A New Social Security 'Notch'? Bad News for People Born in 1947

This year, Social Security benefits received no Cost-of-Living Adjustment (COLA) for the first time since automatic adjustments were adopted in 1975. While current beneficiaries perceive themselves to be harmed, they were compensated by receiving a higher-than-normal 5.8-percent COLA payment in 2009. However, a quirk in Social Security’s benefit formula will produce lower benefits for new retirees, presenting a stronger case for help. Social Security’s formula for granting COLAs, interacting with a spike in inflation during 2008, could reduce benefits for individuals born in 1947 by around 2.6 percent relative to the average benefits received by the 1930-1946 birth cohorts, costing a typical couple over $12,000 over the course of their retirement. Policymakers should consider adjusting benefits for these individuals and implementing longer-term reforms to reduce the likelihood of future “notches.” This brief proceeds as follows. The first section describes the Social Security notch of the 1970s. The second section explains how Social Security’s benefit formula works. The third section looks at how the experience of 2008 has created a new type of notch. The fourth section considers how replacement rates vary for different birth cohorts, and the fifth section offers potential solutions. The final section concludes that some adjustment for the 1947 cohort is both popular and sensible.