In his excellent and very timely working paper, How the Coronavirus Could Permanently Cut Near-Retirees’ Social Security Benefits, Andrew G. Biggs estimates that those born in 1960 could suffer an approximately 14% decrease in their projected Social Security benefits as a result of lower total wages paid in 2020. As discussed by Mr. Biggs, this unanticipated negative impact results directly from the way Social Security uses national economywide wages in the year the worker turns age 60 to calculate benefits. He notes that without legislative action, those born in 1960 – those who turn age 60 in 2020 – could become the next Social Security “Notch Babies.”
Mr. Biggs estimates:
“For a medium wage earner, lifetime benefits will fall by $70,193 in present value. Lifetime losses to a very low wage worker are $24,647; and the maximum wage earner loses $148,030.”We kicked the tires on Mr. Biggs’ present value calculations and estimated about how much more someone born in 1960 might have to save over the next seven years (to age 67) to make up the decrease. Our results are shown below.
The Social Security Quick Calculator available on the SSA.gov website estimates an annual benefit of $32,364 in future dollars for an individual born in 1960 currently making $80,000 and continuing to work full time until age 67. A 14% decrease in this amount would reduce this estimate to $27,833 per annum in future dollars.
Scenario #1
The screen shot below shows the Input/Results tab from our Actuarial Budget Calculator (ABC) for Single Pre-Retirees. We have entered hypothetical data for a 60-year old female, who we will call Ann, making $80,000 per annum. We have assumed Ann has:
- accumulated savings of $400,000,
- is contributing 20% of her pay to her employer’s 401(k) plan, and
- receives an annual employer matching contribution of $2,400, which is 50% of the first 6% of her $80,000 pay that she contributes.
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Scenario #2
If we optimistically assume that:
- Ann’s 401(k) account balance is unaffected by recent stock market activity,
- she will retain her employment for the next seven years,
- she will continue to receive 3% per annum pay increases,
- her company will still match her contributions at the same level, and
- her projected age 67 Social Security Benefit is reduced by 14% because of the born-in-1960 issue mentioned above.
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The above screen shot (Scenario #2) shows that Ann will have to increase her savings from 20% of her pay to about 24% of pay for the next seven years to reach her target of about 84% spending replacement, as a direct result of the 14% decrease in her projected Social Security benefit, simply due to being born 60 years before 2020, the year of the Coronavirus Pandemic.
The PV Calcs tab (not shown) indicates the present value of her lower projected Social Security benefit in this scenario is $442,349, or about $72,000 lower than the present value of her pre-Coronavirus estimated Social Security benefit developed for Scenario #1. This difference in Social Security present values is reasonably consistent with Mr. Bigg’s estimate of the change for a median wage earner, despite the use of somewhat different assumptions.
Not Great Timing Either
Unfortunately, Ann, and millions like her born in 1960, won’t have a whole lot of time before their desired retirement to make up for decreases in Social Security benefits or for other shortfalls in their savings. What would Ann’s options be, for example, if we assume that in addition to suffering a 14% decrease in her projected Social Security benefit, her accumulated savings actually decreased by 25% (from $400,000 to $300,000) during 2020 as a result of negative stock market performance? Under this scenario, our ABC workbook indicates her options to retire with approximately an 84% spending replacement level could include:
- Increasing her savings rate from 20% to 30% for seven years
- Deferring commencement of her retirement and Social Security benefit until age 69 and increasing her savings rate from 20% to 28% for the next nine years
- Increasing her savings rate from 20% to 27% for the next seven years and planning to work a part-time job earning $22,000 per annum for three years starting at age 67
- Instead of assuming a 5% annual rate of investment return (3.5% real) prior to retirement, assume an annual rate of return of 11% (9.5% real), based on her assumption that the market will recoup its losses, and continue to save 20% of her pay for the next seven years until her desired retirement age of 67, or
- Any of several different variations of the above options.
We hope that Congress can come up with a solution to this clearly unintended “notch baby” problem for those born in 1960. And, we certainly don’t want to dump more cold water on those pre-retirees who have been diligently saving up to this point and have suffered recent stock market losses (as this post undoubtedly does). However, we do encourage all of our non-retired readers (even those not born in 1960) to use our ABC workbooks for single pre-retirees and pre-retired couples to factor recent investment experience into their retirement plans. And while pre-retirees not born in 1960 may be lucky not to have this specific “notch baby” problem, it is only prudent to consider possible employment disruptions and potential future Social Security decreases (as part of the next round of Social Security reform) in your retirement plans.
