Critics Say a ‘Flat-Rate’ COLA Would Cut Social Security for Most Americans

Millions of Americans rely on Social Security senior benefits to cover housing, food, health care, and other costs each year. While the cost-of-living adjustment (COLA) helps ensure those benefits keep up with inflation, a "flat-rate COLA" proposal would replace that percentage-based adjustment with a flat-rate adjustment for all beneficiaries. And that, according to industry experts, might be a mistake.

The flat-rate COLA is just a proposal at this time, but it's an important issue that anyone relying on Social Security benefits should follow.

The pitch for the flat-rate COLA

The flat-rate COLA is actually an older idea that was proposed by former Democratic Representative Tim Penny in 1987. According to Penny's idea, the COLA for each year would be a flat-rate dollar amount set by the COLA received by a beneficiary at the 20th income percentile.

The structure would mean that lowest-income beneficiaries would receive larger benefits, which might help reduce poverty. At the same time, the flat rate would help limit the COLA amounts paid out each year, helping to keep the Social Security program solvent for longer.

The Washington Post editorial board covered this proposal in July, and it's gaining attention.

How the current COLA works

The current COLA is a percentage-based calculation. The Social Security Administration (SSA) calculates the COLA using inflation increases in the CPI-W. The data from the third quarter of the current year is compared to the data from the same quarter of the previous year. If inflation has increased, then each beneficiary's benefits are increased by the calculated percentage.

The percentage basis means that higher earners who receive larger benefits also receive a larger boost to their benefits. Low-income earners who receive lower benefits receive less of an increase.

In the case of a flat-rate COLA, the COLA is calculated based on the 20th percentile. That flat dollar amount is then applied to all beneficiaries. Low-income individuals might receive a larger boost compared to the size of their benefits, but for higher-income beneficiaries, that same flat-rate dollar amount might be only a small boost compared to the size of their benefits.

The potential negative effects of the flat-rate COLA

The flat-rate COLA might benefit low-income beneficiaries, but many others might lose out, according to AARP's blog. AARP states that the flat-rate COLA might erode inflation protection for 80% of beneficiaries, and that impact could increase as people age.

"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," the blog states.

A shrinking umbrella in a storm

Bill Sweeney, Senior Vice President of Government Affairs at AARP, criticized the flat-rate COLA proposal in a LinkedIn post. "Why is this proposal so bad? Because the umbrella of Social Security will get smaller as the storm of inflation gets worse. The higher inflation goes up, the bigger the cut to Social Security will be," Sweeney wrote.

He explained that health care and long-term care costs climb fastest in Americans' 80s and 90s, which is also when the compounding losses of a flat-rate COLA could cut the deepest. Seeney emphasized that the wealthy retirees aren't the ones truly at risk here, and instead the middle class, such as truck drivers, nurses, and construction workers who paid into Social Security for decades, could feel the impact of their benefits being eroded.

How a flat-rate COLA might erode benefit purchasing power

According to AARP's blog, if a flat-rate COLA had been implemented at the start of this year, the average beneficiary would receive $34.20 per month in 2026 instead of the $57.90 they received under the current percentage-based COLA. Over the duration of the year, beneficiaries would have lost an average of $285.

Older retirees might be hit the hardest. If a flat-rate COLA were implemented for decades, those older retirees could see cumulative losses from the COLA change. The flat-rate COLA might erode inflation protection, leaving older adults increasingly financially vulnerable. 

According to AARP, poverty rates are twice as high for people with disabilities than they are for those without disabilities, and people ages 80 and older are more likely to experience poverty than younger beneficiaries, so benefit losses and reduced purchasing power could prove to be extra problematic for these groups.

Alternative ways to keep Social Security solvent

Legislators have presented alternative proposals to help keep the Social Security trust fund solvent and avoid benefit reductions. Congress has the option to raise the cap on Social Security payroll taxes; currently only the first $184,500 of an individual's annual income is taxed, meaning high earners are paying Social Security taxes on just a portion of their income.

Raising the full retirement age from 67 to 70 is another option. The raise could be implemented gradually, increasing just three months per year, and reflects the fact that Americans are living longer and are collecting Social Security for longer periods of time.

Neither of these proposals would necessarily erode the purchasing power of benefits like the flat-rate COLA may.

Bottom line

There's currently lots of discussion around Social Security, and Congress is under pressure to implement a solution before the trust fund runs out, which might happen as soon as 2032. Be sure to watch to see if the idea of a flat-rate COLA shows up in any 2026 legislative vehicle, and track where AARP is directing its pushback to gauge which issues are most important to monitor during this discussion.

Hopefully Congress implements a solution and avoids benefits cuts, but this is also a good time to stress-test your retirement plan to see how you might manage just in case benefits were reduced.

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