Flat-Rate COLA Proposal Could Halve Social Security’s 75-Year Funding Gap

A new analysis from the nonpartisan Committee for a Responsible Federal Budget (CRFB) suggests that reforming the cost-of-living adjustment (COLA) calculation for Social Security could significantly reduce the program’s long-term fiscal shortfall. The proposal involves implementing a flat-rate COLA, which would tie annual benefit increases to those received by beneficiaries at the 20th or 30th percentile of the benefit distribution.

The analysis, conducted by Urban Institute economist Karen Smith, found that a flat-rate COLA set at the 20th percentile would close approximately 50% of Social Security’s projected 75-year funding gap, while one set at the 30th percentile would close about 40%. This approach would be relatively progressive, slowing benefit growth most significantly for high earners while providing modest increases for lower-income recipients.

Under the 20th percentile model, the bottom fifth of lifetime earners would see their benefits decline by just 3% by 2065, compared to a 19% reduction for the top fifth. At the 30th percentile, the lowest quintile would receive a 1% benefit increase while the highest earners would face a 17% reduction. Both models would boost benefits for the lowest quintile by 13% to 14%.

The flat-rate COLA would also delay Social Security’s insolvency by two years, according to CRFB. When combined with other proposals like an employer compensation tax, it could maintain trust fund solvency for the full 75-year period. Historical analysis shows that had such a reform been implemented in 1987, it would have extended solvency to 2071 and addressed three-quarters of the funding gap through 2100.

Social Security’s trust funds are currently projected to be depleted by 2032, triggering automatic benefit cuts of 22% under existing law. For a typical dual-income, middle-class couple, this would mean an annual reduction of approximately $16,900 starting in 2033.

CRFB President Maya MacGuineas emphasized the urgency of reform, stating that early action would provide more options for preserving benefits. “One of the biggest takeaways of this particular solution is that it is a stark reminder of the real cost of waiting to save Social Security,” she told FOX Business. “The good news is there are plenty of options out there that, when combined, can save Social Security from abrupt across-the-board cuts in just six years.”

The analysis underscores the importance of proactive policy measures to ensure Social Security’s long-term sustainability while protecting vulnerable beneficiaries from significant benefit reductions.

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