WASHINGTON, July 29 (DC Times Online) — A proposal from the Committee for a Responsible Federal Budget would change a basic part of Social Security: the annual cost-of-living adjustment, or COLA.
Instead of giving each retiree the same percentage increase, the plan would give all beneficiaries the same dollar increase. CRFB says the dollar amount would be set at the COLA received by a beneficiary at the 20th percentile of the benefit range, which would effectively put a floor and a cap on how much the annual adjustment grows.
The idea matters because Social Security’s financing gap is large. CRFB says its analysis, based on modeling by the Urban Institute’s Karen Smith, found that a flat-rate COLA set at the 20th percentile and started in 2027 would close about 50% of Social Security’s 75-year shortfall compared with CRFB’s baseline. A version set at the 30th percentile would close about 40%.
What is a COLA?
Social Security uses a COLA to help benefits keep up with inflation. Under the current system, the annual increase is a percentage of each person’s benefit. That means people with larger checks get larger dollar increases.
A flat-rate COLA changes that. Everyone would get the same dollar increase, regardless of benefit size. CRFB says that design would be relatively progressive because it would slow benefit growth most for people with the highest lifetime earnings and retirement income.
Who would be affected most?
CRFB’s modeling shows the effect would vary a lot by earnings level.
Under the 20th-percentile design, the bottom fifth of lifetime earners would see benefits fall by 3% in 2065, while the top fifth would see benefits fall by 19%.
Under the 30th-percentile version, the bottom quintile would see a 1% increase, while the top fifth would see a 17% decrease.
CRFB also says both designs would increase benefits for the lowest quintile by 13% to 14% compared with a payable-benefits scenario.
Why does this matter for Social Security’s finances?
The program’s trust funds face a long-term funding gap. CRFB says a flat-rate COLA at the 20th percentile would delay insolvency of Social Security’s main trust funds by two years. The group also says that if the change were paired with other measures, such as its employer compensation tax proposal, the combined trust funds could stay solvent for 75 years or nearly that long.
That makes the COLA proposal one of several options policy analysts have discussed for reducing the burden on future workers and taxpayers while preserving benefits for lower-income retirees.
Has this idea been tried before?
CRFB says the concept dates back to a 1987 proposal from then-Rep. Tim Penny. In a retrospective estimate, the group said that if Congress had enacted a flat-rate COLA at that time, the policy would have kept Social Security solvent through 2071.
CRFB has also studied a related idea, a COLA cap, in a separate white paper. That analysis found that capping COLAs at the 75th percentile would close one-tenth of Social Security’s solvency gap and save $115 billion over a decade.
For now, the flat-rate COLA remains a proposal, not a law. The debate is part of the broader search in Washington for ways to narrow Social Security’s long-term shortfall without cutting the program in a way that falls hardest on lower-income retirees.
