Born in 1960? Pay attention. – Victims of the Virus – HumbleDollar

Richard Connor  |  August 19, 2020

SOCIAL SECURITY retirement benefits are one of the most complicated topics in financial planning. As you try to figure out how much you might receive, there are thousands of rules, different types of benefit and numerous scenarios to evaluate.

And then there’s the impact of COVID-19. It turns out that this year’s economic slump, which caused the economy to shrink by a tenth in the second quarter, may interact with Social Security’s methodology to hurt those who turn age 60 in 2020.

It’s a tad confusing, so bear with me while I explain. Social Security benefits are based on your lifetime earnings. To make sure earnings can be compared across time, your actual earnings from each year are adjusted, or “indexed,” to account for differences in average wages from one year to the next. This puts each year’s earnings on a comparable footing. Social Security then calculates your “average indexed monthly earnings,” or AIME, based on your 35 years with the highest index-adjusted earnings.

Think of this as your average career earnings. Your AIME is then used to calculate your base benefit amount as of your full Social Security retirement age, which will be either age 66 or 67. This base benefit is also called your primary insurance amount, or PIA. It’s the amount all other benefits are based on, such as spousal and family benefits.

With me so far?

This is where things get funky—and it has to do with the methodology that Social Security uses to calculate your all-important AIME, that measure of your average career earnings. Each year, Social Security calculates an Average Wage Index, or AWI, based on economywide earnings for that year. Your lifetime earnings are then indexed to the economy’s earnings as of the year you turn age 60. Any earnings received after age 60 are not indexed, but instead they enter the benefit formula in nominal terms. This creates a huge problem for those who were born in 1960 and hence reach age 60 this year—an issue highlighted in a recent paper by Andrew Biggs and published by the University of Pennsylvania’s Wharton School.

What’s the problem?

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Source: Victims of the Virus – HumbleDollar