Q: I keep hearing all this talk about how the COVID-19 virus is going to reduce future Social Security benefits. But I can't figure out why. Can you explain it to me?
A: I'll give it a shot. But before I do, let me make a couple of important points. First, if the virus affects anyone's Social Security, it probably will be just a small cohort of people — essentially, anyone turning 60 this year. No one else. And second, it really isn't clear yet if even that small group of people will be affected. So, now let me explain.
It all has to do with the Social Security benefit formula. When the Social Security Administration figures your retirement benefit, they look at your entire earnings history, pull out the highest 35 years, add them up and then divide by 420 (the number of months in 35 years) to come up with your average monthly wage. Then they use a formula that gets to the "social" part of Social Security to figure your retirement benefit.
That formula is slightly different depending on the year you were born. Here is a quick example. If you were born in 1954, they take the first $856 of your average monthly wage and multiply it by 90%. Then they take the next $4,301 of your average monthly wage and multiply it by 32%. And finally, they take whatever is left over of your average monthly wage and multiply it by 15%.
Can you see the "social" angle I alluded to above? The lower your average monthly wage, the higher your Social Security benefit "rate of return" will be. If you are poor, you don't get more money. But you get a better deal out of the system than your higher-paid counterparts.
OK, I can hear some of you saying, "Thanks a lot for the 'Social' Security lesson, but how does the virus play into all of this?" Well, let me get into that.
I left out one very important part of the benefit formula. I said that the SSA adds up your highest 35 years of earnings. But what I didn't mention is that each year of those earnings are indexed for inflation. And just like the benefit computation formula changes for each year of birth, so, too, do the indexing factors.
For example, let's go back to that guy who was born in 1954. And let's say that 1985 was one of his highest 35 years of earnings — and that he made $35,000 that year. Before they add that into the computation of his average monthly wage, they multiply it by an indexing factor of 2.76. So, instead of $35,000, they use an inflation-adjusted amount of $96,600. And there is a different indexing factor for each year of his earnings. For example, for folks born in 1954, the indexing factor for their 1995 earnings is 1.89. And for 2005 earnings, it's 1.26. Again, there are slightly different factors for each year of earnings.
So, where do those indexing factors come from? For reasons way too complicated to explain in the limited space of this column, all I can tell you for now is that they are based on the year you turn 60. In a nutshell, they take the average national wage for the whole country from the year you turned 60 and use that as a base to figure the indexing factors for each year of earnings that are in your Social Security account.
And over the years, as the average national wage for the country has gone steadily up, the indexing factors have also crept up for each year of birth. Let's say Joe was the guy born in 1954. And, to repeat, he made $35,000 in 1985, but with the 2.76 indexing factor, they actually used $96,600 in his Social Security benefit computation.
Across the street from Joe lives Jane. She was born one year later, in 1955. She also made $35,000 in 1985. But her indexing factor for 1995 earnings is 2.86. So, the SSA will use $100,100 as her 1995 wages in her benefit computation.
Next to them is neighbor Fred. And he was born in 1956 and also made $35,000 in 1985. Based on his year of birth, his indexing factor is 2.89. So, the SSA will use $101,150 in his retirement benefit calculation.
So, do you see the point I am trying to make? Over the years, as the average national wage has crept up, so, too, has the Social Security indexing factor, resulting in slightly higher Social Security benefits for people born in each succeeding year.
Now we finally get to the COVID-19 virus and how it plays into all of this. Because many people have been losing their jobs, there is much speculation that the average national wage in 2020 might actually go down. And if that happens, that means the indexing factors for people turning 60 this year would also go down. There still would be some kind of indexing factor, but it won't be as high as it would have been had the virus not caused all the disruptions in our economy.
I'm no economist, but as I understand it, we still aren't sure if the average national wage actually will go down this year. Still, that hasn't stopped people from speculating about the impact of the virus on Social Security. And that speculation has led to all kinds of scary stories being spread, sometimes in the mainstream media but even more so on the internet — especially in the wacky far corners of the World Wide Web. For example, I've seen gloom and doom reports that Social Security "will be decimated by the virus!" And there already have been bills introduced in Congress to "right this wrong."
I am suggesting that everyone stop and take a breath. Let's see what happens. Let's see if the average national wage does go down in 2020. And if it does, let's see how much it goes down and how much of an effect it will have on the Social Security indexing factors. Remember, if it does happen, it only impacts people born in 1960. The rest of you can relax. The virus has nothing to do with your Social Security checks.
And as the tagline goes in those cheesy late-night TV commercials, "But wait, there's more!" After I wrote all of the above, I did a bit of extra research and learned that the average national wage did go down once before — in 2009, following the 2008 economic collapse that plagued this country and much of the rest of the world. So that means anyone who turned 60 in 2009 had smaller indexing factors than people who turned 60 in prior and future years, and those people ended up with a slightly smaller Social Security benefit than they might otherwise have been due.
WAIT A MINUTE! I was born in 1949. That means I turned 60 in 2009. How come no one got on my bandwagon back then? Why should the 2020 COVID-19 crowd get all the attention and not me? I demand equality! I demand justice! I demand restitution! Oh, well, I'd settle for a free banana split from Dairy Queen!
If you have a Social Security question, Tom Margenau has the answer. Contact him at [email protected] To find out more about Tom Margenau and to read past columns and see features from other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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