How Prolonged Unemployment Can Hurt Your Social Security Benefits -- And How to Fix It

Across America, millions of workers are out of jobs due to COVID-19. Sadly, with coronavirus cases spiking, the end of the 2020 recession isn't yet in sight. In fact, more states are locking down again, which could mean things get worse instead of better.

Unfortunately, if you're out of a job and you don't find a new one for a while, this could have a detrimental impact on the Social Security retirement benefits you'll likely rely on in your later years. But while unemployment could permanently reduce your income from Social Security, it doesn't have to -- if you understand why this happens and take steps to mitigate the damage.

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How long-term unemployment can damage your Social Security

There are two key ways that long-term unemployment could cause you to get lower Social Security benefits for life:

  • It could make it harder for you to put in enough years on the job

Social Security's formula to determine your benefits entitles you to a percentage of your average wages over your career. Specifically, your average is calculated based on the 35 years of work history when your earnings were highest. Without a career that spans 35 years, you'll end up with some years of $0 wages included in the average, reducing it and thus lowering your benefit. 

Unfortunately, long-term unemployment makes it harder to put in 35 years of work, especially if you started working late because you were in school, if you hope to retire early, or if you took off time to raise your kids. If you're just barely going to make your full 35 years, missing a year of work because of coronavirus could leave you falling short. 

  • It could reduce the income used to determine your benefit

Unemployment doesn't just makes it more difficult to ensure you've put in a full 35 years to avoid the inclusion of $0 wages when your average income is determined. It can also lower the income you have during those 35 years.

Say, for example, that this year will count as one of your 35. But you're out of work from March through December. You'd have only three months of earnings for the year, so your wages would be pretty low, and the inclusion of this year's earnings in your average would drag your benefit amount down. 

Likewise, if you don't start working until April of next year, you'd miss out on three months of earnings, so your wages would be lower next year too. And if you had to take a pay cut because you couldn't find work at your current rate, your wages would of course be even lower. 

How to fix it

If you find yourself without a job and unable to get back to work quickly, fixing the damage this does to your Social Security benefit can seem insurmountable. But the good news is, you have options.

Your best solution is to plan to stay on the job a little longer than you otherwise would have toward the end of your career. Chances are good you'll be making more later in life than early on, or than you did during periods when you worked only part of the year because of unemployment. If you stick it out at your job a little longer, you can replace low earning years with other years in which you earned more. Staying on the job a little longer also makes it more likely you'll put in the full 35 years you need to make sure no years of $0 wages are part of your benefit's calculation. 

Working a side gig for a while could also be beneficial, especially if you have to accept a job at a lower rate of pay once you get back to work after an extended break. By paying Social Security tax on your income from a side hustle, you can raise your wages for the year, so you're less likely to have a year of low earnings factored into your average wage. This will be especially helpful if it turns out you can't work much longer at the end of your career and your earnings during this recession end up counting toward the 35 years of income that your benefit amount is based on. 

You'll likely depend on Social Security to provide a good portion of your retirement income, so make sure you consider these fixes if you find yourself with no job for a while until the coronavirus crisis ends. 

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