If you are turning 60 in 2020, the pandemic could do more than interrupt your party plans. It could also lower the amount you’ll receive when you file for Social Security.
Social Security benefits are based on a worker’s 35 highest years of earnings, which are then indexed to the growth in average wages until the year the worker turns 60. That’s a problem for people who turn 60 this year—even if their own earnings were unaffected by the pandemic—because the economic downturn is expected to sharply reduce average wages, dragging down the index. Based on Congressional Budget Office projections, benefits for people who turn 60 in 2020 will be permanently reduced by about 9%, says Andrew Biggs, resident scholar at the American Enterprise Institute and former deputy commissioner of the Social Security Administration. For an average wage earner who claims Social Security benefits at age 67—full retirement age for people born in 1960—that works out to a reduction of about $2,500 a year, Biggs says. The Center for American Progress estimates that this will affect about 3 million people who will turn 60 this year.
Retirees can offset some of the damage by delaying benefits. For every year you delay benefits past full retirement age until age 70, you’ll receive a credit of about 8%.
How Social Security Benefits Are Calculated
To be eligible for Social Security benefits, you must earn at least 40 “credits.” You can earn up to four credits a year, so it takes ten years of work to qualify for Social Security. In 2020 you must earn $1,410 to get one Social Security work credit and $5,640 to get the maximum four credits for the year.
Your benefit is based on the 35 years in which you earned the most money. If you have fewer than 35 years of earnings, each year with no earnings will be factored in at zero. You can increase your benefit by replacing those zero years, say, by working longer, even if it’s just part-time. But don’t worry — no low-earning year will replace a higher-earning year. The benefit isn’t based on 35 consecutive years of work, but the highest-earning 35 years. So if you decide to phase into retirement by going part-time, you won’t affect your benefit at all if you have 35 years of higher earnings. But if you make more money, your benefit will be adjusted upward, even if you are still working while taking your benefit.
There is a maximum benefit amount you can receive, though it depends on the age you retire. For someone at full retirement age in 2020, the maximum monthly benefit is $3,790. You can estimate your own benefit by using Social Security’s online Retirement Estimator.
Social Security Cost-of-Living Adjustments
In less-dark times, one of the most attractive features of Social Security benefits is that every year the government adjusts the benefit for inflation. Known as a cost-of-living adjustment, or COLA, this inflation protection can help you keep up with rising living expenses during retirement. The COLA, which is automatic, is quite valuable; buying inflation protection on a private annuity can cost a pretty penny.