The 1977 reform of Social Security “loaded (the) dice against seniors, who became eligible to retire just two years later,” says a new breakthrough study on the Notch. Changes made to Social Security in 1977 resulted in a precipitous and unprecedented drop in benefits paid to people born in 1917 and the years immediately following. “The 1977 amendments appear to have been unduly harsh on those who retired within a few years after 1977; i.e., the Notch Babies who were born in 1917 and the immediate succeeding years. The 1977 law did not result in the level of fairness that should have been anticipated. The Notch needs to be reviewed again,” concludes noted economist Dr. John Haldi.
The new study is significant because it refutes the Social Security Administration’s long-held view that “Notch Babies” are treated fairly. It also disproves statements from some Congressional opponents of Notch Reform who have claimed the Notch does not exist. Most importantly it also refutes the findings of the 1994 Commission on the Social Security Notch which concluded that “benefits paid to those in the Notch years are equitable, and no remedial legislation is in order.”
Dr. Haldi’s report says that the 1977-benefit formula change “should have been re-examined years ago to see if it achieved a basic level of fairness. All prior reviews seem to have been designed to minimize and dismiss the problem, rather than recognize and remedy it.”
The Notch occurred when Congress enacted changes to the Social Security benefit formula in an effort to prevent the system from going bankrupt by 1981. In order to protect persons about to retire, the government provided a transitional benefit formula. According to the Social Security Administration, this was to phase-in the change. Persons who were born from 1917 through 1921 had their benefits calculated either under the transitional formula or the new benefit formula; whichever would yield the higher benefit.
The drop in benefits resulting from the 1977 law changes was especially steep, Dr. Haldi states, because the five-year transitional formula offered “virtually no protection.” “The meager help it did provide,” says the report, “ was extended to relatively few retirees.”
The Haldi report found the problems with the 1977 law changes were not limited to the transitional formula. The Notch disparity was larger for persons who retired at age 65 and thereafter, than for those retiring at age 62. The 1977 law contains “an array of features that acted to bring about the declining pattern of benefits.”
In addition, the 1977 basic benefit formula involved a number of calculations that make retirees’ benefits vulnerable to economic fluctuations. “When inflation increases rapidly and average earnings fail to keep up, features in the 1977 law can result in benefit awards that appear arbitrary and smack of unfairness,” says the report. “The question raised is whether it was fair for Congress to establish a structure of formulas and procedures that made retirees vulnerable to fluctuations in the economy in such a way that benefits appeared to be determined irrationally.” The report further warns that should economic conditions like those of 1978–1982 recur, “disparities in Social Security benefits similar to those that affected the Notch babies also could recur.”
Sources: The Social Security Notch: An Economic Analysis by John Haldi, October 2002. “The Notch What it Is … and What It Isn’t,” Social Security Administration, May 1993. “Final Report on the Social Security ‘Notch’ Issue,” The Commission on the Social Security ‘Notch’ Issue, December 31, 1994.