Could a flat-rate COLA help fix Social Security?

(NewsNation) — One idea to strengthen Social Security’s finances would give every beneficiary the same annual dollar increase in their monthly checks.

A new analysis from the Committee for a Responsible Federal Budget examined how replacing the current cost-of-living adjustment with a flat-rate COLA could affect the program as it faces a looming funding shortfall.

Under current law, all Social Security beneficiaries receive the same percentage benefit increase each year through the cost-of-living adjustment, or COLA, which is based on inflation.

However, because the adjustment is calculated as a percentage, beneficiaries with higher monthly checks receive larger annual dollar increases — a difference that compounds over time.

A so-called “flat-rate COLA” would also be based on inflation, but instead of giving everyone the same percentage increase, it would give everyone the same dollar increase based on a benchmark benefit level.

That option would help shore up Social Security’s finances by slowing future benefit growth broadly, though the largest reductions would fall on those with the highest lifetime earnings.

It’s one of several reforms lawmakers could consider as they look for ways to put the nation’s primary retirement program on stable footing.

Without congressional action, retirees could face a 22% benefit cut in late 2032, when Social Security’s main retirement trust fund is expected to be depleted.

How would a flat-rate COLA change Social Security benefits?

Former Congressman Tim Penny first proposed a flat-rate COLA in 1987. Under his proposal, everyone would receive the same dollar increase as someone at the 20th percentile of beneficiaries.

“While we protect those most in need of the cost-of-living allowance, we would at the same time make appreciable savings for the Treasury,” Penny said at the time.

If lawmakers revived the proposal, it would mark a major shift from the current COLA model.

This year’s 2.8% COLA increased the average retired worker’s monthly benefit by about $56. By comparison, someone receiving the maximum monthly benefit of $5,181 would get a bump of about $145 under the same percentage adjustment.

Meanwhile, a flat-rate COLA would have applied the 2.8% increase to a benchmark benefit level and given every beneficiary the same dollar amount.

The trade-off is that such a plan would effectively cap benefit growth for most beneficiaries, especially higher earners who receive larger monthly checks because they paid more into the system over their working lives.

Would a flat-rate COLA save Social Security?

On its own, a flat-rate COLA would not solve Social Security’s long-term financial challenges, though it could significantly improve the program’s outlook.

If enacted in 2027, a flat-rate COLA based on the 20th percentile benefit level would close about half of Social Security’s 75-year funding shortfall, according to Urban Institute modeling cited by the CRFB.

That estimate is based on last year’s Social Security Trustees report, so the proposal would likely close a smaller share of the gap under the latest outlook, CRFB noted.

The impact of a flat-rate COLA on future benefits would vary depending on a worker’s lifetime earnings.

If set at the 20th percentile, the bottom fifth of lifetime earners would receive benefits that are about 3% lower in 2065 than under current law, compared with about 19% lower for the top fifth of retirees, according to the analysis.

Whether such a proposal could gain political support remains unclear. Americans overwhelmingly oppose Social Security benefit reductions, which makes major changes to the program politically difficult.

Even politically popular ideas, like lifting the payroll tax cap, would still require additional reforms to fully address the long-term funding shortfall, and lawmakers have yet to agree on a comprehensive solution.

Learn more about other potential Social Security fixes here.

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