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Do Notch Babies Receive the Benefits Congress Intended? By Michael Zabko, Executive Director TREA Senior Citizens League When asked about the Notch, the Social Security Administration says that "although some people sincerely believe an injustice has been done, the truth is that they are being treated fairly and are getting the benefits that Congress intended." They say that, "while most people think of Social Security benefits in terms of specific dollar amounts, comparing dollar benefits among different beneficiaries is misleading. Social Security does not promise to pay a specific dollar amount," they say. "Instead, it is designed to replace a portion or percentage, of a worker's pre-retirement earnings. This percentage is called a 'replacement rate'." The replacement rate for those born from 1917 through 1926, the Notch Babies, was about 43%. A monthly benefit of $430, for example, replaces about 43% of $1,000 in monthly pre-retirement earnings. But the replacement rate was not always 43%. For people who were born in 1916, for example, replacement rates were as high as 54%. In 1977 changes were necessary to "save Social Security" which would have run out of money within 3 or 4 years. The changes cut replacement rates and stabilized them at 43% affecting retirees who were born in 1917 and thereafter. Although the group born from 1917 through 1926 received the replacement rate Congress intended, it cannot be said that Congress intended for the substantial benefit disparities that also occurred from the changes. These were caused by economic conditions that followed the 1977 changes, something Congress could not foresee and therefore could not have intended. The 1977 law changes created a new benefit formula that used "wage indexing" to determine average monthly earnings. Wage indexing adjusts earnings to reflect the growth in wages over a period in time. But Congress and the Social Security Administration assumed that wages would grow more quickly than they actually did in the period that immediately followed the 1977 changes. Because wages were lower than expected, that meant lower pre-retirement earnings against which to compare initial benefits under the new, lower replacement rate target of 43%. If, for example, monthly wages were only $900 instead of $1000 as assumed, then $387 would replace 43% of earnings rather than the expected $430. Thus, although lower benefits were anticipated by Congress in stabilizing the replacement rates from a high of 54% to 43%, under actual economic conditions they were even lower than expected, and that continued for the next decade. Today, at ages 74 through 83, the group that paid the price for "saving Social Security" are the seniors hit hardest by rising healthcare costs, yet our government has never been in a stronger financial position to compensate them for their sacrifice. The non-Social Security portion of the budget surplus is $87 billion for fiscal year 2000 and is projected to reach more than $2 trillion over the next 10 years. We urge you to contact your Members of Congress and ask them to make 2001 the year in which Notch Babies are compensated for Saving Social Security for the rest of us. This article first appeared in Volume 6, Issue 2 of "The Social Security and Medicare Advisor" newsletter (December/January/2001). To receive future editions of "The Advisor" in its special, free e-mail version, please click here. | ||||||||
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