An old idea to increase all Social Security recipients' benefits by the same dollar amount each year is gaining traction, but some say this would be a disaster for middle-income Americans.
In 1987, former Democratic Rep. Tim Penny from Minnesota's 1st Congressional District proposed a "Flat-RateCOLA" that would pay all beneficiaries the same cost-of-living adjustment, or COLA. The COLA dollar amount would be set at the COLA received by a beneficiary at the 20th percentile. By doing this, lowest-income beneficiaries would receive larger benefits, poverty would be reduced, and Social Security's insolvency would be delayed, advocates said.
The trust fund that supplements incoming payroll taxes to pay monthly Social Security benefits is expected to run
dry by the end of 2032, according to the program's trustees. When that happens, law requires benefits to be reduced by an estimated 22% to ensure the program’s costs do not exceed its revenues.
But critics of the flat-rate COLA, like the nonprofit and nonpartisan AARP, calculate that 80% of beneficiaries would see the purchasing power of their benefits erode year after year, leaving many in or near poverty.
"For 80% of beneficiaries, the flat-rate COLA would erode the inflation protection that Social Security has always provided, and the impact would grow as people age," said AARP, which serves 125 million Americans age 50-plus and their families, in a blog. "Because the impact of COLA cuts multiplies over time, a flat-rate COLA would intensify financial hardship for many people in their 80s and 90s and for people who develop disabilities at relatively young ages."
How would a flat-rate COLA differ from current COLAs?
Currently, the Social Security Administration bases its COLA each year on average annual increases in the CPI-W, or the index for urban wage earners, from July through September. Every Social Security beneficiary's check is boosted by that COLA percentage.
In a flat-rate COLA, the percentage increase is calculated the same way, but it will only be applied to those in the 20th percentile. Whatever that dollar amount increase they receive, all Social Security recipients will receive the same that year, no matter what percentile they're in.
Why do advocates like a flat-rate COLA?
A flat-rate COLA set at the 20th percentile provides full benefits for two more years than what's currently predicted and is "highly progressive," the nonpartisan, nonprofit Committee for a Responsible Federal Budget (CRFB) said in an analysis.
It would "slow the growth in benefits the most for those with the highest lifetime earnings – retirees likely to have the highest wealth and incomes – while continuing to pay those with higher initial benefits more than those with lower benefits over their whole lifetime," the CRFB said.
It "would increase cost-of-living adjustments for low earners, improving benefit generosity for those most in need," CRFB added. "In particular, low-income seniors who live into their 80s and 90s (and beyond) who have outlived any savings or work potential would benefit from real benefit growth over time."
What's wrong with a flat-rate COLA?
A flat-rate benefit for everyone above the 20th percentile, which includes middle-class Americans from the 20th to 60th percentiles, would suffer, AARP said.
"Every beneficiary would receive that dollar increase, meaning that 80% of beneficiaries would receive a smaller adjustment than they do now," it said.
If a flat-rate COLA was effective at the start of the year, AARP calculates the average beneficiary would have received $34.20 per month in 2026 instead of the $57.90 they actually received, and below the actual inflation rate.
"The average beneficiary would have lost purchasing power, so the adjustment would not qualify as a true COLA," AARP said. "The proposal would have cost the average beneficiary $285 over the course of the year," at a time when many retirees are already struggling financially.
In January, 30% of retirees who responded to AARP’s Financial Security Trends Survey said they were very or somewhat worried about having enough money to cover basic expenses, and 52% worried about their ability to pay for a large, unexpected expense. Even with the existing COLA in place, 64% said they worried about prices rising faster than their income.
A flat-rate COLA "might sound like an interesting idea, but it’s a massive cut to Social Security dressed up in technical jargon," Bill Sweeney, AARP’s senior vice president for government affairs, wrote in a July LinkedIn post.
What's a better option?
Many ideas to shore up Social Security have been floated, including:
- Former Social Security Administration Commissioner Martin O’Malley said lawmakers should raise the cap on earnings subject to Social Security payroll taxes rather than pursue benefit reductions. Under current rules, the Social Security payroll tax is capped at $184,500.
- Senators Elizabeth Warren (D-Mass.) and Bernie Moreno (R-Ohio) propose eliminating the Social Security payroll tax cap, "given that the current tax cap creates a system where most Americans pay Social Security taxes on 100% of their earnings, while the highest earners are paying on only part of theirs."
- Sen. Bernie Sanders (I-Vermont) wants to apply the Social Security payroll tax on all income above $250,000 a year, increase benefits by $2,400 a year, and expand COLAs.
- Sen. Rand Paul (R-KY) has previously asked to raise the full retirement age (FRA) by three months per year until the retirement age reaches 70. FRA is 67 years now for anyone born in 1960 or later.
Medora Lee is a money, markets and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
This article originally appeared on USA TODAY: 'Flat-rate' COLA cuts Social Security for most Americans, critics say
