For most Americans, Social Security checks are one of the most important sources of income in retirement. Unfortunately, if you're turning 60 this year, your checks may be smaller than they would be if you hit this milestone birthday at any other time but in 2020. 

The sad fact is, for those who are hitting 60 during the time of the coronavirus, there's a quirk in the Social Security Administration (SSA) benefits formula that could cost them thousands.

Here's what the problem is. 

Social Security card sitting on top of money.

Image source: Getty Images.

Social Security's benefits formula depends on average wages in the year you turn 60

The formula used to calculate your Social Security benefits is really complex so it's a little complicated to see the issue. But basically it boils down to the fact the formula relies on average wages in the U.S. in the year that you turn 60 to do two important things:

  • Index your wages earned over your career to account for inflation
  • Determine what percentage of your average wage you receive in benefits

After adjusting your wages for inflation, Social Security calculates your average monthly earnings in the 35 years when your income was the highest. This is called your AIME. Your standard retirement benefit equals 90% of AIME up to a first "bend point," 32% between a first and second bend point; and 15% above the second bend point. The bend points are income-thresholds that change each year. 

Sadly, when average wages in the U.S. are lower in the year you turn 60, this reduces your AIME and lowers the bend points. So you get hurt in two ways. The value of your earnings used to determine your benefit is lower and your benefits equal a smaller percentage of your average earnings. 

And average wages in the U.S. in 2020 are likely to be way lower than normal because they're calculated using a formula that involves adding up total wages earned during the year and dividing by the number of W-2s issued. Since a record number of people were working before the pandemic, tons of W-2s are going to be sent out. But because of the pandemic, there's now a record number of people unemployed so total wages for the year will likely be pretty low. 

This all sounds technical, but it could have a huge impact on the amount of income you get. In fact, research from The Wharton School at the University of Pennsylvania found that if average wages decline by 15% in 2020 due to the coronavirus, a middle-income worker who turned 60 this year would see a 13% reduction in annual Social Security benefits and could lose more than $70,000 in income over a lifetime because of it. 

Be prepared for smaller Social Security checks

Unfortunately, if you're unlucky enough to turn 60 in a year when average wages go down, there's nothing you can do to fix the Social Security benefits formula.

You can raise your check amount by delaying the start of your benefits, as well as by working longer if you're earning more now at the end of your career than you did at the start. But each of these options could require substantial sacrifice on your part.

And regardless of whether you take these steps or not, you may also want to aim higher when it comes to saving a big retirement nest egg. After all, no matter what you do, a low average wage in 2020 is likely going to leave you with less than those born in the years before or after you.