From Kiplinger · · 3m
A flat COLA would shrink checks and tax bills
Swapping Social Security's percentage raise for a flat dollar amount would cut most retirees' benefits, and quietly trim some tax bills too.
In brief
Swapping Social Security's percentage raise for a flat dollar amount would cut most retirees' benefits, and quietly trim some tax bills too. A flat COLA is a benefit cut for roughly 80% of retirees, and the smaller tax bill that comes with it recovers only a fraction of what you lose. Originally reported by Kiplinger.
Same raise for everyone
Proposals would replace Social Security's percentage COLA with one flat dollar amount paid to every beneficiary, regardless of how big their monthly check is.
“a flat-rate cost-of-living adjustment gives each recipient the same flat dollar amount”
Why anyone is asking
The retirement trust fund is projected to run out of reserves in 2032, so lawmakers are hunting for ways to close the gap.
Pegged to the 20th percentile
The flat amount would be set using the benefit of someone around the 20th percentile of the benefit distribution, then paid to everyone.
Small checks gain, big checks lose
Relative to their existing benefit, low earners get a bigger bump and high earners get a smaller one. Even so, some low-income retirees could end up behind over time.
Half the shortfall
The Committee for a Responsible Federal Budget estimates the switch could close about half of Social Security's projected 75-year financing shortfall.
AARP calls it a cut
AARP opposes the idea, saying benefits would grow more slowly than today and roughly 80% of retirees would be worse off.
Fifty-eight dollars versus thirty-four
Under the 2.8% COLA the average retired worker got about $58 more a month. AARP puts the flat-rate version at roughly $34, a $24 monthly gap.
The gap compounds
Benefits often run 15 to 20 years or more. Someone who retired at 65 in 1998 could have collected $77,900 less by age 93 under the flat approach.
Less benefit, less taxable income
Benefits become taxable once combined income is high enough: AGI excluding Social Security, plus tax-exempt interest, plus half your annual benefits.
“Depending on income, up to 85% of Social Security benefits may be taxable.”
Thresholds frozen since 1983
Taxation kicks in at $25,000 for singles and $32,000 for joint filers, unchanged for over four decades. About half of beneficiaries now pay tax on part of their benefits.
Who actually gets the offset
Retirees living mostly on Social Security are already under the thresholds, so they just lose money. Those with a pension or IRA withdrawals may fall into a lower taxable share.
Watch mid-October
A senior bonus deduction of up to $6,000 runs through 2028, and the 2027 COLA, projected at 3.4% to 3.6%, gets announced mid-October.
The headline
A flat COLA is a benefit cut for roughly 80% of retirees, and the smaller tax bill that comes with it recovers only a fraction of what you lose.
