WASHINGTON, July 29 (DC Times Online) — In Washington, a Social Security idea that gives every beneficiary the same annual dollar increase could close about half of the program’s 75-year funding gap, according to the Committee for a Responsible Federal Budget.
The proposal would change the way Social Security’s cost-of-living adjustment, or COLA, is calculated. Instead of a percentage increase, the annual bump would be a flat dollar amount set at the level received by a beneficiary around the 20th percentile of the benefit range, according to CRFB’s analysis based on Urban Institute modeling by Karen Smith.
What is a COLA?
A COLA is Social Security’s yearly inflation adjustment. It is meant to help benefits keep up with rising prices. Under the current percentage-based formula, people with larger monthly checks get larger dollar increases. A flat-rate COLA would work differently: everyone would get the same dollar increase, no matter how big the underlying benefit is.
Why does CRFB say the change is progressive?
CRFB says a flat-rate COLA would slow benefit growth most for people with the highest lifetime earnings and the biggest retirement checks. Because the same dollar increase would go to everyone, the increase would make up a larger share of a smaller benefit than of a larger one.
Under CRFB’s 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%, according to the group’s modeling. Under a 30th-percentile version, the bottom fifth would see a 1% increase and the top fifth would see a 17% decrease.
How much money could it save?
CRFB says a flat-rate COLA set at the 20th percentile and put in place in 2027 would close 50% of Social Security’s 75-year shortfall. A 30th-percentile version would close about 40%, the group says.
The group also says the 20th-percentile option would delay insolvency of Social Security’s main trust funds by two years. CRFB says the idea could keep the combined trust funds solvent for 75 years, or nearly that long, if paired with other measures.
Who would feel the effects?
The proposal would matter most for retirees and workers who expect to rely on Social Security for much of their income. Lower-income retirees would be more protected than higher earners because the same dollar increase would take a bigger share of a small benefit.
That does not mean the change would be painless. For people with higher lifetime earnings, future benefit growth would slow more sharply. Over time, that would change how much income Social Security provides in retirement and how much the program costs the government.
Has this idea come up before?
CRFB says a similar flat-rate COLA idea was proposed in 1987 by Rep. Tim Penny. In a retrospective estimate, the group says that if Congress had enacted the policy then, Social Security would have remained solvent through 2071.
The bottom line is that the proposal is meant to stretch Social Security’s finances without cutting benefits evenly across the board. Instead, it would shift more of the adjustment burden to people with larger benefits while leaving lower-income retirees comparatively better shielded.
It is still only a proposal. No change has been enacted, and the current Social Security COLA formula remains in place.
