Social security Looming insolvency less than a decade from now could be delayed by a change in how the annual cost of living adjustment (COLA) is calculated, with a new analysis finding it could cut the welfare program’s budget deficit in half over 75 years.
The nonpartisan Committee for a Responsible Federal Budget (CRFB) has proposed a COLA cap that would limit the dollar amount of the annual increase in Social security benefits received by those whose benefit amount is higher. This 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 COLA would pay all Social Security beneficiaries the same COLA, which would be set to the COLA received by a beneficiary at the 20th percentile of the benefit range – a decision that effectively combined a COLA cap with a COLA floor at that level.
CRFB asked Karen Smith of the Urban Institute to estimate the impact of a flat COLA set at the beneficiary’s 20th percentile and 30th percentile on creditworthiness and Social Security benefits. The analysis found that a flat COLA at the 20th percentile would close 50% of the 75-year Social Security shortfall from its baseline, while at the 30th percentile it would close about 40%.
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CRFB and the Urban Institute analyzed the flat COLA proposal and found that it would extend Social Security’s solvency. (Getty Images/stock)
The flat COLA would be relatively progressive – slowing benefit growth the most for those with the highest lifetime earnings and the most retirement income.
If defined at the 20th percentile, the bottom fifth of employees for life would see benefits decline by just 3% in 2065, compared to 19% for the richest fifth of earners. For a flat COLA at the 30th percentile, this would increase the bottom quintile’s benefits by 1%, while the top fifth would see benefits decrease by 17%.
A flat 20th or 30th percentile COLA would increase Social Security benefits for the lowest quintile from 13% to 14%.
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A flat-rate COLA would slow the growth of benefits for higher earners. (Getty Images/iStock)
A flat 20th percentile COLA would delay the insolvency of the main Social Security trust funds by two years – although the CRFB noted that if combined with other policies, such as its employers’ compensation tax proposal, it could keep the merged trust funds solvent for close to 75 years.
In hindsight, if Congress had passed a flat-rate COLA in 1987, when it was proposed by Penny, CRFB estimates suggest it would have achieved 75 years of solvency at the time, delaying insolvency to 2071.
It would also have covered about three-quarters of the solvency gap through 2100, giving policymakers time to take further action. progressive reforms to social security to make up the remaining deficit.
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The main Social Security trust funds are expected to become insolvent in 2032, at which point automatic benefit reductions would be triggered under current law. (J. David Ake/Getty Images / Getty Images)
The most recent estimates place Social Security’s insolvency in 2032, when benefits will be automatically reduced by 22 percent to match incoming tax revenue once trust funds are exhausted. This would amount to a $16,900 reduction in annual benefits for a middle-income and dual-earner couple starting in 2033.
The impending insolvency of trust funds and its implications for American retirees should compel policymakers to pursue reforms aimed at shoring up the system. program finances as soon as possible, argued the CRFB.
“One of the key takeaways from this particular solution is that it is a stark reminder of the real cost of waiting to save Social Security,” CRFB President Maya MacGuineas told FOX Business.
“Adopting a flat-rate COLA when Congressman Penny proposed the idea would have achieved solvency through 2071, nearly half a century away, and would have done so by protecting low-income beneficiaries and reducing poverty among the elderly; today, that same plan would only delay insolvency for two more years,” she explained.
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“The good news is that there are many options that, when combined, can save Social Security from abrupt, across-the-board cuts in just six years. But taking options off the table and waiting until the last minute leaves fewer and fewer ways to make the math work,” MacGuineas added.
