What Caused The Social Security Notch?
The Social Security Notch is the unexpectedly steep drop in benefits that affects people born from 1917 through 1926. This generation of seniors receives lower benefits than other seniors who had nearly identical work and earnings histories.
The sharp plunge was the result of changes that Congress made in 1977 to a Social Security benefit formula glitch that over-adjusted for inflation. At the time, Social Security actuaries forecast that if left unchanged, some groups of future retirees would receive benefits that would be even higher than their average earnings during their working years. Social Security was almost insolvent.
The 1977 benefit formula changes affected workers who turned 62 and became eligible for benefits just two years later, in 1979 and thereafter. To protect people close to retirement from abrupt benefit cuts, and to phase in the benefit reductions, a 5-year transitional formula was provided affecting people born from 1917 through 1921. That group had their benefits figured two different ways – using both the transitional benefit formula, and the new benefit formula. People received the higher of the two benefits.
But the transitional formula failed, and in most cases, the new benefit formula abruptly kicked in. Extreme inflation that climbed to 14.3% in 1980 magnified the disparities. When the benefits are illustrated on a bar graph, they show a deep "V" Notch.
According to economist John Haldi, Ph.D., who performed a comprehensive analysis of the Notch in 2003, "The result of their (transitional benefit) formula should have been re-examined years ago to see if it achieved a basic level of fairness, 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."
TSCL continues working for enactment of The Notch Fairness Act, which has recently been reintroduced in both the House (H.R.155) and Senate (S.90). Like an "old age boost" the legislation would provide Notch Babies born from 1917 through 1926 with a choice of $5,000 payable in four annual installments of $1,250 or an improved monthly benefit. To learn more about The Notch Fairness Act, click here.
Source: "The Social Security Notch: An Economic Analysis," John Haldi, The Senior Citizens League, October 2002.
