Reducing Cost of Living Adjustments (COLA)
Social Security’s cost-of-living adjustment (COLA) automatically increases benefits to keep pace with inflation. Some argue that the COLA should be cut because it overstates price increases. Reducing the COLA would distribute benefit cuts to both current and future retirees and immediately improve the program’s financing, but it would disproportionately reduce income for older and low-income beneficiaries.
How Does the COLA Work?
To maintain Social Security’s purchasing power, retirement benefits automatically increase each year by the percentage change in the consumer price index for urban wage earners and clerical workers (CPI), a measure of price inflation.
Why Reduce the COLA?
Some experts argue that the CPI overstates cost-of-living increases.
- The CPI is based on a theoretical basket of goods (see Bureau of Labor Statistics 2008). Critics argue that the CPI does not adequately factor in consumers’ ability to find cheaper substitutes when the prices of those goods increase.
- COLA reductions would lower the cost of Social Security and help preserve the program’s solvency for a longer period of time.
Why Retain the Current COLA?
Others argue that reducing COLAs would harm older and low-income beneficiaries.
- Because Social Security makes up an especially large share of total income for lower-income people (figure 1), a benefit cut would reduce their income relatively more than others.
- Older beneficiaries would also experience relatively large benefit cuts, because the effects of COLA reductions accumulate over time once people start collecting benefits.
The CPI may not overstate inflation for older adults, who spend more than younger people on health care and other goods and services whose prices have been increasing faster than inflation.
- The Bureau of Labor Statistics computes an experimental price index for elderly consumers; this index has increased faster than the CPI for wage earners over the past 25 years.
- Some suggest lowering initial Social Security benefits so that benefits can be raised at older ages, when health care costs tend to be highest (Steuerle 1999).
Source: Social Security Administration (2012, Table 8.A5)
What Would Be the Impact on Social Security’s Long-Term Fiscal Deficit?
Experts forecast that immediately reducing the COLA by 1 percentage point could extend Social Security solvency about a quarter century beyond levels supported by current-law benefits (Social Security Administration 2012). Immediately switching to a chained CPI, a much smaller COLA reduction, would reduce the long-run deficit by just under a quarter.
Who Is Proposing COLA Reductions?
- The late Robert Ball, former Social Security Administration commissioner, included COLA reductions as part of a larger reform package (Ball 2007).
- All three of the plans advanced by the 1994–1996 Advisory Council on Social Security (1997) discussed COLA adjustments.
- The National Commission on Fiscal Responsibility and Reform (2010)
The Retirement Policy Program at the Urban Institute uses the DYNASIM3 computational model to estimate the effects of different Social Security reform designs on different groups of Americans. See our latest estimates here.
See the Following Reports to Learn More:
Favreault, Melissa M. and Nadia S. Karamcheva. 2011. "How Would the President’s Fiscal Commission’s Social Security Proposals Affect Future Beneficiaries?" Washington, DC: The Urban Institute.
Johnson, Richard W.; Joshua H. Goldwyn; Melissa Favreault. 2004. “Social Security COLA Reductions Would Weaken Financial Security for the Oldest and Poorest Retirees.” The Retirement Project Brief No. 18. Washington, DC: The Urban Institute.
Mermin, Gordon B. T. 2005. “Distributional Effects of Reforming Social Security through Benefit Reductions.” Washington, DC: The Urban Institute.
Penner, Rudolph. 2010. "Adjusting Social Security Benefits for Changes in the Cost of Living. "Washington, DC: The Urban Institute.
Steuerle, C. Eugene. 1999. “Social Security’s Cost-of-Living Adjustments: Can Reforms Protect the Most Vulnerable Recipients?” Straight Talk on Social Security and Retirement Policy No. 8.Washington, DC: The Urban Institute.
Advisory Council on Social Security. 1997. Report of the 1994–1996 Advisory Council on Social Security. Volume 1: Findings and Recommendations. Volume 2: Reports of the Technical Panel on Trends and Issues in Retirement Savings Technical Panel on Assumptions and Methods and Presentations to the Council. Washington, DC: Author.
Ball, Robert M. 2007. “Meeting Social Security’s Long-Range Shortfall: A Golden Opportunity for the New Congress.” http://robertmball.org/.
Bureau of Labor Statistics. 2008. “Consumer Price Indexes: Frequently Asked Questions.” ”http://www.bls.gov/cpi/cpifaq.htm#Question%204.
National Commission on Fiscal Responsibility and Reform. 2010. The Moment of Truth: Report of the National Commission on Fiscal Responsibility and Reform.
Social Security Administration. 2012. “Provisions Affecting Cost of Living Adjustment” http://www.ssa.gov/OACT/solvency/provisions/cola.html
———. 2012. Income of the Population 55 or Older, 2010. Washington, DC: Author. http://www.socialsecurity.gov/policy/docs/statcomps/income_pop55/
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Last updated January 2013.