Notch Reform Bulletin: Deck Stacked Against Notch Babies Who Delayed Retirement

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Notch Reform Bulletin: Deck Stacked Against Notch Babies Who Delayed Retirement

“Abrupt and painful adjustments.” According to Federal Reserve Chairman Alan Greenspan, that’s what Baby Boomers face if Congress delays making necessary changes to Social Security. Mr. Greenspan must have been thinking of the Notch Babies when he made that statement. “Abrupt and painful adjustments” are precisely what persons who were born from 1917 through 1926 had to make when they retired and learned their benefit would be lower than expected.

Mr. Greenspan said that policy-makers have a range of options for fixing Social Security, one being “for a more fit elderly population to increase their participation in the work force,” in other words, to delay retirement. Such a change, however, may require a re-design of the current benefit formula, because features of the formula “stack the deck against extra work.”

This was one of the findings of noted economist Dr. John Haldi in his recent landmark study on the Notch. “This feature of the benefit formula is one reason why the Notch is larger for persons who retired at age 65 than for persons who retired at age 62,” Haldi says. “Were it not for this effect,” he notes, “the benefit reduction associated with the change to the 1977 law would be smaller for many retirees.”

Dr. Haldi found a number of gaps in the post-1977 benefit formula that was ultimately the formula used to calculate benefits for most Notch babies. One of Haldi’s central findings was that, depending on the year and economic factors, a retiree’s initial benefit may not reflect the level of price or wage inflation if wages are lagging behind price inflation as they did during the period when Notch babies were retiring. Wages normally tend to increase faster than price inflation.

“These ‘failures-to-reflect’,” says Haldi “can result in a benefit level that is lower than it would otherwise be.” He continues, “the question raised is whether it was fair for Congress to establish a structure of formulas and procedures that made retirees vulnerable to fluctuation in the economy in such a way that benefits appeared to be determined irrationally.” Dr. Haldi’s study concludes “those procedures have generated an instability and benefit comparisons that hardly can be considered fair. The factors that led to the Notch need to be reviewed again.”

TSCL agrees, and has been working hard to make sure that every Member of Congress learns about these important new findings. With economic fluctuations once again becoming a policy focus, we urge you to contact your Members of Congress. Ask them to co-sponsor “The Notch Fairness Act.”

For a related story see, “Notch Reform Bulletin: Why Congress Should Reconsider Notch Reform” at http://www.tscl.org/NewContent/101809.asp.

June 2003