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

Abstract

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.”

Keywords: Social Security, COLA

JEL Classification: H55