Social Security Notch Issue: A Summary

Social Security Notch Issue: A Summary

Order Code 95-188 EPW
Updated August 5, 2003
CRS Report for Congress
Received through the CRS Web
Social Security Notch Issue: A Summary
Geoffrey Kollmann
Domestic Social Policy Division
Summary
The Social Security Amendments of 1977 (P.L. 95-216) substantially altered the
way Social Security benefits are computed. The changes were effective beginning with
people who became eligible in 1979. For retirees, this meant people born after 1916.
Many of those born in the 5- to 15-year period after 1916 – so-called “notch babies” –
have complained that the changes in the rules caused their benefits to be lower than
those of retirees who were born before and after them. A number of legislative attempts
have been made over the years to modify the rules, but none have been successful. A
congressionally mandated commission recently studied the issue and concluded in its
report, released December 29, 1994, that “benefits paid to those in the ‘Notch’ years are
equitable, and no remedial legislation is in order.” This report will be updated
periodically.
Background
The benefit-computation changes enacted in 1977 were designed to shore up the
Social Security system’s financial condition. Without them, the system would have
become insolvent within 3 or 4 years. Legislation enacted in the 1972-1973 period,
automatically tying Social Security benefits to inflation, was the cause. Although
intended to provide regular inflation adjustments to people already receiving benefits,
each automatic increase to current recipients also raised the eventual benefits of future
retirees. These future retirees, however, would have earned higher benefits in any event
because their wage histories would have been higher (since Social Security benefits are
based on a person’s wages). Under the assumptions made in the early 1970s with regard
to future wage growth and inflation, this dual indexing would not have caused problems,
but those assumptions proved wrong, and without the changes enacted in 1977, many
future retirees would have come into the system with benefits that exceeded the earnings
they had in their last year of work. The 1977 changes that Congress enacted were
designed to keep this from happening and improve the system’s financial condition.
These changes, however, caused immediate notable benefit disparities between the people
first affected by them — those born after 1916 — and the last few groups of retirees
grandfathered under the old rules.
Congressional Research Service ˜ The Library of Congress

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Arguments for Notch Legislation
Proponents of legislation to
eliminate the benefit disparities argue that
Monthly Benefits for Workers With Average
Wages Retiring at Age 65 (in 2002 dollars)
the 1977 rules changes were harmful to $1,600
millions of people born after 1916 $1,400
Notch
because their benefits are lower than those $1,200
of retirees who came before and after
$1,000
them (see chart to the right). They
$800
contend that the differences in benefits
$600
between the notch babies and those who
$400
were born before them are often very
$200
large, in some instances exceeding $200 a
$0
month. They argue that the disparities
1895
1906
1917
1928
1939
1950
1961
were not intended when the rules were
Ye ar of Birth
changed in 1977, and that the “transition
rules” intended to smooth the shift to the new method of computing benefits were faulty.
They maintain that these significant benefit disparities among such a large group of
people raise doubts about the fairness of the Social Security system and Congress’ ability
to oversee it. They argue that the proposed notch remedies would result in a smoother
shift to the new rules and that the Social Security system has a large enough trust fund to
remedy the problem. They believe that the legislation merits a straight up or down floor
vote.
Arguments Against Notch Legislation
Critics of the legislation argue that
Benefits as % of Earnings
there is no injustice — that the “notch
for Age 65 Retirees
babies” are comparing themselves to
60%
people born before them in the 1911 to
Notch Babies
Baby Boomers
1916 period who got more than intended. 50%
They contend that when the notch babies’ 40%
benefits are measured against their
earnings before retirement, they are getting 30%
what Congress intended and a higher 20%
percentage than future generations will get
10%
(see chart to the right). They argue that the
notch babies on average will get back
0%
considerably more than they paid into
1895
1906
1917
1928
1939
1950
1961
Year of Birth
Social Security, and a much better “deal”
than the baby boomers will get. They point
out that the current surplus in the trust funds is already spoken for, as the Social Security
system is facing a large deficit in the next century, and that the notch proposals would
make this worse, as well as adding to the federal debt being passed on to future
generations (the Social Security actuaries have estimated that proposed remedies would
cumulatively cost up to $300 billion by 2020). They contend that though many Members
cosponsored notch bills in past Congresses, far fewer were willing to sign petitions to
force a House vote on the issue. Some Members have complained that the National
Committee to Preserve Social Security and Medicare — the lead proponent of the

