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Born in 1960? Your Social Security Retirement or Disability Benefits Could Take a Hit

Why the pandemic is threatening to reduce future payments for today's 60-year-olds

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Roughly 4 million people born in 1960 could see a big drop in their Social Security retirement or disability benefits if Congress doesn't act to fix this year's glitch in how benefits are calculated. Like seemingly everything else in 2020, the pandemic is largely to blame.

The problem lies in how your Social Security benefits are calculated. The amount of your benefit is tied to the average of your top 35 years of earnings. Before that calculation, however, Social Security adjusts your earnings for historical changes in wages, using an index called the average wage index (AWI). The adjustment helps correct for the changes to wage growth over your working life: For example, a $20,000 salary in 1975 has the buying power of nearly $50,000 today.

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The Social Security Administration (SSA) adjusts an individual's lifetime earnings two years prior to first eligibility. For retirement benefits, first eligibility is age 62. For boomers turning 60 this year, then, the 2020 AWI — which won't be calculated until late next year — is extremely important in adjusting lifetime wages.

The problem: Thanks to the economic slowdown caused by the coronavirus, the AWI could be down about 9 percent in 2020 from what the SSA projected in 2019, according to estimates by the SSA. The AWI has only fallen once, during the Great Recession in 2009, and then by only 1.5 percent. A 2020 AWI based on dramatically lower average wages would result in lower initial Social Security retirement or disability benefits for those who become eligible for benefits in 2022, as well as for their spouses or dependents. And since your future benefits hinge on the amount of your initial benefit, a lower AWI would affect the benefits for those born in 1960 for life.

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Impact of the pandemic

By most measures, average wages have increased in 2020, but that's because those who were most affected by the pandemic tended to be in sectors with low wages, says IHS Markit principal economist David Deull. Leisure and hospitality, professional and business service, and health and social services accounted for 55 percent of the jobs lost since February, Deull says. Despite the rebound in the economy, employment for those whose wages are $27,000 or less is still down 19 percent, Deull says,

The AWI, unlike other wage measures, looks at the total amount of wages paid for the year and divides that by the number of people with income reported on federal income tax form W-2. The AWI is measured yearly. In January 2020 the economy was booming and unemployment, at 3.6 percent, was exceptionally low. That means a lot of W-2s for the AWI calculation. But by April 2020, the unemployment rate had soared to 14.7 percent. Although the unemployment rate improved to 6.9 percent in October, a second wave of the coronavirus could push up the number of people out of work in November and December, Deull says. In any event, the AWI for 2020 is likely to be lower than it was for 2019 due to all of the lost wages throughout the year resulting from layoffs and business closures.

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Stephen Goss, chief actuary for Social Security, testified to Congress in July that the AWI could be about 5.9 percent lower in 2020 than in 2019. Earlier estimates had predicted a 3.5 percent increase in the AWI. The upshot for retirees born in 1960: Social Security benefits would be 9.1 percent lower than expected — for life. A person with average wages who reached age 62 in 2022 would get an initial monthly retirement benefit $189 less than they would have received if the average wage index was not dramatically reduced because of COVID, Goss said. Over 20 years, that would be a reduction of about $45,000 for those born in 1960.

A fix is possible

When the AWI fell a small amount in 2009, Congress did nothing. But the potential fallout from the coronavirus recession could be far more dramatic than it was in 2009. AARP urges Congress to work on a bipartisan basis to hold workers harmless from the impact of the 2020 AWI, and to include a solution in year-end legislation.

"The pandemic and economic downturn will likely cause an unprecedented drop in the national average wage index used to calculate Social Security benefits for 2020, and Congress must address this permanent ‘COVID cut’ that will reduce lifetime Social Security benefits by tens of thousands of dollars for millions of American workers,” says David Certner, legislative counsel and director of legislative policy for AARP.

The SSA estimates the overall cost of the 2020 AWI benefit reduction fix included in current legislative proposals at approximately $20 billion over 10 years and, depending on the approach taken for all those with wages in 2020, between $49 billion and $90 billion over 75 years.

Social Security continues to be the principal source of income for over 50 percent of older American households receiving benefits. Roughly 25 percent of those households, or about 10 million people age 65 and older, depend on it for nearly all (90 percent or more) of their income.

Average current Social Security benefits are modest, at only $1,514 a month for retirees and $1,259 for those with disabilities. Yet Social Security keeps 15 million older Americans out of poverty and allows millions more to live independently and without fear of outliving their income.

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