AARP Says This Social Security COLA Change Could Cost Some Retirees Nearly $78,000

A Social Security raise can help when everyday costs keep creeping higher, especially if senior benefits make up a big part of your retirement income.

Under the current system, your COLA is applied to your own monthly benefit, so the dollar increase grows along with the size of your check.

A proposal getting attention in Washington would replace that with the same dollar increase for everyone. AARP says many retirees could end up with less over time, and one of its examples shows a loss of nearly $78,000 over a long retirement. Here's how that gap can get so large.

How the flat-dollar COLA would work

Under today's system, a 2.8% COLA would add about $58 to an average $2,071 monthly benefit. The flat-dollar proposal would instead calculate the increase using a lower benefit of about $1,223, producing a raise of roughly $34 for everyone.

For someone receiving the average benefit, that would mean:

• Current system: About $58 more a month
• Flat-dollar approach: About $34 more a month
• Difference: About $24 a month, or nearly $290 a year

The closer your benefit is to $1,223, the smaller the difference. If your check is higher, you would give up more of the increase you receive under the current system.

Who would lose and by how much

AARP estimates that roughly 80% of beneficiaries would receive smaller annual raises under a flat-dollar COLA than they do under the current percentage-based system.

How much smaller would depend largely on where your benefit falls compared with the amount used to set the flat increase.

The Committee for a Responsible Federal Budget (CRFB) estimates the difference would build over time:

• Bottom 20% of lifetime earners: Scheduled benefits would be about 3% lower in 2065.
• Top 20%: Scheduled benefits would be about 19% lower in 2065.

Lower-benefit retirees would therefore be affected much less, while people receiving larger checks could give up a bigger share of their future COLAs. For roughly four out of five beneficiaries, those smaller annual increases could become more costly the longer they collect Social Security.

Why the gap grows so much over a long retirement

AARP's Public Policy Institute modeled someone who began collecting an average Social Security benefit in 1998 and lived to age 93.

By 2026, that person would receive about $22,600 a year under the current percentage-based COLA, compared with roughly $18,000 under the flat-dollar approach, about $4,600 less in 2026 alone.

Across the retiree's full retirement, AARP estimated the difference would add up to nearly $78,000 in today's dollars. What starts as a relatively small gap can become much more costly when smaller increases keep building on a lower monthly benefit year after year.

What it could mean for retirees who depend most on Social Security

About 20% of Americans age 65 and older get at least 90% of their income from Social Security. With nearly 60% of people 75 and older having little or no retirement savings, even a smaller annual increase can become more important as the years pass.

AARP illustrated the risk with a woman who retired at 65 in 1998 and received the average benefit for women. Under the current COLA system, her income would remain above the federal poverty line at age 93.

With a flat-dollar COLA, AARP found that her benefit would eventually fall below it. Its analysis found a similar result for a disabled worker who began collecting benefits in 1998, with income falling below the poverty line by age 64.

If Social Security covers most of your expenses, smaller annual increases could become harder to absorb over time, especially if you have little savings to make up the difference.

How this compares to the raise you get now

Under the current COLA system, each annual increase becomes part of your new monthly benefit. If your check rises from $2,000 to $2,060 after a 3% COLA, the next increase is applied to $2,060 rather than the original $2,000.

Over time, that helps your benefit keep pace with rising prices based on the amount you actually receive. A flat-dollar approach would break that link for people with benefits above the amount used to set the increase.

Bottom line

Congress hasn't approved a flat-dollar COLA, so your Social Security increases still follow the current percentage-based formula. The idea is one of several being discussed as lawmakers look for ways to reduce the program's long-term funding gap.

AARP opposes the change because smaller annual increases could leave retirees with less protection against rising prices over time. If Social Security will cover a large share of your expenses, building some flexibility into your retirement plan can make it easier to handle slower benefit growth if the rules ever change.

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