Switching to a Flat COLA Could Cut Social Security's Shortfall in Half

Since its inception, Social Security has used a percentage-based COLA to protect benefits from inflation. This method gives higher absolute increases to those with larger benefits, even though all retirees face similar cost-of-living pressures. The flat-rate proposal instead provides the same dollar adjustment to every beneficiary, aiming to better protect low-income retirees.

The Idea That Keeps Coming Back

Here is a weird math fact about Social Security. Right now, every retiree gets the same percentage bump each year to keep up with rising prices. That means a retiree collecting a higher benefit gets a bigger dollar increase than someone collecting a lower benefit - even though both face the same grocery bill.

A flat-rate COLA would flip that. Instead of a percentage, everyone would get the same dollar amount added to their monthly check. It is not a new idea.

Former Representative Tim Penny first proposed it back in 1987. If Congress had adopted it then, Social Security would have stayed solvent all the way through 2071 - nearly half a century.

But Congress did not adopt it, and now the math is much harder.

A recent study by the Committee for a Responsible Federal Budget, conducted by Urban Institute researcher Karen Smith, found that [deleted repeated sentence: "tying the COLA to a fixed dollar amount at the 20th benefit percentile would cover half of Social Security's 75-year funding gap."] Set it at the 30th percentile, and it closes about 40% of the gap. Those are big numbers for a single policy change.

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Winners and Losers

The flat-rate approach is designed to protect the people who need it most. For retirees in the bottom fifth of lifetime earnings, a 20th‑percentile flat COLA would reduce their benefits by just 3% by 2065. Even under the higher 30th‑percentile option, those same low‑earning retirees would see a 1% increase. [Deleted contradictory clause: "and both options would raise the benefits received by the bottom fifth of earners by 13% to 14%."]

The trade-off falls on higher earners. The top fifth of lifetime earners would see their benefits drop by 19% by 2065 under the 20th-percentile flat rate. Under the 30th-percentile option, the decline is 17%.

The catch is that even this change only buys two extra years of solvency. [Deleted repeated sentence: "Social Security's main trust funds are currently projected to run dry in 2032."] A flat-rate COLA would push that by two years.

That is not a fix. It is a bridge.

The Cost of Delaying Action

Maya MacGuineas, CRFB's president, said, "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 noted that adopting a flat-rate COLA back when Penny proposed it "would have achieved solvency through 2071, nearly half a century from now, and would have done so by protecting lower-income beneficiaries and reducing old-age poverty; now, that same plan would only delay insolvency another two years."

The clock is ticking. If nothing changes by 2032, benefits get cut 22% automatically for everyone. That is not a theoretical threat - that is what current law says.

MacGuineas added that "there are plenty of options out there 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." A flat-rate COLA is one piece of a larger puzzle. Others include raising the payroll tax cap, lifting the retirement age, or tweaking the benefit formula.

What This Means for Your Retirement

For investors, the takeaway is less about picking a political winner and more about understanding that Social Security is unlikely to deliver the same benefits to you as it does to current retirees - especially if you earn above the median. Planning around that reality is the sensible move. The sooner policymakers act, the softer the landing for everyone.

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