Some bad news on how coronavirus will effect Social Security

Adding to a vast ocean of bad news, let’s explore some troubling research into the fine print on Social Security benefits.

Andrew Biggs, a resident scholar of the American Enterprise Institute, has two papers out this spring on our most important safety net for retirees.

One paper has bad news for a specific cohort of soon-to-be retirees. The other explores an idea for helping with many workers’ current financial distress — a policy proposals that I think is wrong, but worth discussing.

Biggs wrote in a recent paper that for a group of workers approaching retirement — specifically those born in 1960 — the COVID-19 recession could be very harmful to the benefits they can claim in 2027, at full retirement age.

Biggs assumes the 2020 U.S. gross domestic product shrinks by 15 percent in 2022, and that average wages also drop by a similar amount. The net effect of this drop in average wages will drop benefits by 13 percent overall. If that happens, for a middleincome worker born in 1960, Biggs calculates a drop in benefits of $3,900 per year. For that same worker, lifetime Social Security benefits drop by a present value of $70,193 due to the 2020 COVID effect.

The math justification behind Biggs’ claim isn’t obvious unless you enjoy building your own

Social Security benefits spreadsheet. Guilty as charged!

The math trick to know is that before calculating your first benefit check, Social Security indexes your annual earnings to a national wage index — rather than an inflation index, as you might expect.

If the wage index declines by 15 percent in 2020 (Biggs’ core assumption), then this national wage indexing of 2020 earnings has a substantial negative impact on your benefit check starting at age 67. Subsequent retiree benefit checks do increase according to inflation. But if benefits start at a low base — and they will remain permanently lowered, even as they move up with inflation over the years.

An economic recovery may mean later cohorts do not suffer this same drop. Biggs recommends Congress consider interventions to protect this specific born-in-1960 cohort.

The COVID recession, depending on its duration and lasting effects on national wages, may also affect near-retirees born in 1961. So that’s your not-so-great news of the day on COVID.

Biggs’ other paper in April 2020 should be placed in the “interesting, but bad idea” pile.

In the midst of our national discussions about stimulus payments, Biggs and his co-author, Stanford University economist Joshua Rauh, propose allowing pre-retirement individuals to take loans from their future Social Security benefits, which could be paid back at retirement age.

For context, private lenders do not make loans collateralized by future Social Security payments. But Biggs and Rauh propose the