(The opinions expressed in guest op-eds are those of the writer and do not necessarily represent the views of RedState.com.)
When most people hear of the dysfunction of Social Security, they generally think about the prospect of automatic benefit reductions that loom on the horizon. Believe it or not, the system has more immediate problems, like whether or not the program will be able to cash checks a dozen years from now.
While most seniors are looking forward to collecting a larger benefit check from Social Security, one set of seniors will get nothing to offset the highest rate of inflation in 40 years because of a quirk in the benefit formula.
Specifically, people born (or married to someone born) in 1961 will get nothing to offset the rise in prices during 2022. These people aren’t getting cheated. It is just the way the system works, and has worked since the late 1970s when Congress shifted the system.
People born in 1961 will not get a penny of inflation protection for their retirement benefits to offset the current year’s inflation, costing them as much as $50,000 in lifetime retirement benefits.
If “average wages” sounds too complex, you really can’t complain if you come up on the short end of the rules.
Nearly 50 years ago, Congress set Social Security on auto-pilot, where the whole system is controlled by the “average wage index.” Every year, the program taxes a little bit more in wages, and provides a slightly more generous benefit package.
Congress made a conscious choice to enable Social Security to expand itself every year without having to vote on the changes. On the upside, it does not take an act of Congress to expand Social Security benefits. On the downside, it is entirely possible for quirks of the program to go undetected, and therefore unsolved, for decades.
For the person who had the misfortune of being born in 1961, he or she will start retirement roughly $50,000 in the hole, solely because the retiree was born in the wrong year. Washington isn’t working on the problem. Congress appears blissfully unaware that the problem even exists.
Social Security replaces a percentage of your “career annual wages.” To offset the impact of inflation on wages earned in the past, the system adjusts the worker’s historic wages to the year in which he or she turns 60. After a worker turns 62, the annual cost of living adjustment protects the buying power of the retiree’s check throughout the duration of their retirement.
The obvious question is: what happens in the year someone turns 61? That is a gap year, where the worker gets no protection.
The fact is that economic results vary year to year, and Social Security is designed to feed that uncertainty into the retiree’s benefit check. Maybe there is a war thousands of miles away. Maybe there is a pandemic. If you happen to be born 61 years prior to the economic turmoil, your benefits could be reduced, or you might get a considerable windfall. Essentially, wage-indexing, a quirk within the benefits formula, turns Social Security into a boom-and-bust piñata that bursts about three months before some retirees start collecting benefits.
At the start of 2022, people born in 1961 could expect their benefit checks to grow in real terms by more than three percent annually because of a combination of low inflation and rapid pay increases. That is the Holy Grail of retirement. That mix means that benefit checks would replace a larger amount of wages that passed through a more generous formula.
A year later, the prospects of those who are 61 years old are much less favorable, where checks will reflect a relatively smaller career wage passing through a less generous formula. Inflation is higher, and the projected wage growth didn’t materialize.
As unpleasant as that trend might sound, the harder truth is people born in 1961 do not know what their benefit might be because the data on which the system is built will not be available until mid-October. So, no one knows the full extent of the damage.
The one thing that we do know is this: the retirement piñata we call Social Security will drop Charlie Brown’s proverbial rock on an entire birth year of Americans. These retirees will get a smaller check, one that does not contain any boost for the inflation currently ravaging the economy
So, you were born in 1962, and feel compelled to sneak a smirk at your older sibling. Keep in mind that next year, the wage index must digest the impact of the retirees returning to the workplace.
Social Security reform should focus on fixing the program over the long haul, rather than the patchwork approach of how to keep it from insolvency over the short term.
Brenton Smith ([email protected]) is a policy adviser at The Heartland Institute, with work appearing in nationally recognized publications including Barron’s, Forbes, MarketWatch, The Hill, USA Today, and more.