Notch Reform Bulletin: Government Economic Assumptions Deviated From Reality

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Notch Reform Bulletin: Government Economic Assumptions Deviated From Reality

Government economists have a notoriously bad reputation for getting it wrong. One of the chief problems lies in the assumptions they use for everything from predicting budgets to designing the Social Security benefit formula. For seniors born from 1917 through 1926, government assumptions used in calculating their benefits were more like “wishful thinking,” says noted economist Dr. John Haldi in a landmark study. Known as “Notch Babies,” these seniors receive substantially lower Social Security benefits than other retirees with similar work records.

Haldi says the economic assumptions the government used in developing a transitional benefit formula, and the new post-1977 benefit formula, were a major cause in the steep drop in benefits. A 1988 report on the Notch by the General Accounting Office said it was generally anticipated that a phase-in would prevent a significant drop in the benefit levels of retirees in the period covered by the transitional formula. Instead, benefits plummeted immediately. Says Haldi, “the transition formula was predicated on assumptions that clearly deviated substantially from the subsequent reality.” Not only was the transition formula ill-suited to deal with the inflation that occurred, the new post-1977 benefit formula was as well.

A study by the Office of the Actuary of the Social Security Administration analyzed how the Notch would have looked if the “economic assumptions that Congress used in crafting the 1977 amendments” had turned out to be correct. Under 1977 projections, a person who was born in 1919 and retired with average earnings at age 65 for example, should have had a benefit cut of 14%. Instead, under actual conditions, that worker had a benefit cut of 26%.

Haldi concludes that “the result of their formula should have been re-examined years ago, but all prior reviews seem to have been designed to minimize and dismiss the problem rather than recognize and remedy it. The factors that led to the Notch need to be reviewed again.”

Congress should reconsider the Notch. The 1977 benefit formula changes were in response to an earlier 1973 change that increased benefits too rapidly. Just as Congress acted then to protect the solvency of the Social Security program, Congress must follow up to ensure that those changes worked as fairly as originally anticipated. Please contact your Members of Congress and ask them to co-sponsor “The Notch Fairness Act.”

Source: “The Social Security Notch: An Economic Analysis,” Dr. John Haldi, October 2002.

July 2003