The Social Security Benefit Notch: A Study

By: Robert J. Myers, Gary Burtless, Suzanne B. Dilk, and James W. Kelley
Published: November 1988

In 1977, the Congress enacted a new method for computing Social Security benefits applicable to persons first becoming eligible for retirement benefits on or after January 1, 1979. Essentially, insured workers attaining age 62 before the effective date were to have their benefits computed under the old system, whereas those attaining age 62 after that date were to be under the new system. The Social Security Amendments of 1977 included special transition provisions that applied only to workers who attained age 62 in 1979-1983.

Shortly after the new system took effect, it became clear that the differences between the benefit amounts computed under the old procedures were larger than had been expected. In particular, sharp differences could arise between two workers who had similar work histories but who differed mainly in that one was born in 1916 and became age 62 before January 1979, whereas the other was born in 1917 and became age 62 on or after January 1, 1979. For example, a worker who had earned in each year the maximum amount creditable for benefits and who retired at age 65 could receive about $100 a month less if born after January 1, 1917 than if born in 1916.

The pattern under which persons reaching age 62 in 1979 and thereafter have lower benefits than similarly situated older persons has become known as the "notch." And the people who attained age 62 in 1979 and thereafter are known as the "notch group." Some of them believe incorrectly that the lower benefits are applicable only to insured workers reaching age 62 in the 1979-1983 period, and believe that the notch issue is a question of inequitable treatment in comparison with those who attain age 62 later, as well as with those who have done so before. Other persons are simply concerned about the fact that their benefits are lower than are those paid to similarly situated older workers.

A number of legislative changes have been proposed to deal with the notch benefit disparity. Most of these changes involve increasing the benefits paid to at least some of the people reaching age 62 in or after 1979. Generally, these proposals require large expenditures from the Social Security trust funds.

The notch situation is undesirable and unfortunate. Naturally, it seems unfair to those born in the years shortly after 1916. However, careful and thorough analysis shows that the problem is really largely attributable to the fact that those born in the several years before 1917 who worked well beyond age 62 (after 1978) received benefits which are too large and that it would be unwise to extend this over-generous treatment to additional persons.

Senator Daniel Patrick Moynihan, Chairman of the Subcommittee on Social Security and Family Policy of the Senate Finance Committee, and Senator Bob Dole, the ranking minority member of that subcommittee, asked the National Academy of Social Insurance to examint the "notch" question. This report has been prepared in response to that request.