Could the Social Security COLA Be More Fairly Adjusted to Provide a Fixed Annual Dollar Amount?
Q: Could the annual Social Security cost-of-living adjustment be more fairly adjusted to provide a fixed annual dollar amount? If the dollar amount of the increase were to be based on middle income, then low- and middle-income beneficiaries would be on more equal footing, and higher income beneficiaries would not be hurt any worse than we typically are anyway like this year with a 1.3% COLA!
A: What you propose is an interesting concept. It would be possible to design such cost of living adjustment (COLA) option in several different ways. For example, the COLA could be calculated based on the national average retiree benefit in the current year. This amount could be adjusted using the current method the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), or the use of a seniors’ consumer price index such as the Consumer Price Index for the Elderly (CPI-E). The law could even add a provision that the COLA would never be lower than a certain amount— such as 3%.
Calculating the COLA in this manner would remove more of the uncertainty in years of economic recession and high unemployment and it would reflect inflation two ways — the growth in average wages which determine the average benefit, as well as the growth in prices. The national average Social Security benefit tends to rise most years, because new people coming onto the rolls tend to have higher wages than people who retired ahead of them. Indexing using this method would still tend to ensure a small boost to benefits even in years when inflation is so low that no COLA is payable.
Using this approach would put low to middle benefit recipients on more equal footing. The draw- back however, is that people with higher benefits would experience a benefit cut. They would not receive a COLA based on the benefit that they actually receive, and the dollar amount would be lower than what they would have received under current law. While that loss would be relatively small at first, it would compound and rapidly grow deeper over time. It would tend to lower the total amount of income that retirees with higher benefits could expect to receive from Social Security. This sort of proposed change to the COLA would quite likely encounter fierce push back, particularly from those affected, and even from middle-income people who delayed their retirement perhaps by as much as 4 years or more to allow their benefit to grow to its maximum.
The idea you propose is a good starting place for discussion though, and a great way to get people talking about how we can make Social Security COLAs fairer and more adequate for everyone!
