Topic:
ELDERLY; SOCIAL SECURITY;
Location:
SOCIAL SECURITY;
Scope:
Federal laws/regulations;

OLR Research Report


February 11, 2002

 

2002-R-0149

SOCIAL SECURITY NOTCH

 

By: Sandra Norman-Eady, Chief Attorney

You asked for information on Social Security Notch, including efforts to obtain a $5,000 settlement for each person born during the “Notch years.”

SUMMARY

Congress passed legislation in the 1970's that cause people born between 1917 and 1921 to have their Social Security benefits calculated based on a different formula than other beneficiaries. As a result, some believe that workers born between 1917 and 1921 receive fewer benefits than they should. (Because of the gradual implementation of the 1970 legislation, some argue that those negatively affected by it also include workers born from 1921 to 1926).

Recently proposed federal legislation would offer workers from this group a lump sum payment of $5,000 in order to make up for the perceived unfairness in the way their Social Security benefits are calculated. However, a commission established by Congress to study this issue found that benefits paid to workers born between 1917 and 1921 are equitable and no remedial legislation is needed.

SOCIAL SECURITY NOTCH

In a line graph showing social security benefit levels, a v-shaped dip represents the benefits received by people born from 1917 through 1921. Most people refer to this dip as a “notch” and to the people born during this period as “notch babies.”

The notch issue arose when Congress corrected a flaw in the Social Security benefit computation rules it enacted in 1972. The formula Congress used in that year to compute the cost of living increase caused Social Security beneficiaries to receive more than they should and would have bankrupted the system. Congress fixed the formula in 1977. But by that time, some people born before 1917 had already retired and had their benefits calculated using the incorrect formula. Congress opted not to take anything from these retirees or others born during the same period. Because Congress was also concerned about the impact of this change on people about to retire, it created a special transition formula for people who were within five years of retirement age when the law was changed.

This means we now have three classes of Social Security beneficiaries: (1) people born before 1917 who receive benefits calculated under the 1972 formula; (2) people born between 1917 and 1921 who receive benefits calculated using either the 1977 formula or the transition formula, whichever is higher; and (3) people born after 1921 who receive benefits calculated using the 1977 formula.

In 1992, Congress established the Commission on the Social Security “Notch” Issue, charging its bipartisan members with examining whether those people born during the notch years were treated unfairly and recommending, if necessary, remedial legislation and the means to pay for it. The commission, which completed its work in 1994, concluded that benefits paid to the notch babies are equitable and no remedial legislation is needed. We have attached a copy of the commission's report for your information.

Despite this conclusion, legislation is often introduced in both houses of Congress to give the notch babies benefits comparable to people born earlier. A recent proposal by the Retired Enlistees Association would provide every worker born between 1916 and 1927 with a lump-sum payment of $5,000 and every surviving spouse of such a worker with a lump-sum payment of $4,000.

H.R. 97, introduced in 2001 by Representative Ralph Hall of Texas, would have remedied the notch “problem” by allowing retirees born between 1917 and 1926 to choose between a $5,000 lump sum payment over four years or an improved benefit computation formula under a new 10-year rule. Representative Robert Drexler of Florida introduced a similar bill, H.R. 853. Hall's bill would finance Notch reform through non-defense discretionary spending. Drexler's bill would fund it through the surplus. Both of these bills were referred to the Ways and Means Committee. For more information on these and other related bills introduced last year, go to Thomas.loc.gov and search for “Notch.”

ARGUMENTS FOR NOTCH LEGISLATION

Proponents of notch legislation argue that approximately nine million notch babies receive Social Security benefits that are lower than retirees who were born before and after them. They contend that the disparities between the notch babies and people born before them are often very large, resulting in benefit shortfalls of almost 25% in some instances. They suggest that Congress did not intend to create the benefit disparities when it changed the rules in 1977, but that they were caused by a faulty transition to the new rules.

Finally, they argue that the notch babies deserve compensation for the sacrifices they made to help save Social Security when it almost collapsed in the late 1970s.

ARGUMENTS AGAINST NOTCH LEGISLATION

Critics of the legislation argue that there is no injustice—that the notch babies are comparing themselves to people born from 1911 through 1916 who got more than Congress intended. They contend that when the notch babies' benefits are measured against their earnings before retirement, they are getting what Congress intended and a higher percentage than future generations (e.g., baby boomers) will get. They also argue that the proposed remedies would cost hundreds of billions of dollars, weakening Social Security's financial condition.

SN-E:ro