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legislation among the interest groups — has misled many seniors about the issue in
mailings that solicit money.
Legislative Action
Many notch bills have been introduced in Congress since 1981, but there has been
little legislative action on them. Support from outside interest groups has been limited.
The National Committee to Preserve Social Security and Medicare took up the issue in
1986 and has periodically sent out mass mailings seeking support from seniors born in the
12-year period after 1916. A few veterans’ groups and grass roots notch groups also have
supported notch legislation. Most other organizations representing the elderly, led by the
American Association of Retired Persons, have opposed such legislation. The AFL-CIO,
National Association of Manufacturers, and National Taxpayers Union also have come
out in opposition, as did the Carter, Reagan, and Bush Administrations. The Clinton
Administration took, and the George W. Bush Administration has taken, no position.
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 measures did reach the
Senate floor a number of times. The most recent was on September 10, 1992, when
former Senator Terry Sanford sought to attach his notch bill (S. 567) to an appropriations
bill. It would have liberalized benefits for some people born in 1917 through 1926. The
attempt failed when the Senate, on a 49 to 49 vote, refused to set aside an objection raised
by Senator Bentsen that the bill violated the Social Security “firewall” rules — by
proposing to increase Social Security spending without offsetting reductions or tax
increases. Later in the debate, the Senate adopted and the House agreed to a measure
establishing a 12-member commission to study the issue.
The Commission on the Social Security “Notch” Issue released its report on
December 29, 1994. 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 who were grandfathered, but that it is too late now to do so
given their advanced age (i.e., those grandfathered under the old law were a minimum of
78 years old in 1994).
Bills Introduced in 107th Congress. Six bills were introduced in the 107th
Congress that would have provided additional cash benefits to workers (and thus to their
dependents and survivors) born in the notch years. H.R. 80, introduced by Representative
Emerson, would have provided additional benefits prospectively to many retired workers
born in the years 1917 through 1926. H.R. 870, by Representative Clement, would have
provided additional benefits prospectively to many retired workers born in the years 1917
through 1921. In these bills, the method of determining whether additional benefits are
payable were the same, although somewhat complex. The basic idea is to smooth out
benefits over the transition period by creating a new way of computing benefits for
affected recipients that in many instances would lead to higher benefits than those they
currently receive (a more technical description is available in the appendix). The bills
differed, however, in the amounts they would add to current benefits for affected

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recipients. Also, H.R. 80 would have been effective only for benefits payable after 1999,
H.R. 870 would have been effective only for benefits payable after enactment.
The Retired Enlistees Association (TREA) has proposed that every worker born
between 1916 and 1927 be paid a lump-sum of $5,000, and every surviving spouse of
such a worker be paid $4,000. The proposal does not differentiate between those who
actually were adversely affected by the 1977 change and those who were not (many
individuals born in the above-referenced years were not adversely affected — in fact a
significant but undetermined number of them received a higher benefit than they would
have under the old rules).
A combination of the approaches of TREA and H.R. 80/H.R. 870 was incorporated
in H.R. 97, introduced by Representative Hall, H.R. 853, introduced by Representative
Wexler, and S. 825, by Senator Reid. They would have allowed workers born between
1916 and 1927 to choose either a lump-sum of $5,000 spread over 4 years or a higher
monthly payment recomputed under rules similar to those in H.R. 80.
An additional bill, H.R. 82, also introduced by representative Emerson, would not
have provided additional cash benefits to workers born in 1917 — 1926, but would have
given them or their surviving spouses an income tax credit equal to their Medicare Part
B premium.
Bills Introduced in the 108th Congress. Three bills have been introduced so
far in the 108th Congress. H.R. 63, introduced by Representative Emerson, is the same
as her bill, H.R. 80, in the 107th Congress. H.R. 97, introduced by Representative Hall,
is the same as his bill, also H.R. 97, in the 107th Congress. S. 1418, introduced by Senator
Reid, is the same as his bill, S 825, in the 107th Congress.
Estimates of the costs of these bills currently are not available. The costs of H.R. 63
would be ongoing, and would end when the last of the affected Social Security recipients
leaves the rolls. The cost of the TREA proposal would be concentrated; all of it could
fall within one fiscal year. The exact cost is unknown, but it is likely to be high.
According to data from the Social Security Administration, as of December 2001, there
were 9,223,690 recipients born between 1916 and 1927 who were receiving Social
Security retirement benefits. If all these recipients received a lump-sum of $5,000, the
cost would be about $46 billion, not including the additional cost of providing lump-sums
to survivors of workers born in those years.
For additional information, see CRS Info Pack IP266S. The Social Security “Notch.”

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APPENDIX
Under H.R. 80, H.R. 97, H.R. 853, H.R. 870, and S. 825 in the 107th Congress, and
H.R. 63, H.R. 97, and S. 1418 in the 108th Congress, the method of determining whether
additional monthly benefits are payable is the following multi-step process:
(1) The benefit would be computed as under new law (i.e., the wage-indexed
benefit enacted by the 1977 Amendments that applies to all workers who
become eligible for benefits after 1983).
(2) The benefit would be computed as under old (pre-1977) law (but with a
limit of 3 years of earnings counted after age 61).
(3) If the modified old-law benefit exceeds the new law wage-indexed benefit,
a percentage, the amount of which depends on the worker’s year of birth,
of the difference would be added to the benefit computed under step (1).
(4) The resulting benefit total computed under step (3) would be paid to the
affected recipients if it exceeds the benefit they currently receive.
The bills differ, however, in the age cohorts affected and in the percentages of the
difference between the new and modified old law benefit that they would provide. The
percentages that would apply to the designated years of birth under each bill are reflected
in Table 1. Note that the percentages in the table do not reflect the amount by which the
individual’s benefit would be increased; rather, they refer only to the proportion of the
difference between the modified old benefit and the new law wage-indexed benefit that
may be added to the wage-indexed benefit to determine if additional benefits are payable.

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Table 1. Percent of Difference Between New and Modified
Old Law That Could be Added to Benefits
H.R. 97,
H.R. 853,
H.R. 63,
S. 825 &
Birth year
H.R. 80
S.1418
H.R. 870
1917
60%
55%
70%
1918
60%
45%
50%
1919
35%
35%
40%
1920
35%
32%
35%
1921
30%
25%
35%
1922
30%
20%
–
1923
25%
16%
–
1924
25%
10%
–
1925
10%
3%
–
1926
10%
5%
–