WikiLeaks Document Release
http://wikileaks.org/wiki/CRS-RS22678
February 2, 2009
Congressional Research Service
Report RS22678
Social Security: The Notch Issue
Kathleen Romig, Domestic Social Policy Division
Updated June 13, 2007
Abstract. A number of legislative attempts have been made over the years to give notch babies additional bene-
fits, but none have been successful. A congressionally mandated commission studied the issue and concluded in its
1994 report that "benefits paid to those in the Notch' years are equitable, and no remedial legislation is in order."
Order Code RS22678
June 13, 2007
Social Security: The Notch Issue
Kathleen Romig
Analyst in Social Security
Domestic Social Policy Division
Summary
Some Social Security beneficiaries who were born from 1917 to 1921 -- the so-
called notch babies -- believe they are not receiving fair Social Security benefits.1 The
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notch issue resulted from legislative changes to Social Security during the 1970s. The
1972 Amendments to the Social Security Act first established cost-of-living adjustments
(COLAs) for Social Security benefits. This change was intended to adjust benefits for
inflation automatically, but an error in the formula caused benefits to rise substantially
faster than inflation. Congress corrected the error in the 1977 Amendments. However,
benefits for beneficiaries born from 1910 to 1916 were calculated using the flawed
formula, giving them unintended windfall benefits. The notch babies, born from 1917
to 1921, became eligible for benefits during the period in which the corrected formula
was phased in. Some feel it is unfair that their benefits are lower than those who
received the windfall benefits. The term "notch" comes from graphs of benefit levels
over time; there is a v-shaped dip for those born from 1917 to 1921, during the transition
to the corrected formula.
A number of legislative attempts have been made over the years to give notch
babies additional benefits, but none have been successful. A congressionally mandated
commission studied the issue and concluded in its 1994 report that "benefits paid to
those in the `Notch' years are equitable, and no remedial legislation is in order." This
CRS report will be updated as events warrant.
Origins of the Notch
The 1972 Amendments. Congress approved legislation in 1972 to adjust Social
Security benefits for inflation automatically (P.L. 92-336). However, the formula for
calculating the new cost-of-living adjustment (COLA) was flawed. Although intended
to provide inflation adjustments only to people already receiving benefits, each increase
for current beneficiaries also raised the initial benefits of future beneficiaries. The
1
The Social Security Administration (SSA) and a 1994 commission on the notch issue define the
notch period as 1917 to 1921, though some advocates define the period as 1917 to 1926.
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formula assumed that wages would continue to rise faster than prices, as they had in the
past. However, the high inflation and unemployment in the 1970s resulted in higher-than-
intended increases for beneficiaries affected by the new formula, and lower-than-expected
revenues for Social Security.2 If the erroneous formula had not been changed, future
beneficiaries could have received initial benefits that exceeded their pre-retirement
earnings -- higher than Congress intended and higher than payroll taxes could finance.3
The 1977 Amendments. As part of the 1977 Amendments (P.L. 95-216),
Congress corrected the error in the COLA formula in the 1972 Amendments by creating
a new formula in which initial benefit levels are indexed to wages, then increased by
inflation after the initial year. Without the 1977 Amendments, the system would have
become insolvent within five years.4 The correction to the COLA formula resulted in
different treatment for all Social Security beneficiaries depending on year of birth, as
described in the following section.5
Benefit Levels Before, During, and After the Notch
Beneficiaries Born from 1910 to 1916. The erroneous COLA formula created
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by the 1972 Amendments affected people who turned 62 in 1972 or later -- that is,
individuals born in 1910 and later. This is because the formula used to calculate Social
Security retirement benefits is based on the year an individual reaches the earliest age of
eligibility, which is age 62. When the error in the benefit formula was corrected in the
1977 Amendments, benefits for people who were already eligible for retirement benefits
were left unchanged. As a result, beneficiaries born between 1910 and 1916 -- the seven
years prior to the notch -- were allowed to receive unintentional windfall benefits for the
rest of their lives.
Beneficiaries Born from 1917 to 1921. The 1977 Amendments corrected the
error in the Social Security benefit formula, starting with individuals born in 1917. As
a result, the benefits of people who were born during the notch years are lower than those
of the beneficiaries who came just before them. To ease the transition to the new,
corrected formula, Congress phased in the change for people born from 1917 through
1921 -- the notch babies.6 Figure 1 shows inflation-adjusted initial monthly benefit
amounts for individuals born from 1900 to 1965. The notch babies' birth years are shown
2
For example, annual inflation averaged over 7% during the 1972-1977 period, compared to less
than 3% from 2002-2007. (U.S. Department of Labor, Bureau of Labor Statistics, Consumer Price
Index-All Urban Consumers (CPI-U) 1913 to present, at [ftp://ftp.bls.gov/pub/special.requests/
cpi/cpiai.txt].)
3
1977Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance
and Disability Insurance Trust Funds, May 10, 1977. (1977 Trustees Report.)
4
1977 Trustees Report.
5
See also Social Security Administration, The "Notch" Provision, SSA Publication No.
05-10042, January 2004, at [http://www.ssa.gov/pubs/10042.pdf].
6
As of December 2005, about 2.6 million -- less than 9% -- of Social Security retired worker
beneficiaries were born between 1917 and 1921, and thus are considered notch babies. (SSA,
Annual Statistical Supplement 2006, Table 5A, May 2007, at [http://www.ssa.gov/policy/docs/
statcomps/supplement/2006/5a.pdf].)
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in yellow. The term "notch" originated from graphs such as this one, where the lines
representing the benefit levels of notch babies dip below the lines representing the benefit
levels of individuals born immediately before and soon after.
