Allworth Co-CEO Scott Hanson answers a reader's question about Social Security.
“I’ve always believed that the amount of Social Security I’ll receive is based upon the age I retire and the amount of money I’ve earned. But I just today heard that the level of something called the “national average wage index” during the year you turn 60 has a major impact on your future Social Security payments.
As I’ll be 60 this November, please tell me, this can’t possibly be true, can it?”
Unfortunately, not only is what you’ve heard true, but almost no one else realizes it, either.
That’s because, as I’ll explain in a moment, what is happening to wages in America right now hasn’t happened in 80 years.2 And, most people don’t realize—because it’s never been an issue in our lifetimes—that your Social Security payments are forever tied to the performance of this “wage index” during the year you turn 60.
Ruthie, frankly, this is being underreported and it’s a big deal.
First, as you mentioned above, while there are other factors, most pre-retirees believe that their future Social Security benefit amount is calculated by averaging their 35 highest years of wages, along with the age at which they retire. And, historically, when it comes to those key numbers (along with things like adjustments for inflation), that’s pretty much the case.
However, when it comes to the final tally on the amount of your monthly Social Security payments, there is another not-very-well understood consideration that makes the year you turn 60 extremely important (it’s just never really mattered all that much until this year).
And for the more than four million people born in 1960? Unless something drastic happens, depending on their other sources of income, this could mean trouble.
In a nutshell, it works like this: The national average wage index (NAWI) tracks the year-by-year “up and down” trends in the wages we all earn. And the NAWI is a rarely-mentioned-but-important tool the Social Security Administration uses to calculate adjustments to everyone’s benefits and contributions.
Are you with me so far?
And, unfortunately, for people born in 1960, this year (2020) just happens to be the year you reach the magic, designated age, that the Social Security Administration long-ago decided would automatically marry each person’s (the year you turn 60) benefit calculation to the NAWI for life.
Obviously, when you consider the protests that have brought important issues to the forefront of all our lives, along with the devastating impact and death caused by COVID-19, in terms of history, this has already been a monumental year.
But the other noteworthy thing that has happened (so far) in 2020, is massive and sudden unemployment, which has resulted in a record decline in the average amount of wages being earned.
In short, the wage index has plummeted. And that means because you’re turning 60 this year (of all years), unless Congress gets involved, there’s going to be an age block of retirees (all born in 1960) who, for the first time in history, receive significantly less Social Security income than they were probably expecting just a year ago.
As stated, the percent that the NAWI goes up or down in the year you turn 60 directly correlates to how your retirement benefit is calculated.
And, as a sobering example of the wage anomaly that is 2020, in April of this year, the Wharton School (the business school at the University of Pennsylvania) published a report, which, based on early 2020’s wage numbers, showed that people born in 1960 could see a lifetime benefit reduction of around 13%.
(As an example—this one taken from an InvestmentNews article on the same topic—for someone whose income averaged $50,000 a year during her career, that would amount to a roughly $3,900 yearly reduction in benefits, which extends out to a $70,000 reduction over the duration of an average retirement.1)
Now, while hard to identify, if there’s any wisp of optimism, it’s that the estimate of the wage index decline for the year has recently improved a bit.2 The current estimate (as of July 7th, 2020)2 means that the corresponding calculation for reduced Social Security earnings for people turning 60 this year has “improved” to an 8.8% overall decline in payments.2
For you, Ruthie, if your income averaged $50,000 a year throughout your career, as of this moment, that decline amounts to a roughly $49,000 reduction in benefits over the likely duration of your post-work life.1
In the last 70 years of Social Security payments, a wage index decline has only happened once (2009). But that decline (due to the Great Recession) was so inconsequential (comparatively), that Congress didn’t see any reason to act.
If the current decline in the NAWI remains the same (or worsens) for the remainder of 2020, Congress will have until about the end of 2021 (one year) to fix this predicament. (That’s because people born in 1960 will be turning 62 and can begin taking Social Security in 2022.)
Remember, we haven’t had unemployment this high in 80 years, and Congress has never had reason to remedy the Social Security Administration’s use of the NAWI in its benefits calculations. If these numbers continue, Congress could step in and do something such as alter the law so that a decline in the wage index won’t significantly lower benefits from one year to the next.
Ruthie, in short, your question is a good one, it’s a legitimate worry, and in the middle of everything we are all going through right now, here are some considerations.
First, have you accumulated other assets for retirement?
I realize it’s a difficult thing to hear right now, but Social Security was never intended, nor should it be counted upon, as a guaranteed source of retirement income. The fact is, that as it currently exists, the program is unsustainable, even potentially insolvent, and major, sudden changes, including “means testing” or reduced benefits could happen at any time.
Second, you need to update your financial and retirement plans. As it stands right now, and based on your question, it’s likely that any other monies you have are going to need to last longer. (And, depending on your other income, you might have to work longer.)
Frankly, knowing all your options has never been more important than right now.
But, most importantly, let’s hope that Congress realizes the urgency here, and rises to meet the considerable responsibility that is its charge, and keeps folks like you from being penalized for something as arbitrary as being born exactly 60 years before a pandemic routed the wages of working Americans.
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1The NBRI Circle of Excellence Award is bestowed upon NBRI clients meeting one or both of the following criteria: Total Company score at or above the 75th percentile of the NBRI ClearPath Benchmarking Database and/or improvement of five (5) or more benchmarking percentiles in Total Company score over the previous survey.
2Scott Hanson (2011, 2012, 2013, 2014, 2015 & 2016) and Pat McClain (2012, 2013, 2014, 2015 & 2016). Barron's© magazine is a trademark of Dow Jones L.P. The ranking reflects the volume of assets overseen by the advisors and their teams, revenues generated for the firms and the quality of the advisors' practices.
3As of 08/20, Allworth Financial, an SEC registered investment adviser and AW Securities, a registered broker/dealer have approximately $9 billion in total assets under management and administration.
4Barron’s 2020 Top 100 RIA Firms. Barron's© magazine is a trademark of Dow Jones L.P. The ranking reflects the volume of assets overseen by the advisors and their teams, revenues generated for the firms and the quality of the advisors' practices.
✢Scott Hanson, Investment Advisor 2005, 25 most influential people in the financial services industry. The ranking reflects 25 people who Investment Advisor magazine believes have had or will have the greatest influence on the financial services industry.
✼Pat McClain, InvestmentNews 2014, Invest in Others Community Service Award, presented to an advisor who has made an outstanding impact on a community through managerial contributions to a non-profit organization.
†Financial Times, FT 300 Top Registered Investment Advisers, June 2019. The ranking reflects six areas of consideration including the company's years in existence, industry certifications of key employees, AUM, asset growth, SEC compliance record and online accessibility and calculates a numeric score for each company.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.