The Social Security Notch Issue
T-HRD-89-2, Jan 23, 1989
GAO discussed its and the National Academy of Social Insurance's studies of the social security notch issue. GAO found that: (1) benefit differences arose between retiree groups of similar ages because a problem with the benefit formula instituted in 1972 led to higher benefits than expected; (2) in 1977, Congress set the replacement rate for an average earner retiring at age 65 at about 42 percent, in an effort to correct the problem; (3) workers under the new system received higher replacement rates than workers that retired in the late 1960s, but did not get as much as the old rule allowed for workers retiring in 1978 or 1979; (4) in combination with the old, flawed formula, rapid inflation caused some pre-notch group benefits to rise faster than expected and widened the gap between those who continued to work after age 62 under the old rules, compared to those working under the new rules; (5) because of social security cost-of-living increases that outpaced wage increases, many notch retirees benefited more than non-retired groups from inflation; and (6) although Congress introduced several proposals to increase benefits for those under the new rules through 1996, the proposals lacked specific financing mechanisms. GAO believes that Congress should not: (1) adopt notch legislation without considering the Social Security Administration's ability to implement it efficiently and effectively, and bear the associated administrative costs; and (2) consider the notch issue until the social security trust fund reserves achieve an adequate contingency reserve level.