The Covid Downturn May Cut Social Security Benefits for Some. Whether That Will Be Fixed Is Uncertain

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  • A precipitous drop in wages in 2020 could inadvertently lower Social Security benefits for one cohort.
  • Whether or not that will happen depends on the average wage index, or AWI, which is still in flux as new data is expected.
  • While the decline may not be as steep due to an improving economy, experts say Congress should still make a fix that prevents benefits from being reduced.

When the Covid-19 pandemic set in last year, one of the unintentional effects from the deep economic downturn included a potential reduction in Social Security benefits for one group of people.

And now, as the U.S. economy is beginning to repair itself, signs point to those benefits perhaps falling less dramatically, if at all.

Average wages in the U.S. fell sharply in 2020 as the economy came to a near halt amid a national shutdown.

Those numbers — known as the average wage index, or AWI — are used to calculate Social Security benefits. The 2020 data applies to people born in 1960, who would first be eligible to claim their monthly checks when they turn 62 in 2022. Your total monthly benefit is a formula based on the total number of years worked, your wages over that time, the AWI and other criteria, such as the age at which you claim.

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Others who become disabled in 2022 or who die that year, thus triggering benefits for their survivors, would also receive benefits based on the 2020 wages.

The total number of so-called notch people affected could be 5 million, according to estimates from Rep. John Larson, D-Conn., who has introduced legislation that addresses the issue.

Last year, Social Security Administration Chief Actuary Stephen Goss said during congressional testimony that the AWI could be 5.9% lower than it was in 2019. That in turn could reduce a median earner's monthly retirement benefits for someone born in 1960 by about $119 per month.

However, recent data from the Congressional Budget Office points to a much less dramatic decline. In a January letter, the federal agency estimated that the AWI dropped by just 0.5% from calendar year 2019 to 2020.

The actual figures will not be known until later this year, the CBO said. Social Security is set to release wage data from the fourth quarter of 2020 in April.

Regardless of whether there's a decline, Social Security advocates say now is the time for Congress to act to prevent Social Security benefits from inadvertently going down.

"Even if it's not as bad as we think it's going to be, and it might be negligible in terms of a decrease, that doesn't mean a big drop like this won't happen in the future," said Dan Adcock, director of government relations and policy at the National Committee to Preserve Social Security and Medicare.

"It might be better now to address it rather than wait until it happens in the future," he said.

Historically, the AWI declined for the first time in 2009, prompted by the financial crisis, Goss said in his testimony last year. The 1.5% dip did not prompt any action at the time, though the AWI had increased every year from 1951 to 2008.

This time, however, because early estimates showed a possible bigger drop, Congressional leaders drafted bills to address the problem.

That includes a broader plan put forward by Larson, who serves as Social Security subcommittee chairman on the House Ways and Means Committee. Larson proposed a bill last July, the Social Security COVID-19 Correction and Equity Act, that would fix the "notch" affecting those born in 1960, while also increase benefits by 2%, among other changes.

That proposal could be updated pending new information from Social Security's chief actuary.

Meanwhile, Sens. Tim Caine, D-Va., and Bill Cassidy, R-La., introduced a bill that would prevent the AWI from ever going negative.

Social Security advocates had been hoping that the AWI decline would prompt Congress to act this year, and could even perhaps include larger fixes to the program.

However, broader changes may be less likely now, considering President Joe Biden's current agenda focusing on infrastructure and tax reform.

If the notch does get addressed, it would more likely be a one-off change in a broader package rather than sweeping reform, said Shai Akabas, director of economic policy at the Bipartisan Policy Center.

Still, others are hopeful Congress will make the fix before any potential benefit changes affect those beneficiaries starting next year.

"I don't think AWI should go negative," said Charlie Douglas, president of HH Legacy Investments Inc. in Atlanta.

"Why should there be a negative adjustment in one year for people turning 60, when there's no negative adjustment for any other person receiving Social Security?" Douglas said.

Nancy Altman, president of Social Security Works, an advocacy organization that wants to see the overall program expanded, said the notch was an "action-forcing" event that would have nudged Congress to act if the drop was as steep as originally projected.

"It still makes sense for them to act before the end of 2021," Altman said. "It's both the right policy and the right politics, so I would hope they would do it."

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