Social Security Benefits: How Turning 60 Could Impact Your Payments

Millions of seniors rely on Social Security in retirement, and many look to those benefits as their primary source of income. But if you're currently 60, or are turning 60 in 2020, you may need to brace for smaller benefits than you'd expect.

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Social Security's benefit formula is unkind to this year's 60-year-olds

Your Social Security benefits are calculated by taking your average monthly wage over your 35 highest-paid years of earnings and adjusting that wage for inflation. This is known as your AIME. From there, a special formula is applied that determines what your monthly benefits look like. That formula is based on indexing factors that take the average national wage the year you turn 60 into account. When that average wage declines, so too can your retirement benefits.

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Right now, the U.S. is looking at historic unemployment levels. That will likely result in lower wages this year across the board, which could impact your benefits in a very undesirable way -- but again, only if you're turning 60 this year.

How bad a hit are we talking? Based on recent data from the Congressional Budget Office, we may be looking at a 9.8% decline in average wages in 2020. That's not shocking given that the jobless rate was in double-digit territory for the entire second quarter of 2020. If that projection is correct, it could result in an 8.8% reduction in Social Security benefits for workers who happen to be turning 60 this year.

What does that mean in terms of actual retirement income? For those earning a median wage, it would spell a $2,500 annual hit in benefits during retirement, and a loss of $49,000 in lifetime income. Ouch.

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Can lawmakers intervene?

It may seem unfair that this year's 60-year-olds face such devastating financial repercussions due to the state of the economy and the way Social Security's benefit formula works. But unfortunately, the only way around this rule is for Congress to step up and change it. And that's somewhat unlikely.

The last time the average wage declined on a national level was 2009, during the latter part of the Great Recession. Back then, Congress didn't act. However, the unemployment situation caused by COVID-19 is far more extreme, and workers turning 60 this year are looking at a greater Social Security impact than those who turned 60 back in 2009. Therefore, there's a chance -- albeit a slight one -- that lawmakers will step in to address the issue at hand.

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That said, they don't have a lot of time. Today's 60-year-olds will be eligible to claim Social Security come 2022, since 62 is the earliest age to sign up for benefits, albeit at a reduced rate. (You're not entitled to your full monthly benefit until you reach full retirement age. If you were born in 1960, that means you need to wait until you turn 67 to collect that benefit in full.) As such, any changes to the benefit formula would need to be implemented by the end of 2021.

But again, that may not happen, and so today's 60-year-olds will need to act strategically to maximize the benefits they're entitled to. If you're worried about a hit to your Social Security income, you can offset it by waiting until full retirement age to sign up for benefits, or even beyond. For each year you hold off on filing past full retirement age, up until age 70, your benefits go up 8%. If you're 60 today, you have a chance to grow your benefits by 24%, and that increase will remain in effect for the rest of your life. It's not a perfect consolation prize, but it's something.

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