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If Congress does nothing to shore up the Social Security Trust Fund, benefits will be cut 21% when the fund is depleted, which could happen as soon as a dozen years from now if not sooner. Pre-retirees born in 1960 face an additional risk due to the complicated formula the Social Security Administration uses to calculate benefits.

These are among several ways the COVID-19 pandemic could batter Social Security, according to retirement experts on a recent webinar, “Social Security Insecurity: A New Consideration in Retirement Planning,” hosted by the American College of Financial Services.

Turning 60 This Year?

Pre-retirees born in 1960 may suffer a blow to benefits. That’s because the Social Security Administration employs a complicated formula to calculate benefits, which includes using the top 35 years of a retiree’s earnings, adjusted by an indexing factor. That factor, in turn, is based on the Average Wage Index for the year an individual turns 60, which will be 2020 for those born in 1960. 

Job losses and declines in average wages this year due to the pandemic will affect the average wage index, which has risen almost every year since the 1950s, according to Wade Pfau, director of the Retirement Income Certified Professional (RICP) program at the American College of Financial Services. The index fell in 2009 but only slightly, according to Pfau.

“We don’t know what will happen this year but if the average wage index has a dramatic drop, then suddenly those born in 1960 would have a lot lower benefit than those born in 1959,” said Pfau.

Social Security benefits for those beneficiaries could decline by 13% and “smaller benefit reductions” were possible for those born after 1960 “at least until average economy-wide wages recover to their previously projected levels,” according to a study from the Wharton School of the University of Pennsylvania. The study assumed a 15% decline in the Social Security Administration’s measure of average wages for 2020.

COLA Near Zero

A more immediate concern, and one that will affect all Social Security beneficiaries, is the expectation of a near-zero cost-of-living adjustment for 2021. The COLA, which is tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers, may be half of this year’s COLA, which was just 1.6%, said Heather Schreiber, president and founder of HLS Retirement Consulting, who also participated in the webinar. The Senior Citizens League, an advocacy group to protect Social Security, Medicare and retired veterans benefits, has reported that the recent plunge in oil prices has “all but wiped out” the prospect of a Social Security COLA for next year.

(Related: Social Security COLA for 2012 Could be Zero: Report)

What Happens When the Trust Fund Runs Dry?

The 21% benefit cut would affect retirees already collecting benefits as well as future beneficiaries, according to former Sen. Kent Conrad, D-N.D.

“When Social Security can’t meet its legislated obligation, then there will be an across-the-board cut to match income and revenue,” Conrad said. “All of us believe Congress won’t allow Social Security to become insolvent, but if it fails to act, we would face those cuts.”

A fix for Social Security is a challenge in ordinary times, but during the COVID-19 pandemic it may be impossible.

The pandemic and subsequent lockdowns have pushed the U.S. economy into a recession, leaving 20 million unemployed Americans who, along with their employers, are no longer contributing the taxes that are funneled into the Social Security Trust Fund on their behalf. 

Another Wharton study, published in late May, found that the Old Age, Survivors, and Disability Insurance Trust Fund, which includes two separate trusts — one for retirees and one for disabled individuals — could be depleted as much as four years earlier than expected because of the impact of the pandemic, in 2032. 

(Related: Coronavirus Could Shave 2-4 Years Off Social Security Trust Fund: Wharton)

What’s an Advisor to Do?

Assuming there is no fix coming for a while, advisors need “to navigate what-if scenarios … [and] have alternative scenarios in place” because of that risk, said Schreiber. These scenarios could include including a 25% decline in benefits as well as no change when calculating future Social Security benefits in clients’ retirement plans. Schreiber added that there’s a lack of software available for financial advisors doing such calculations.

Looking longer term, Conrad, who co-chaired the Bipartisan Policy Center Commission on Retirement Security and Personal Savings, said any fix to Social Security needs to involve increasing revenues and reducing benefits. The consensus of the commission was to do more on the revenue side.

“We have such a big hole to fill that you’re probably not going to get bipartisan agreement unless you work both sides of the equation,” Conrad said.

The 152-page BPC report released in 2016 recommended raising the FICA rate slightly along with the income subject to FICA taxes and the full retirement age. It also recommended adjusting benefits to provide more to lower income beneficiaries and less to those with very high incomes and indexing the Social Security COLA to the chained CPI, which would have the effect of reducing the inflation adjustment. 

“We have these big challenges like Social Security and our representatives in Washington are not being sufficiently serious about dealing with these things,” Conrad said. He urged all those who tuned into the webinar to appeal to their congressional members to work on fixing Social Security.

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