Please ensure Javascript is enabled for purposes of website accessibility

A Strange Social Security Rule Puts Today's 60-Year-Olds at a Big Disadvantage. Lawmakers Are Working to Change That.

By Maurie Backman – Jul 26, 2020 at 9:03AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

When it comes to Social Security, 2020 is a bad year to turn 60.

Social Security serves as a critical income source for millions of retired seniors, but the program is loaded with quirky rules that don't always work to beneficiaries' advantage. One such rule is that the average wage index the year seniors turn 60 is used, combined with other factors, like lifetime earnings, to determine what their monthly benefits will look like.

Generally speaking, the average national wage rises from year to year. But this year, that won't be the case. Thanks to the COVID-19 pandemic, millions of Americans are out of work and could stay that way for the rest of the year, and so average wages are apt to decline substantially. As a result, seniors who turn 60 in 2020 will be in line for a much lower benefit during retirement than those who turned 60 just a year ago. That is, unless lawmakers intervene.

Social Security cards

Image source: Getty Images.

Will today's 60-year-olds be spared a reduction in benefits?

A couple of bills have been introduced to adjust the formula used to calculate Social Security benefits, thereby saving today's 60-year-olds from a lower monthly benefit for life. The Social Security COVID Correction and Equity Act seeks to ensure that the average wage index used to determine Social Security benefits can't drop below the previous year's level. If it passes, those who turn 60 this year won't lose out on a huge amount of lifetime income due to bad timing. The Protecting Benefits for Retirees Act has a similar goal.

But lawmakers will need to act quickly to push these bills through. Though seniors aren't entitled to their full monthly benefit based on their earnings history until they reach full retirement age -- which is either 66, 67, or somewhere in between, depending on year of birth -- they are allowed to claim benefits as early as age 62. Doing so results in a reduction in benefits (generally, a permanent one), but it also gives seniors access to that money sooner. In fact, 62 is actually the most popular age to sign up for benefits despite the reduction it causes. As such, some of today's 60-year-olds may very well seek to sign up for Social Security as early as 2022, and if the aforementioned formula isn't corrected by then, they may wind up sorely out of luck.

Of course, this isn't the first time the average wage index has declined on a national level. The same thing happened in 2009 due to the effects of the Great Recession. But that decline was much less extreme than the unemployment crisis caused by COVID-19, and so lawmakers weren't motivated to act on it. This time around, today's 60-year-olds could be looking at Social Security benefits that are 5.9% lower than those for workers who turned 60 last year, so the extreme nature of that discrepancy has, thankfully, pushed lawmakers to act. Let's hope those advocating for today's 60-year-olds are successful, because if not, a lot of people stand to struggle financially in retirement due to no fault of their own.

The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.