This Proposed Change to Social Security's COLA Formula Could Benefit Millions of Retirees

Social Security checks increase each year due to COLA boosts, and proposed
changes to that formula could increase your check’s annual growth rate. It’s part
of the Social Security 2100 Act, which Representative John Larson and Senator
Richard Blumenthal proposed.

The act is intended to protect Social Security benefits for decades, and it could aid your retirement
goals. Higher Social Security checks offer more flexibility, but the bill
must be passed before the new COLA formula could take effect.

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The current COLA formula

Social Security has an annual cost of living adjustment (COLA) that boosts
benefits due to inflation. It’s designed to protect seniors from rising costs
and ensure that their government checks would keep up.

The current COLA formula focuses on inflation rates that wage workers
experience. While it has provided a steady boost to Social Security benefits,
the authors of the proposed Social Security 2100 Act think another benchmark
should be used instead.

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What the Social Security 2100 Act would do

The Social Security 2100 Act has provisions that would extend the duration of
Social Security benefits while offering higher payouts now. The current COLA
formula uses CPI-W as its framework for annual hikes, but this proposal would throw the CPI-E into the mix.

It won’t be a transformative boost to your Social Security benefits, but the
provision could result in your total government check increasing slightly higher
than normal.

CPI-W vs. CPI-E

The Consumer Price Index for Urban Wage Earners (CPI-W) is the current benchmark
for COLA, but the proposal would shift the focus toward the Consumer Price Index
for the Elderly (CPI-E).

CPI-W focuses on inflation that wage workers would experience, while CPI-E
addresses living costs that are more prevalent for retirees. The CPI-E, in
particular, places a stronger emphasis on housing and healthcare costs.

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How much your government checks can grow

Your government check could grow slightly due to the change, but it depends on the
difference between the CPI-W and the CPI-E in any given year. For instance,
CPI-W increased by 3.3% over the past 12 months, while CPI-E was up by 3.55%
over the past 12 months.

Under the current 3.3% COLA growth rate, a $2,000 Social Security benefit turns
into $2,066. A 3.55% COLA growth rate translates into $2,071.

Compound growth adds up

This example shows how using the new COLA benchmark could net additional income per
month. People with higher benefits would see more gains each year.

While it may seem small, the growth could compound into sizable government checks
over time. An annualized 3.3% rate over the next decade turns a $2,000 monthly
check into $2,767.15. That same check would have turned into $2,834.86 per
month. That’s almost an extra $70 per month.

Other provisions included in the act

The COLA change isn’t the only part of the Social Security 2100 Act. Caregivers
would receive credits so they are not penalized for having to stop working, the
new minimum benefit would be set at 25% above the poverty line, and qualifying
students get their benefits extended to 26.

The proposal aims to prevent a 22% cut in 2032 by raising payroll
taxes on millionaires and billionaires.

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How the bill will be paid for

The authors of this proposal put all of the responsibility on millionaires and
billionaires to cover the costs. Right now, payroll taxes are not collected on
wages over $184,500, and the proposal would apply the payroll taxes to wages
above $400,000.

This change would only affect the top 0.4% of wage earners, according to Larson
and Blumenthal.

Don’t count on this bill passing anytime soon

Although the proposal could increase Social Security benefits, retirees shouldn’t
consider it for their financial plans. The bill was proposed by two Democrats
who would face tough resistance from a Republican majority.

The Republican Party doesn’t rally around raising taxes on millionaires and
billionaires. Since the funding of this proposal depends on higher taxes for the
rich, it would face sharp resistance as long as Republicans hold the majority.

How the bill may be passed in the future

Some of the lofty goals of this proposal may see the light of day in a future
bipartisan bill. The Social Security 2100 Act’s objectives may be used as
bargaining chips for a pressing Republican goal.

If a Democrat becomes President soon and the party reclaims the House and
Senate, it would be much easier for all of the proposed ideas in this bill to
receive approval.

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Bottom line

Retirees should keep this proposal on their radar but not adjust their plans for
it. Any bill that increases Social Security benefits for retirees offers more
financial flexibility. However, you should still follow basic money habits like
reducing expenses and looking for ways to make extra money.

A slight boost to your Social Security benefits is a nice bonus, but it won’t
change your financial trajectory. Your actions and ability to avoid financial mistakes
play a far bigger role in your finances than the government.

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