent explanations of how this all works. It is a complicated subject, and you have done a great service for the membership by making it understandable.

 

[audreyh1]

There was a decrease in 2009, which would follow the same concept for this year.

Yes, that table shows exactly what happened in 2009.

 

[cathy63]

There was a decrease in 2009, which would follow the same concept for this year.

Yes, but 2020's drop is expected to be significantly larger than the one in 2009.

2017 $50,321.89
2018 $52,145.80 +3.62%
2019 estimate* $53,836 +3.24%
2020 orig estimate* $56,396 +4.75%, new estimate $50,171 -6.8%

The new 2020 estimated AWI is less than the 2017 AWI. The 2009 decrease was -1.51% and the final value was still higher than the 2007 AWI, so it only set back that year's cohort by one year. We're looking at three years for the 2020 group.

*estimates above from the 2019 SS Trustees report.

 

[Samething]

Yes, but 2020's drop is expected to be significantly larger than the one in 2009.



2017 $50,321.89

2018 $52,145.80 +3.62%

2019 estimate* $53,836 +3.24%

2020 orig estimate* $56,396 +4.75%, new estimate $50,171 -6.8%



The new 2020 estimated AWI is less than the 2017 AWI. The 2009 decrease was -1.51% and the final value was still higher than the 2007 AWI, so it only set back that year's cohort by one year. We're looking at three years for the 2020 group.



*estimates above from the 2019 SS Trustees report.

https://www.google.com/url?sa=t&rct...ity-benefits&usg=AOvVaw0j5waGHTric90rKUFXEtk8

Social Security's benefit formula is indexed for the growth of average wages in two ways, producing permanent benefit reductions when average wages drop substantially for Americans nearing retirement. Due to the Coronavirus-induced recession, Social Security's Average Wage Index will fall in 2020, resulting in 13 percent lower annual retirement benefits for individuals born in 1960 compared to what the 2019 Social Security Trustees Report projected.

Policymakers can enact ad hoc changes to the Social Security benefit formula to counteract these benefit cuts. Nevertheless, a more comprehensive reform would replace the wage-indexed career-average earnings in the Social Security benefit formula with inflation-indexed career-average earnings, coupled with an increase in the 90, 32, and 15 percent bend points to maintain the dollar level of benefits. Inflation-indexed earnings are more closely tied to workers' retirement planning goals, and a Social Security benefit formula using price-indexed earnings would be far less prone to imposing large benefit cuts due to a sudden decline economywide average earnings.

 

[SevenUp]

Due to the Coronavirus-induced recession, Social Security's Average Wage Index will fall in 2020

That's a reasonable guess.

resulting in 13 percent lower annual retirement benefits for individuals born in 1960 compared to what the 2019 Social Security Trustees Report projected.

As for specific numbers, as the linked article notes, "[c]learly these assumptions embody extreme uncertainty."

 

[BADGERWIN]

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

If the unemployment continues into 2021 it could. Would be the same reasons.

 

[teejayevans]

Refresh my memory, isn’t 1960 the first year that full retirement age was 67?

 

[SevenUp]

Refresh my memory, isn’t 1960 the first year that full retirement age was 67?

Yes. 66 for those born in 1954 or earlier, then increasing by two months in each subsequent birth year. No full retirement age greater than age 67 at this time.

 

[RetiredAt55.5]

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.

I dunno either.

I'm thinking professional athletes (baseball, basketball, football, hockey), singers, actors, company executives are all going to be taking a big pay cut this year.