Forbes - May 15, 2020
The financial effects of the coronavirus pandemic can be more far-reaching and long-lasting than many people realize.
Perhaps the longest-lasting and stealthiest negative effect of the economic downturn from the coronavirus will fall on those born in 1960. They are likely to feel the effect for the rest of their lives through lower Social Security retirement benefits.
Social Security can be complicated and even counterintuitive. Understanding the hit the recession will have on lifetime retirement benefits requires knowing a little about how Social Security retirement benefits are calculated.
The Social Security Administration uses your lifetime earnings record as the foundation for calculating retirement benefits. Of course, your benefits are likely to be lower than they would have been if you lost your job or your income declined during 2020. While this might reduce your lifetime benefits by some amount, the loss of or a reduction in one year’s earnings isn’t the worst effect from the pandemic.
After Social Security compiles your lifetime earnings record, each year’s earnings is indexed to the growth or inflation of national average earnings during your lifetime. In other words, your earnings of years ago are adjusted to make them equivalent to today’s earnings.
After the wage inflation adjustment, Social Security makes a few other calculations to arrive at your monthly retirement benefit. But for those born in 1960, the wage indexing is the key step.
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.
That’s where the unfortunate timing comes in. Instead of having an increase in national average earnings for 2020, we’re likely to have a decrease from 2019. The large amount of unemployment and reduction in economic activity from the pandemic probably will cause this decline in average earnings, though we won’t know for sure until after the end of the year.
The reduction in national average earnings will reduce the indexed lifetime earnings of everyone born in 1960 and reduce their monthly Social Security retirement benefits, regardless of the age at which each claims the benefits. If the negative economic effects of the pandemic match the negative scenarios anticipated by some analysts, average earnings could decline for another year or so, reducing the benefits of those born after 1960.
A 15% reduction in the national average earnings from 2019 to 2020 will reduce the monthly retirement benefit of someone born in 1960 by 13.6%, estimates Andrew Biggs of AEI.
A 9% decline in average earnings would reduce monthly benefits by 8%, according to Alicia Munnel of the Center for Retirement Research at Boston College, while a 3% reduction in average earnings would reduce benefits by the same percentage.
There’s nothing a near-retiree can do to change these results. Only Congress can prevent these benefit reductions by instructing the Social Security Administration not to include any reduction in 2020 average earnings in its calculations of retirement benefits for those born in 1960.
Otherwise, those born in 1960 need to realize their Social Security benefits are likely to be lower than they anticipated and factor that into their retirement plans.
Current retirees could be affected in a different way.
The Consumer Price Index (CPI) for 2020 is likely to be very low or even negative. That means little or no cost of living increase (COLA) in Social Security benefits in 2021 for those already receiving them.
Little or no COLA could affect the Medicare Part B premiums you pay.
There’s a “hold harmless” provision in Social Security. When Medicare Part B premiums are withheld from Social Security benefits, the dollar increase in Medicare premiums can’t cause a reduction in net monthly Social Security benefits.
So, if there is little or no Social Security COLA and there’s an increase in Part B Medicare premiums, Medicare won’t be able to collect the premium increases from Social Security beneficiaries who have their premiums withheld from Social Security benefits.
Instead, the Medicare beneficiaries who don’t have their premiums deducted from Social Security benefits will bear the full cost of the Medicare cost increase. About 70% of Medicare beneficiaries have their premiums withheld from Social Security benefits, so the other 30% would bear the entire cost increase.
Those most likely to be hurt are first-time Medicare beneficiaries and those between ages 65 and 70 who signed up for Medicare as required at age 65 but are delaying Social Security retirement benefits until a later age to increase the benefit level. These people are at risk of seeing a substantial Medicare Part B premium increase in 2021 because of the 70% of Medicare enrollees protected by the hold harmless provision.
This sequence of events happened in 2016. Congress stepped in with a plan to prevent a steep premium increase on a minority of Medicare beneficiaries. Congress lent money to the Medicare trust fund. All Medicare beneficiaries are paying it back over time through a Medicare premium surcharge.
We might see the same thing happen again very soon.
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