Social Security Report

Capping COLA: What Would it Mean for Social Security Solvency? - CRFB; AMAC

Social Security’s annual cost-of-living adjustment (COLA) is, naturally, in the news these days. The announcement of an across-the-board 2.8% increase beginning in January has generated quite a bit of commentary, including criticism for its inability to help seniors combat inflation. Other commentary addresses the relationship of COLA increases to the steadily eroding financial picture Social Security faces. It’s in this later commentary that the Committee for a Responsible Federal Budget (CRFB) recently weighed in with a proposal to blunt some of the long-term impact COLAs have on Social Security costs.

In a post on their website, CRFB suggests limiting the COLA amount for higher earners, a change that would preserve the adjustment for most beneficiaries but, depending on where the limit is set, would reduce outlays substantially. The rationale for this suggestion is discussed in this post and in greater detail in CRFB’s Trust Fund Solutions Initiative.

The CRFB proposal is one of many emerging from thought leaders as the timeline on Social Security’s insolvency crisis continues to close in. It’s certainly a novel suggestion that needs to be considered as Congress searches for a solution to avert a catastrophe for millions of beneficiaries. As another example of outside-the-box thinking, the Association of Mature American Citizens (AMAC) has suggested an approach that would achieve a result similar to CRFB’s proposal while also enhancing progressivity. To help reinforce Social Security’s mission as an anti-poverty program, adopting an equal-dollar approach to the COLA calculation based on the average retirement benefit could be considered. Combined with a 1% floor for COLAs, this approach would shift more of the adjustment to lower-income beneficiaries and increase their buying power. 

Here’s an illustration of this in practice, in a year when inflation is measured at 2.5%:

The CRFB and AMAC suggestions for modifying COLA mathematics address just one aspect of the overall search for solutions to the insolvency problem. What is clearly needed is a slate of changes that would preserve Social Security for generations to come, and would align the program more effectively with 21st-century economics. It’s a daunting task, and time is running out.

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