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Will 2020 Take a Bite Out of Your Future Social Security Check?

By Christy Bieber – Sep 12, 2020 at 10:16AM

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You can fix it, but only if you're aware of the problem.

For many people, 2020 has been an unusual year -- to say the least. Sadly, the novel coronavirus has resulted in not just a public health disaster, but also a financial crisis. Millions of Americans are unemployed, facing a reduction in work hours, or have been forced to scale back their career plans due to losing child care. 

If you're one of the many who's looking at lower earnings this year, the effects could haunt you for a long time. A year of low earnings now could actually impact your future retirement benefits. 

Older woman looking at check with calculator on her lap.

Image source: Getty Images.

Will reduced earnings in 2020 come back to haunt you as a retiree?

It may seem hard to believe that lower paychecks now could have much of an impact on retirement income -- especially if you're a long way away from leaving the workforce. But your Social Security retirement benefits are calculated based on average wages over the 35 years when your earnings were the highest. That means if you earn less this year than you otherwise would have, one of two things could happen:

  • You'll have this low-earning year included in your average wage, dragging that average down.
  • This year won't be included in the average because your wages are really low -- but your average will be affected by the inclusion of a different lower-earning year that would otherwise have been pushed out had you been able to make your normal salary in 2020.

If either of these happen, the average wage used to determine your benefits will be lower than it would have been if the 2020 recession had never happened. And since Social Security benefits are an important source of retirement income, this could have an effect on your financial security in your later years.

The greater the disparity between what you could have earned this year and what you'll end up earning due to COVID-19, the more profound the impact will be. And those who end up experiencing multiple years of reduced income -- perhaps because their industry takes a long time to recover or they must step back from their career to care for children -- will face an outsized impact.

The good news is, there's a fix to this problem for most people. If you find your income is lower this year -- or even for the next several years -- but you're able to get back on track, you can simply stay on the job longer later in your career. 

If you're earning more at the end of your career than during the 2020 recession (on an inflation-adjusted basis), you can keep working for at least an extra year (or longer if you'd prefer). That way, you'll have more than 35 years of earnings, and 2020 won't have to be included when your average wage is calculated.

Of course, this only works if you're able to keep working and earn more at the end of your career than you're doing now, and that's not an option for everyone. In case that doesn't happen, it's best to consider the impact that low-earning years can have on your retirement income and aim to increase the amount you're saving to supplement your Social Security if you suspect your future checks will be smaller due to COVID-19. 

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