WASHINGTON, July 29 (DC Times Online) — A proposal from the Committee for a Responsible Federal Budget would change how Social Security’s annual cost-of-living adjustment, or COLA, is calculated. Instead of giving every beneficiary the same percentage increase, the plan would give everyone the same dollar increase. CRFB says that change could slow benefit growth most for people with the highest lifetime earnings and retirement income while leaving lower-income retirees relatively better protected.
What is a flat-rate COLA?
A COLA is the yearly increase meant to help Social Security benefits keep up with inflation. Under the current formula, everyone gets the same percentage increase, which means people with larger checks get larger dollar increases.
Under CRFB’s flat-rate design, everyone would get the same dollar increase. The amount would be set at the COLA received by a beneficiary at the 20th percentile of the benefit range. In practical terms, that works like a cap and a floor at the same level: people above that point would get a smaller raise than under current law, while people with smaller benefits would be less affected or could come out ahead.
How much could it change benefits?
In a July 21 analysis, CRFB said that if a flat-rate COLA at the 20th percentile were enacted in 2027, it would close 50% of Social Security’s 75-year shortfall under CRFB’s baseline. A 30th-percentile version would close about 40%.
CRFB said the policy would be relatively progressive because it would slow benefit growth most for people with the highest earnings. Using Urban Institute modeling by Karen Smith, CRFB said that under the 20th-percentile version, benefits for the bottom fifth of lifetime earners would be 3% lower in 2065, while benefits for the top fifth would be 19% lower. Under the 30th-percentile version, the bottom fifth would see a 1% increase and the top fifth would see a 17% decrease.
CRFB also said both versions would increase benefits for the lowest quintile by 13% to 14% compared with its payable-benefits scenario.
What would it mean for Social Security’s finances?
CRFB said a flat-rate COLA set at the 20th percentile would delay insolvency of Social Security’s main trust funds by two years. On its own, the change would not solve the full financing problem, but CRFB said it could do more when paired with other changes, such as an employer compensation tax proposal. In that case, CRFB said the combined trust funds could stay solvent for 75 years, or nearly that long.
The group also pointed to a historical example. In a retrospective estimate, CRFB said that if Congress had adopted a flat-rate COLA when Representative Tim Penny proposed the idea in 1987, Social Security would have remained solvent through 2071.
Is this a law today?
No. The flat-rate COLA is a proposal, not an enacted change. Social Security still uses its current percentage-based formula for annual COLAs.
