Economic Snapshot | Retirement

COLA cut would hurt oldest retirees the most

Many deficit reduction proposals under discussion reportedly include a lower cost-of-living adjustment (COLA) for Social Security benefits. This change in how to calculate the COLA would reduce it by an estimated 0.3 percentage points per year. This seemingly small cut would erode benefits over time. Under the proposed COLA, an average-wage worker retiring this year would, in 2031, receive $1,754 less in annual benefits. This represents a decline of 5.4 percent in the next 20 years.

The COLA cut would affect all Social Security participants, including current retirees. It is even worse than an across-the-board benefit cut, because the reduction compounds over time: the oldest retirees tend to be the poorest ones. Proponents argue that such a cut is a technical fix, based on the claim that the current COLA overstates inflation. However, as EPI economist Josh Bivens explains in a recent briefing paper, the current COLA likely understates the inflation faced by seniors, who devote a much greater share of their income to health care expenses than is reflected in either of these two ways of calculating the COLA.

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