Consumers : Figuring Out Some Retirement Benefits
Question: I found your column last year on how Social Security benefits are computed (“Seniors May Benefit From Not Retiring,” View, Oct. 13) to be the most comprehensive and understandable explanation I have ever seen or heard--and that includes visits to three different Social Security offices. Whereas you clarify the figure of 1951 as being an arbitrary number, your explanation of the figure age 62 wasn’t so apparent. Of course, nothing connected with Social Security seems to be rational.--G.D.
And:
Question: Your explanation (same column) was very helpful in trying to understand how benefits from Social Security are figured, but you made no mention of “the Notch”--those born during 1917 to 1928, the most severe being those born 1919 to 1924 (I was born in ‘22). I would appreciate your explanation as to how the benefits were figured in those years and how the benefits were cut.--F.McD.
Answer: Talking about the mysterious ways in which Social Security works is a little bit like eating peanuts, it seems. One answer creates an insatiable hunger for still another question. Why the determination of benefits hangs on the age 62 isn’t quite as arbitrary as the use of 1951.
A flashback here: To determine normal benefits for someone retiring, for instance, this year, you would begin with the year of birth and add 62 to this. In other words, for someone born in 1922, you would arrive at the figure 1984 (1922 plus 62).
From this you subtract 1951 (the arbitrary number) and arrive at the number of years (33) on which Social Security computes your benefits. From these 33 years of credit, Social Security then knocks out the five years of lowest earnings, and your dollar benefits are based on the remaining 28 “best” years--when your earnings were highest and the years when your contributions into Social Security were also at their highest.
But why add 62? Why not 65?
In the beginning, according to Roy Aragon, a public affairs specialist here for Social Security, that was the normal retirement age for women and, since they were assumed to have (probably) a shorter work experience than men--who would be taking normal retirement at 65--it would be more advantageous for retiring women to use 62.
Equitable to Both
When normal retirement for both sexes was changed to 65, however, it was determined to stick with the 62 figure because it would be more equitable to both sexes.
Why advantageous? Because it permits Social Security to factor in the three years from age 62 to 65 which, normally, are the retiree’s best three years in terms of earnings and contributions into the program.
At first blush, admittedly, it seems as if calculating all of this from age 62 is knocking out those critical three years, but actually it has exactly the opposite effect. In 99 out of 100 cases--and in the example cited above--those 28 “best” years will include those last three years of highest earnings and contributions.
If age 65 were used (same example) you would end up with 36 years as your base and, subtracting the five worst years from that would give you 31 “best” years instead of 28, and three of those years would extend back into the 1950s--years of relatively low earnings and contributions--which would drag your overall average down considerably.
Sure, it’s a little convoluted, but using 62 instead of 65 really does work to everyone’s advantage.
Now, then, the “notch.” And the critical years here were 1916 and 1917, not 1917-1928. This came about because in 1971 Congress realized--to its horror--that the computation then being used, which used both the average growth in wages and price increases, was grossly overcompensating retirees for inflation, and the system would have gone broke in fairly fast order.
A new computation--for those born in 1917 or later--was derived, using only the wage figures in calculating benefits. Where Congress blew it, though, was in not phasing in the new formula over several years, but in putting it into effect in one fell swoop.
Benefits Vary
Thus, two workers born only days apart--on Dec. 31, 1916 and Jan. 2, 1917, for example, who held the same jobs and paid the maximum payroll tax into Social Security from its inception in 1937, could get benefits that vary from $1,300 to $2,000 a year.
It was a dumb way to put the change in effect. Spread over five or six years, it would have been relatively painless. Now, however, we seem to be stuck with it, and although there’s legislation proposed almost every year to rectify it, the cost of doing so manages to get the bill killed in committee every time. The last estimate we saw was a price tag of $20 billion and up.
Campbell cannot answer mail personally but will respond in this column to consumer questions of general interest. Write to Consumer VIEWS, You section, The Times, Times Mirror Square, Los Angeles 90053.
