Understanding the Social Security Notch
The "notch" is a term used by some people to describe Social Security benefits received by those born from 1917 through 1921. Some people in this group believe that they are not getting fair Social Security benefits when compared with those born before or after them.
The History Behind the "Notch"
In 1972, Congress increased Social Security benefits and provided an annual Cost of Living Adjustment (COLA). As a result, those born from 1912 through 1916 received extra benefits.
Congress corrected this error five years later, by gradually adjusting benefit levels (replacement rates) for those born after 1916. If no correction had been made, the system would have gone bankrupt and been unable to pay any benefits.
In order to avoid an abrupt change for those about to retire, Congress phased-in a new benefit formula for those born from 1917 through 1921. This phase-in formula only applies to the 1917-1921 group. Everyone born after 1921 has their benefits calculated in the same way. Unfortunately, some of those in the 1917-1921 group have been led to believe that they are being cheated out of Social Security benefits and want a change in law so that they can get extra benefits.
A special Commission on the Social Security Notch was appointed in 1994 to review this controversial subject. The Commission's central finding was that benefits paid to those in the "notch" years are equitable, and no new legislation is needed. Their report also notes that Congress acted responsibly and appropriately in 1977 when it adjusted the flawed benefit formula.
AARP supports the findings of the Commission's report. And we believe that no one is receiving less than his or her intended benefits. You can visit the Social Security Administration's website to learn more about the Commission's findings.
The Dangers of Changing Current Law
Legislative proposals to raise benefits for people born between 1917-1921 would create a serious threat to the long-term stability of the Social Security trust funds. These proposals would siphon off trust fund reserves which cushion today's retirees against an economic downturn and which will also help finance the retirement benefits of Baby Boomers. Ultimately, changing the law would merely postpone the "notch" or create a new one.
Consumer Advice
You may be contacted to make a donation to an organization working on the Social Security "notch" issue. AARP urges members to be as informed as possible when deciding whether to contribute to any organization. If you have never heard of the group before, or if you know very little about it, we encourage you to be cautious before contributing.
If an organization solicits you for money, remember that you have every right to request a copy of its financial statement before making a contribution. Frequently Asked Questions About the Social Security "Notch"
What period does the "notch" cover?
Some retirees born from 1917 through 1921 call themselves "notch babies" because they believe they are receiving lower Social Security benefits than those before or after them. Some have redefined the "notch" to include those born from 1922 through 1926. However, those born after 1921 have their benefits calculated in exactly the same way. Any differences arise from the overall level of a worker's earnings.
As a "notch baby," aren't I receiving lower benefits than other retirees?
No, you're not. Retirees born in the years 1912 through 1916 received an unintended increase in benefits caused by an error in the benefit formula introduced in 1972 Social Security Amendments. The 1977 Amendments corrected that mistake. Under the 1977 law, benefits for workers born from 1917 through 1921 are figured using a transition formula. Everyone born after 1921 has their benefits calculated in the same way. In most cases, those born from 1917-1921 have replacement rates that are higher than those for individuals born after 1921.
What caused the "notch"?
In 1972, a benefit calculation method was enacted into law. It overcompensated for inflation by taking into account increases in wages in the calculation of a worker's initial benefit and provided annual cost-of-living adjustments (COLAs) in the worker's benefit amount. This "double indexing" would have ultimately created benefit rates higher than a worker's pre-retirement earnings.
In the mid-1970s, because of the unusually high inflation, benefit levels began to increase rapidly and Congress realized it had to correct the formula or risk bankrupting the Social Security system.
How did Congress correct the mistake?
In 1977, Congress adopted legislation to correct this mistake by changing the benefit formula. However, the lawmakers did not want to stop annual COLAs that keep retirees' benefits even with inflation. Nor did they want to to jeopardize the financial plans of those close to retirement who would not have time to adjust to the correct but changed benefit formula. Thus, a plan was designed that provided a five-year transition to "cushion" the impact of the new benefit formula for those closest to retirement (those born from 1917 through 1921); and a new formula that provided stable replacement rates for future retirees.
What is a replacement rate?
The term "replacement rate" describes the amount of Social Security benefits received in the first year of retirement as a percentage of the amount of earnings in the last year of employment. The replacement rate is not used to calculate how much your Social Security check will be. It represents the relationship between a Social Security benefit and pre-retirement earnings.
When Social Security was established, the intended replacement rate for individuals who earned an average wage through their working lives was approximately 40 percent. The benefit formula established by Congress in 1972 would have raised the replacement rates to nearly 65 percent for average workers.
Is my Social Security benefit based only on my year of birth?
No. Many factors are considered when an initial Social Security benefit is calculated:
- Year of birth,
- Age of retirement
- Level of earnings during working life
- Pattern of working life (gaps in earnings for child care, education, etc.)
- Level of inflation
These factors, in addition to specific requirements for different types of benefits (i.e., survivor, child, disability), can lead to benefit amounts that vary substantially among retirees born in different years.
What would fixing the "notch" do?
Proposals to "fix" the "notch"would extend the costly mistake made in 1972 and grant unintended benefit levels to additional Social Security beneficiaries. Moreover, "fixes" would drain dollars from the Social Security Trust Fund reserve. The reserve must be protected in both the short- and long-term. In the short-term, it is important that the system maintain an adequate reserve to pay today's beneficiaries in an economic downturn. In the long-term, the reserve will be used to help provide benefits for future generations.
Legislative proposals to change current law are costly and inconsistent with the budget rules adopted in 1990 when Social Security was taken out of the calculation of the federal deficit. These rules require that any use of the Social Security reserve, such as to fix the "notch," must be offset by raising payroll taxes or cutting other spending for Social Security.
What is AARP's position on the "notch"?
In 1994, a special Commission on the Social Security Notch was appointed to review this controversial subject. The Commission's central finding was that benefits paid to those in the "notch" years are equitable, and no new legislation is needed. Their report also asserts that Congress acted responsibly and appropriately in 1977 when it adjusted the flawed benefit formula.
AARP supports the findings of the Commission's report. And we believe that no one is receiving less than his or her intended benefits.