Many notch babies actually receive higher real benefits than people who were born
after they were, all else equal. For example, people born in 1917 receive significantly
higher average monthly benefits than people born in 1922 (the first year the correct
formula was fully phased in). As shown in Figure 1, an average wage earner born in 1917
would receive a monthly benefit of $1,166 (in 2007 dollars), while an average wage
earner born in 1922 would receive a monthly benefit of $1,080.
Figure 1. Initial Benefit Amounts for Average Wage
Earners Retiring at Age 65 in 2007 Dollars
$1,800
$1,600
$1,400
Monthly Benefit (2007$)
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$1,200
$1,000
$800
$600
$400
$200
$0
1900
1904
1908
1912
1916
1920
1924
1928
1932
1936
1940
1944
1948
1952
1956
1960
1964
Year of Birth
Source: 2007 Social Security Trustees Report, Table VI.F10.
Note: The lines representing the notch period (1917-1921) are yellow. Average wage earners are assumed
to have earnings equal to SSA's Average Wage Index (AWI) each year (about $40,000 in 2007).
In addition, most notch babies have significantly higher replacement rates than
people born after they were, all else equal. A replacement rate is one way of measuring
the adequacy of a person's post-retirement income; it is a comparison between a person's
income before and after retirement. This report calculates replacement rates in the same
way as the Social Security Administration (SSA) actuaries, which is to show the
proportion of beneficiaries' average indexed earnings replaced by their initial Social
Security benefits. In 2007, the estimated replacement rate for an average wage earner
retiring at age 65 is 40%.
In drafting the 1972 Amendments, Congress intended to maintain replacement rates
at roughly 40%, but the double-indexing error caused replacement rates to rise above 50%
before the error was fixed, as shown in Figure 2 below. The notch babies' replacement
rates are higher than most beneficiaries born after they were -- particularly in comparison
to current and future beneficiaries, whose replacement rates are declining as the full
retirement age increases.
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Beneficiaries Born after 1921. Benefits for people born in 1922 and later are
calculated using the new, corrected formula established by the 1977 Amendments. This
formula is currently being used to calculate the annual COLA.
Figure 2. Replacement Rates for Average Wage
Earners Retiring at Age 65
60%
50%
Replacement Rate
40%
30%
20%
10%
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0%
1900
1903
1906
1909
1912
1915
1918
1921
1924
1927
1930
1933
1936
1939
1942
1945
1948
1951
1954
1957
1960
1963
Year of Birth
Source: 2007 Social Security Trustees Report, Table VI.F10.
Note: The lines representing the notch period (1917-1921) are yellow. Average wage earners are assumed
to have earnings equal to SSA's Average Wage Index (AWI) each year (about $40,000 in 2007).
Commission on the Social Security Notch Issue
In 1992, Congress voted to establish a 12-member commission to study the notch
issue. The Commission on the Social Security "Notch" Issue released its report on
December 29, 1994.7 Its principal conclusion was that the "benefits paid to those in the
`Notch' years are equitable, and no remedial legislation is in order." Its report states that
"the uneven treatment between those in the `Notch' years and those just before them was
magnified by the decision of Congress to fully grandfather" people born before 1917
under the old law. It further states that "in retrospect" Congress "probably should have"
limited the benefits of those whose benefits were calculated using the erroneous formula
in the 1972 Amendments, but that it was too late to do so given their advanced age.
Advocacy Group Activity
Among advocacy groups, support for legislation to increase benefits for notch babies
has been limited. The lead proponent of such legislation is the TREA Senior Citizens
League (TSCL). TSCL argues that the transitional benefit formula affecting notch babies
was flawed. Some Members have complained that TSCL has misled seniors about the
7
The Commission on the Social Security "Notch" Issue, Final Report on the Social Security
"Notch" Issue, December 31, 1994, at [http://www.ssa.gov/history/notchbase.html].
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issue in mailings that solicit money.8 A few veterans' groups and grassroots notch groups
also have supported notch legislation.
Most other organizations representing older Americans, led by AARP, have opposed
notch legislation. The AFL-CIO, the National Association of Manufacturers, and the
National Taxpayers Union also have come out in opposition, as did the Carter, Reagan,
and George H. W. Bush Administrations. The Clinton Administration took no position,
and the George W. Bush Administration has also taken no position.
Legislative Activity
Many bills to increase benefits for notch babies have been introduced in Congress,
but there has been little legislative action on them. Various attempts were made in past
Congresses to gain support for discharge petitions to force the House Ways and Means
Committee to report out a bill, but the sponsors were unable to get enough signatures.
However, notch legislation did reach the Senate floor a number of times.
Bills Introduced in 110th Congress. Three bills have been introduced in the
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110th Congress that would affect notch babies. No official cost estimates for these bills
are available.
! H.R. 368, introduced by Representative Ralph M. Hall, would provide
additional benefit increases to retired workers born from 1917 to 1926,
which would also increase benefits for their dependents and survivors.
The amount of the increase would range from 5% to 55%, depending on
birth year. Eligible beneficiaries could also elect to receive lump sum
payments totaling $5,000.
! H.R. 288, introduced by Representative Jo Ann Emerson, would provide
additional benefit increases to retired workers born from 1917 to 1926,
which would also increase benefits for their dependents and survivors.
The increase would range from 10% to 60%, depending on birth year.
! H.R. 287, also introduced by Representative Emerson, would allow an
income tax credit equal to Medicare Part B premiums paid by retired
workers born from 1917 to1926 (or their surviving spouses).
8
See transcript of hearing, "Misleading Mailings Targeted to Seniors" before the Subcommittee
on Social Security of the Committee on Ways and Means, Serial 107-44, July 26, 2001, at
[http://waysandmeans.house.gov/legacy/socsec/107cong/7-26-01/107-44final.htm].