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.

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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.

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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.

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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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