A new analysis suggests that changing the way Social Security's annual cost-of-living adjustment (COLA) is calculated could significantly improve the program's long-term solvency. The nonpartisan Committee for a Responsible Federal Budget (CRFB) proposed a flat-rate COLA, which would pay all beneficiaries the same COLA, set at the level received by a beneficiary at the 20th percentile of the benefit range. This approach would combine a COLA cap for higher earners with a COLA floor for lower earners [1].
The CRFB commissioned Karen Smith of the Urban Institute to estimate the impact of this flat-rate COLA. The analysis found that setting the flat-rate COLA at the 20th percentile would close 50% of Social Security's 75-year fiscal shortfall compared to the baseline, while setting it at the 30th percentile would close about 40% of the shortfall [1]. The proposal is considered relatively progressive, as it would slow benefit growth most for those with the highest lifetime earnings. For example, by 2065, the bottom fifth of lifetime earners would see benefits decline by just 3%, compared to a 19% decline for the top fifth under the 20th percentile scenario. At the 30th percentile, the bottom quintile would see a 1% benefit increase, while the top fifth would see a 17% decline [1].
Both the 20th and 30th percentile flat-rate COLA options would boost Social Security benefits for the lowest quintile by 13% to 14% [1]. Implementing a flat-rate COLA at the 20th percentile would delay the projected insolvency of Social Security's main trust funds by two years. CRFB noted that combining this change with other policies, such as its employer compensation tax proposal, could potentially keep the trust funds solvent for the full 75-year period or close to it [1].
Historical analysis indicates that if Congress had adopted a flat-rate COLA in 1987, as proposed by former Rep. Tim Penny, Social Security would have achieved 75-year solvency at that time, delaying insolvency to 2071 and covering about three-quarters of the solvency gap through 2100. Currently, Social Security's main trust funds are projected to reach insolvency in 2032, at which point automatic benefit cuts of 22% would be triggered under existing law [1].
CONCLUSION
The proposed flat-rate COLA could substantially reduce Social Security's long-term funding gap and delay insolvency, especially if paired with additional reforms. While the plan would most affect higher earners, it would protect or even enhance benefits for lower-income retirees, making it a progressive option for policymakers to consider.