One type of Social Security adjustment could cut the 75-year shortfall in half

One type of Social Security adjustment could cut the 75-year shortfall in half

Social Security's looming insolvency in under a decade could be delayed by a change to how the annual cost-of-living adjustment (COLA) is calculated, with a new analysis finding that it could cut the entitlement program's 75-year fiscal shortfall in half.

The nonpartisan Committee for a Responsible Federal Budget (CRFB) proposed a COLA cap that would limit the dollar amount of the annual increase in Social Security benefits received by those with higher benefit amounts. That proposal was similar to a flat-rate COLA proposed by one of the think tank's co-chairs, former Rep. Tim Penny, when he was in Congress in 1987. The flat-rate COLA would pay all Social Security beneficiaries the same COLA, which would be set at the COLA received by a beneficiary at the 20th percentile of the benefit range – a move that effectively combined a COLA cap with a COLA floor at that level.

CRFB asked the Urban Institute's Karen Smith to estimate how a flat-rate COLA set at the 20th percentile and 30th percentile beneficiary would impact Social Security's solvency and benefits. The analysis found that a flat-rate COLA at the 20th percentile would close 50% of Social Security's 75-year shortfall compared to her baseline, while at the 30th percentile it would close about 40%.

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CRFB and the Urban Institute analyzed the flat-rate COLA proposal, finding it would extend the solvency of Social Security.

The flat-rate COLA would be relatively progressive – slowing the growth in benefits the most for those with the highest lifetime earnings and with the most income in retirement. If set at the 20th percentile, the bottom fifth of lifetime earners would see benefits decline by just 3% in 2065, compared with 19% for the top fifth of earners. For a flat-rate COLA at the 30th percentile, it would boost the bottom quintile's benefit by 1% while the top fifth would see benefits decline 17%. Both a 20th or 30th percentile flat-rate COLA would boost Social Security benefits for the lowest quintile by 13% to 14%.

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A flat-rate COLA would curb benefit growth for the highest earners.

A flat-rate COLA at the 20th percentile would delay the insolvency of Social Security's main trust funds by two years – though CRFB noted that if it were combined with other policies, such as its employer compensation tax proposal, it could keep the merged trust funds solvent for 75 years close to it. Looking back, if Congress had adopted a flat-rate COLA back in 1987 when it was proposed by Penny, CRFB's estimates suggest it would have achieved 75-year solvency at the time, delaying insolvency to 2071. It also would've covered about three-quarters of the solvency gap through 2100, giving policymakers time to make other gradual reforms to Social Security to address the remaining gap.

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Social Security's main trust funds are projected to reach insolvency in 2032, when automatic benefit cuts would be triggered under current law.

The most recent estimates put the insolvency of Social Security in 2032, when benefits would be subject to an automatic cut of 22% to match incoming tax revenue after trust funds are tapped out. That would amount to a $16,900 cut in annual benefits for a medium-income, dual-earning couple starting in 2033. The fast-approaching insolvency of the trust funds and the implications for Ameri...