What is the “Notch”?

The term “Notch” refers to the disparity in Social Security benefits paid to people born from 1917 through 1926 and those paid to people born before and after them with similar work and earnings records.  Many of those born during the Notch period feel they have not been treated fairly and are not receiving the benefits that Congress intended.  On the other hand, the Social Security Administration (SSA), some government officials, and AARP (formerly the American Association of Retired Persons) say that those born during the Notch period are treated fairly and are receiving the benefits that Congress intended.  The SSA and AARP say that Social Security does not promise a specific amount of benefits, rather Social Security is designed to replace a certain percentage of pre-retirement earnings.  The following provides background on the issue and lays out the position of TREA Senior Citizens League.

In 1977, Social Security was going bankrupt because of a flawed benefit formula that raised benefits too quickly.  That year Congress passed legislation which changed the way benefits were calculated starting with retirees who were born in 1917 and became eligible for benefits in 1979.  The changes were major and the transition between the old and new method of calculating benefits did not work as anticipated. Changes were very abrupt.

The period covered by the Notch is a major area of dispute.  When benefits are represented on a chart, the disparity forms a deep “V” notch.  Benefits plunged from a peak for retirees born in 1916 and hit the lowest part of the “V” for those who were born in the years 1920-21.  Benefits began to rise for those born in 1922 until they became level with other retirees, starting with those born in 1927.  See illustration below.

Source: Congressional Research Service May 24, 1999

Despite the ten-year trough of charted benefit disparities, the SSA and AARP say that the Notch affects only those born during the five-year period of 1917 through 1921.    Those born during that period were covered by a special transitional benefit formula, the purpose of which was to provide a five-year phase-in for the new benefit formula created by the 1977 law.
 
In making the 1977 changes, Congress, wanting to avoid an abrupt change, allowed persons born from 1917 through 1921 to use a special transitional benefit formula or the new 1977 formula, whichever would yield the higher of the two benefits.  The transition benefit formula never delivered the promised benefit protection, however, because it did not yield a higher benefit amount.  Instead, the new benefit formula most often yielded the higher amount.
 
Thus, the new formula went into effect almost immediately for most people and is one reason why retirees born over the ten-year period of 1917 through 1926 were affected, not just those covered by the five-year transitional formula period.  In addition, the economy did not perform the way Congress and the Social Security Administration assumed it would under the new benefit formula.  Slower than anticipated wage growth and higher than expected price inflation resulted in greater disparities between those born during the Notch period and those born outside of it.  These economic conditions persisted for a decade, thus affecting those born over a ten-year period.
 
According to the Congressional Research Service (CRS), for a retiree age 65 with average wages, a maximum benefit disparity of 10% would have arisen between the highest benefit under the old rules and the lowest benefit under the new rules if the 1977 assumptions had materialized.  Under the economic conditions that actually arose, the disparity was 25% - two and one half times greater than anticipated.
 
Indeed, the Social Security Administration does not "promise" a specific amount of benefits, but neither do they promise to replace a specific percentage of pre-retirement earnings either.  Both benefit amounts and "replacement rates" can change at any time if Congress deems it necessary.  Prior to the 1977 changes, the replacement rate was not a stable percentage. For people who retired under the 1972-73 flawed formula (those born 1913 through 1916), replacement rates grew from 39% to a high of 54%.  The new benefit formula led to a lower, more stable replacement rate of about 43% for those born during the Notch years, as well as lower benefits than they would have received under the old system.
 
For those planning retirement, however, it is the estimated dollar amount in Social Security benefits, not the estimated percentage of income that benefits replace that one uses to determine a retirement budget, or how much more one will need to save for retirement.  One of the most frequent requests for services received by the Social Security Administration is for an estimate of benefits.  While no promises of benefits are made, millions of estimates are made annually.  If the rules are changed abruptly, as they were for those born during the Notch period, this leaves no time to save for the shortfalls in benefits (if they can be foreseen ahead of time).
 
Both the SSA and AARP say that "fixing" the Notch would be a costly mistake that would drain dollars from the Social Security Trust Fund reserve.  In 1992, one popular piece of legislation to provide improved monthly benefits was estimated to cost $300 billion.  To counter these concerns, alternative "capped-cost" legislation has been introduced.  "The Notch Fairness Act" would provide those born from 1917 through 1926 their choice of either improved monthly benefits, or a Lump-Sum of $5,000 payable over a four-year period.  The cost of Lump-Sum legislation is estimated to be $45 billion, or slightly less than $11.25 billion per year over a four-year period.
 
The $45 billion could be financed through cutting wasteful pork barrel spending and reducing fraud and abuse in government programs.  Lawmakers spent $12.1 billion in 1999, $17.7 billion in 2000, and $18.5 billion in fiscal 2001 on hometown pork.  That doesn't include what the government lost to fraud and abuse.  In 1999, improper payments in Medicare and Medicaid, Social Security, and disability programs alone totaled $17.5 billion, and about $15.9 billion in 2000.
 
Those born during the Notch period "saved Social Security" in the 1980s by receiving lower benefits for the rest of their lives.  They are the generation that fought and sacrificed during World War II. Now, although they receive lower benefits, they are among the senior age group hit hardest by escalating health care insurance premiums and prescription drug costs.
 
TREA Senior Citizens League (TSCL) was formed in 1993 to protect "earned" Social Security and Medicare benefits.  Many TSCL members are affected by the Notch, and rank Notch Reform as their top legislative priority.  TSCL is the only national senior citizens action organization to continue lobbying for Notch Reform.  TSCL has over 1 million members and supporters who participate in a number of grassroots lobbying and public education campaigns.
 
Article I of the United States Bill of Rights guarantees citizens the right to petition the government for "redress" of grievances.  Individuals build greater political clout when they join forces with other like-minded activists to press for change.  Time is running out for Notch Babies. TSCL and its members and their families, friends, and supporters will not allow the Notch Issue to quietly die away, but will continue to press for compensating those born during the Notch period.

TREA Senior Citizens League is tax-exempt under section 501(c)(4) of the Internal Revenue Service code. Our mission is to educate and alert senior citizens about their rights and freedoms as U.S. citizens, to assist and to promote the rights of members and supporters, and to work to protect and defend the benefits that senior citizens have earned and paid for. 

No government moneys are accepted or utilized by TSCL.
(Updated May 16, 2002.)

For more information:
TREA Senior Citizens League
909 N. Washington St.
Suite 300
Alexandria, VA 22314
1-800-333-8725
http://www.tscl.org

To view the Addendum, click here: http://www.tscl.org/NewContent/101591.asp.

August 2002

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