WASHINGTON, July 29 (DC Times Online) — Social Security’s annual cost-of-living adjustment, or COLA, is meant to keep benefits from losing buying power as prices rise. The Committee for a Responsible Federal Budget says one alternative formula — a flat-rate COLA — could do more than slow benefit growth. In its analysis, the change could close about 50% of Social Security’s 75-year funding shortfall if adopted in 2027.
What is a flat-rate COLA?
Under today’s system, Social Security uses a percentage increase. Everyone gets the same percentage, so people with larger monthly checks receive larger dollar increases.
CRFB’s flat-rate version would switch to the same dollar increase for all beneficiaries. The dollar amount would be set at the COLA received by a beneficiary around the 20th percentile of the benefit range. In practice, that would slow growth for higher-benefit retirees more than for lower-benefit retirees, while keeping the yearly increase the same in dollars across the program.
What does CRFB’s modeling show?
CRFB says its estimate comes from Urban Institute modeling by Karen Smith. In that model, a flat-rate COLA at the 20th percentile would close half of the 75-year shortfall. A version set at the 30th percentile would close about 40%.
The budget group says the 20th-percentile option would also delay insolvency of Social Security’s main trust funds by two years. On its own, that would not solve the long-term financing problem, but CRFB says it would make a meaningful dent in it.
Who would be affected most?
CRFB describes the policy as relatively progressive. That means it would slow benefit growth more for people with higher lifetime earnings and larger retirement benefits.
In CRFB’s model, under the 20th-percentile design, the bottom fifth of lifetime earners would see benefits 3% lower in 2065 than under the baseline, while the top fifth would see benefits 19% lower. Under the 30th-percentile design, the bottom fifth would see a 1% increase and the top fifth a 17% decrease.
CRFB also says both versions would leave the lowest fifth of lifetime earners with benefits 13% to 14% higher than under a payable-benefits scenario, which is the level Social Security could pay if its trust funds ran short and only current revenue were available.
Why does this matter?
Because COLAs apply every year, even a small change in the formula can add up over time. A flat-rate approach would not change how much a retiree has already received, but it would change how future annual increases are calculated.
CRFB has also looked at the idea historically. In a retrospective estimate, it said that if Congress had adopted a flat-rate COLA in 1987, when Representative Tim Penny proposed it, the policy would have kept the program solvent through 2071.
The broader lesson is that Social Security’s financing gap can be narrowed through benefit formulas as well as tax changes. CRFB says the flat-rate COLA could also be part of a larger package of changes; paired with other measures, it says the combined trust funds could remain solvent for 75 years or nearly that long.
For now, though, the flat-rate COLA remains a proposal. CRFB’s analysis shows how a change in the way annual increases are calculated could shift more of the slowdown to higher earners while protecting lower-income retirees and improving the program’s long-term finances.
