	Origins of the Notch

		The 1972 Amendments

Congress approved legislation in 1972 to adjust Social Security benefits for inflation automatically (P.L. However, the formula for calculating the new cost-of-living adjustment (COLA) was flawed. The formula assumed that wages would continue to rise faster than prices, as they had in the past. 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. For many who retired during in this phase-in period, however, the transition formula did not lessen the differential between their benefits and the windfall benefits received by people born in earlier cohorts. 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. Commission on the Social Security Notch Issue

In 1992, Congress voted to establish a 12-member commission to study the notch issue. Its principal conclusion was that the "benefits paid to those in the 'Notch' years are equitable, and no remedial legislation is in order." Potential for Future Notches

One lesson from the experience of the notch babies is that almost any change to Social Security benefits can create a notch.
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. (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.) The 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. This change was intended to adjust benefits for inflation automatically, but an error caused benefits to rise substantially faster than inflation.
Congress corrected the error in the 1977 Amendments. However, benefits for those 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. For many who retired during in this phase-in period, however, the transition formula did not lessen the differential between their benefits and the windfall benefits received by people born in earlier cohorts. Some notch babies feel it is unfair that their benefits are lower than those received by the older individuals who received the windfall, and also that the transition formula did not do enough to make up the difference.
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."
Any future change to the Social Security benefit formula has the potential to create a notch. This is an important consideration as lawmakers consider changes to ensure long-term system solvency.