WASHINGTON, July 29 (DC Times Online) — A proposal from the Committee for a Responsible Federal Budget would change one of Social Security’s most familiar rules: how annual cost-of-living adjustments, or COLAs, are calculated. Instead of giving every retiree the same percentage increase, the plan would give every beneficiary the same dollar increase each year.
CRFB says that change could do more than reshape benefit checks. In its analysis, based on Urban Institute modeling by Karen Smith, a flat-rate COLA set at the 20th percentile of the benefit range and enacted in 2027 would close about 50% of Social Security’s 75-year funding shortfall. A version set at the 30th percentile would close about 40%.
What is a flat-rate COLA?
Under current law, Social Security benefits rise by the same percentage each year to keep up with inflation. That means someone with a larger monthly benefit gets a larger dollar increase than someone with a smaller check.
A flat-rate COLA would work differently. Everyone would get the same dollar increase, with CRFB’s model setting that increase at the amount received by a beneficiary at the 20th percentile of the benefit range. In practice, that would slow benefit growth more for people with the biggest checks and protect smaller benefits from being cut as sharply.
Why does it matter for Social Security’s finances?
Social Security’s long-term shortfall is the gap between the money the program is expected to bring in and the benefits it is expected to owe over 75 years. CRFB says changing the COLA formula could narrow that gap because it would trim future spending.
In CRFB’s analysis, the 20th-percentile version would delay insolvency of Social Security’s main trust funds by two years. The group also says that if the flat-rate COLA were paired with other changes, such as an employer compensation tax proposal, the combined trust funds could stay solvent for 75 years or nearly that long.
Who would feel the change most?
CRFB describes the proposal as relatively progressive because it would slow benefit growth most for people with higher lifetime earnings and higher retirement income.
Under the 20th-percentile design, CRFB says 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.
CRFB also says both the 20th- and 30th-percentile versions would leave the lowest fifth of earners with benefits 13% to 14% higher than they would get in a payable-benefits scenario, the reduced level that would apply if the program ran short of money.
Has this idea come up before?
CRFB says the flat-rate COLA is not new. Its retrospective estimate says that if Congress had enacted the policy in 1987, when Representative Tim Penny proposed it, Social Security would have remained solvent through 2071.
For now, the idea remains a proposal. The current Social Security COLA formula is still in place, and CRFB’s numbers are an estimate of how a different rule could affect retirees and the program’s finances over time.
For workers, retirees, and taxpayers, the basic tradeoff is straightforward: a flat-rate COLA would slow the growth of larger benefits more than smaller ones, and in exchange it could make Social Security’s finances last longer.
