The most basic problem in Social Security over the last 80 years is the way that Congress can use the system to buy votes today at the expense of workers in the future.
While it is not the most egregious example, the “Notch Babies” provides clear insight into the financial imbalances in the system. Congress rewards it’s constituents with cash that seemingly falls like manna from heaven.
What is a Notch-Baby? The Social Security Administration defines this group as those people born between 1917 and 1921 who believe that they received less than their fair share of Social Security benefits. American Association of Retired People (AARP) accepts this definition.
Voting-Buying is a non-partisan issue in 2015. In the House, U.S. Rep. Grace Meng (D-Queens) introduced the proposal (H.R. 314). In the Senate, Sen. David Vitter (R-LA) introduced the same legislation (S.99). If enacted, the “Notch Fairness Act” would increase benefits of select retirees who would be given a choice between a lump-sum pay-out and an increase in their benefit checks.
This legislation does not fix injustices of the past, nor correct the benefit levels of anyone. As written, the legislation would invade the Trust Fund for the purpose of enriching current voters with money reserved for future retirees. The legislation in fact widens the definition of Notch-Baby to 1917 to 1926 to capture an extra 5 years of voters. The proposal contains no source of additional funding to pay for the largesse. It is just manna from the Social Security Trust Fund.
Who will pay for this generosity? Future retirees. The Trustees Report says that the system created $900 billion in unfunded liabilities solely because we moved the clock forward by one year. That figure is more than the system collected in all forms of revenue during that time. In English, this means that every dollar of benefit paid in 2013 comes at the projected expense of a future retiree.
The notch was created by separate pieces of legislation. In 1972 Congress passed a law which automatically adjusted benefits for a cost-of-living adjustment. That law contained a flaw in the calculation which acted something like the mythical Monopoly card “Government Calculation Error in Your Favor, Advance to Go and collect $50,000.” The costs quickly spiraled out of control.
Congress fixed the flaw in 1977 for those born 1917 and later. These changes significantly lowered benefit level. The legislation protected retirees born between 1910 and 1916, thus creating the illusion of unfairness. The notch-babies do not want their fair share of Social Security benefits. They are angry that they were excluded from falling manna.
The Notch-Babies have never been harmed as a group in anyway. They collected benefit levels that were roughly what they were supposed to collect from Social Security. This group received some of the highest replacement rates in the history of the system. The Urban Institute reports that an average couple born in 1920 expected to collect nearly $2 for every $1 contributed on an investment adjusted basis. In short, they have received nearly the best deal of anyone.
In 1992, Congress formed the “The Commission on the Social Security “Notch” Issue”. It concluded :
To the extent that disparities in benefit levels do exist, they exist not because those born in the “Notch” years received less than their due; they exist because those born before the “Notch” years (who were “grandfathered” under the old law’s more generous computational method) continue to receive substantially inflated benefits. This disparity has created an understandable perception of unfairness.
Congress sees the resources of Social Security as a campaign re-election fund, something with which to reward constituents. Here Rep. Meng has widened the number of people to include 5 years of people who weren’t even in the notch. At the same time, the system cannot reasonably assure those who are 67 that they will receive their full scheduled benefits.
This legislation is an example of Congress trading the short-term interest of politicians at the expense of the long-term needs of the elderly.