Knowing potential impacts allows you to plan your finances accordingly without being caught off guard.
For anyone who has been paying attention to economists over the past year or so, the word recession is likely engrained in their minds from hearing it so often. Some economists think it’s guaranteed, some think it’s an overreaction, and some seemingly flop between the two weekly.
Either way, for those nearing Social Security age or currently receiving Social Security, it’s best to know how a looming recession could potentially impact your benefits. There’s no concrete answer about how the economy will hold up in the near future, but it’s better to be overprepared than underprepared.
A change in your earnings could lower monthly benefits
Unfortunately, recessions can sometimes lead to job loss; it’s one of their harsh realities. In the unfavorable event that your income is cut or lowered during a recession, it could lead to a lower monthly Social Security benefit in retirement.
Social Security calculates your benefits by taking a percentage of your average income during the 35 years when your earnings were highest (adjusted for inflation).
There’s a cap, called the wage base limit, on how much income is taxed and considered in Social Security calculations. For 2023, the wage base limit is $160,200, but it’s adjusted for inflation annually. If you’re forced to take a pay cut but your earned income remains above the wage limit, you don’t have to worry about your benefits changing.
For most people, though, this isn’t the case. A drop in income could lower one (or more) of the 35 years of earnings that will be used to calculate your Social Security benefit.
For example, for someone to be eligible for the maximum $4,555 monthly benefit in 2023, their income must be at or above the wage base limit for each of the 35 years used in calculations made by the Social Security Administration. If 2023 will be one of the years included, any earnings below $160,200 would automatically mean no shot at the maximum benefit.
An increase in early benefit claims
Your full retirement age, which is based on your birth year, is when you’re eligible to receive your full Social Security benefit.
| BIRTH YEAR | FULL RETIREMENT AGE |
|---|---|
| 1943 to 1954 | 66 |
| 1955 | 66 and 2 months |
| 1956 | 66 and 4 months |
| 1957 | 66 and 6 months |
| 1958 | 66 and 8 months |
| 1959 | 66 and 10 months |
| 1960 or after | 67 |
Studies have shown there’s an increase in early Social Security claims during recessions. There’s nothing wrong with claiming benefits early. Just be aware of how it could impact your monthly benefits.
Monthly benefits are reduced by five-ninths of a percentage point monthly for the first 36 months and five-twelfths of a percentage point for each additional month. For example, if your full retirement age is 67 and you take benefits at 64 (36 months), they’ll be reduced by 20%. If you take benefits at 62 (60 months), they’ll be reduced by 30%.
The decision of when to take Social Security shouldn’t be taken lightly because it can have a noticeable effect on your retirement income. If you need Social Security to cover your living expenses, by all means take it. But if Social Security will be supplemental income, fully weigh if the reduced monthly benefit is worth the early claim.
How inflation changes could affect benefits
Since monthly Social Security benefits are fixed, Social Security uses a cost-of-living adjustment (COLA) to help offset the effects of inflation.
The COLA works by taking inflation levels — based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) — from the third quarter of one year to the third quarter of the next and adjusting monthly benefits accordingly. For example, if inflation is 5% over that span, monthly benefits are increased by 5%.
Many of the recession worries are centered on inflation levels and the Federal Reserve’s steps to address it. If a recession causes inflation to slow drastically, the COLA could be noticeably lower the following year. In the event it turns into deflation (which isn’t ideal), there would be no COLA at all.
Although it’s not common, no COLA increases have happened. Recently, there haven’t been increases in 2010, 2011, and 2016.
Remember: There’s no guarantee that a recession or any of the above will happen. The important part is just being aware of what could happen so you’re not caught off guard. Preparation is key.
