WASHINGTON, July 29 (DC Times Online) — A proposed change to Social Security’s annual cost-of-living adjustment, or COLA, could make the program’s long-term finances look very different.
The Committee for a Responsible Federal Budget said in a July 21 analysis that a flat-rate COLA set at the 20th percentile of the benefit range could close about 50% of Social Security’s 75-year funding shortfall. A version set at the 30th percentile would close about 40%, the group said, based on modeling by Karen Smith of the Urban Institute.
What is a flat-rate COLA?
Under the current system, Social Security benefits rise by the same percentage each year. That means people who receive larger monthly checks also get larger dollar increases.
A flat-rate COLA would work differently. Instead of giving everyone the same percentage increase, it would give all beneficiaries the same dollar increase. In CRFB’s proposal, that dollar increase would be set at the amount received by a beneficiary at the 20th percentile of the benefit range.
In plain English, that means lower-benefit retirees would be protected from losing ground, while higher-benefit retirees would see smaller increases than they get now.
Why does it matter?
Social Security’s financing problem is driven by the gap between what the program pays out and what it collects. CRFB said a flat-rate COLA would slow benefit growth, which would reduce the pressure on the trust funds over time.
The group described the proposal as relatively progressive because it would slow benefit growth most for people with the highest lifetime earnings and retirement income.
CRFB’s modeling says the effect is large at both ends of the income scale. 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 design, the bottom fifth would see a 1% increase, while the top fifth would see a 17% decrease.
The group also said both the 20th- and 30th-percentile versions would increase benefits for the lowest quintile by 13% to 14% compared with a payable-benefits scenario.
How much would it help Social Security?
CRFB said a 20th-percentile flat-rate COLA enacted in 2027 would delay insolvency of Social Security’s main trust funds by two years.
The group also said that if the proposal were paired with other changes, such as an employer compensation tax proposal, the combined changes could keep the trust funds solvent for 75 years or nearly that long.
That kind of result matters because Social Security is a mandatory program with long-term obligations. Even small changes in annual benefit growth can add up over decades, affecting retirees, workers, and the federal budget.
Has anything like this been tried before?
CRFB pointed to an earlier version of the idea from Representative Tim Penny. In a retrospective estimate, the group said that if Congress had adopted a flat-rate COLA in 1987 when Penny proposed it, the policy would have kept the program solvent through 2071.
Is this an actual change right now?
No. The flat-rate COLA is still a proposal. It has not been adopted as law.
That means Social Security continues to use its current COLA formula unless Congress changes it. For now, the debate is about whether slowing benefit growth for higher earners could help shore up the program without sharply reducing protection for lower-income retirees.
CRFB’s separate white paper on a COLA cap makes a similar point: limiting growth at the top can slow benefit costs for people with larger checks and higher lifetime incomes. But the flat-rate COLA analysis goes a step further by testing what happens when every beneficiary gets the same dollar increase.
The basic policy trade-off is straightforward. A flat-rate COLA would be more generous, in percentage terms, to people with smaller benefits. It would be less generous to people with larger benefits. And over time, CRFB says, that shift could make a meaningful dent in Social Security’s long-term shortfall.
