Proposed Changes to Social Security’s Cost-of-Living Adjustment

As policymakers debate ways to reduce the federal budget deficit, several proposals have included a change to the way that inflation is calculated in Social Security. A new cost of living measure (chained-CPI), which grows more slowly than the current calculation (CPI-W), would reduce spending on Social Security as well as other federally administered programs such as Supplemental Security Income and pensions for veterans.

Changing the cost-of-living adjustment (COLA) using a chained CPI would have a detrimental impact on the economic wellbeing of older and disabled Americans and their family members who receive benefits from Social Security. Small reductions to the annual COLA will accumulate over time so that the largest reductions in benefits will be on the oldest beneficiaries and the long-term disabled. For example, 92- year-old beneficiaries who were on the program for 30 years would see an 8.4% cut in benefits. Disabled children could face even larger benefit cuts over their lifetime. Oldest Americans are the least able to absorb cuts to their benefits as they are more reliant on Social Security for their income and have higher out-of-pocket medical spending and a higher poverty rate than younger Americans.

In addition to the chained CPI, this insight on the issues discusses alternative measures of inflation that could be used to adjust Social Security benefits, such as an elderly price index. It also discusses their implications for beneficiaries and for the solvency of Social Security.