Is it curtains for COLA? Saving Social Security could mean changing the cost-of-living adjustment.

By Alessandra Malito

Several proposals consider changing the way retirees receive inflation protection. Here's what it could cost you.

Many Americans rely on the cost-of-living adjustment, but altering it might be one provision in a package to fix the program's insolvency issue.

For U.S. workers, Social Security is a cherished benefit. It's guaranteed lifetime income that adjusts every year to keep up with inflation.

That yearly cost-of-living adjustment, or COLA, is crucial because it allows older Americans to retain their purchasing power. But with Social Security facing insolvency in the next six years, the way in which recipients receive that perk may change substantially.

The COLA will be 3.6% in 2027, up from 2.8% this year. For the average beneficiary, that means an additional $75 a month. The Social Security Administration uses a formula that's tied to a subset of the Consumer Price Index to calculate the cost of living change each year. While the amount of the increase doesn't always align with what retirees spend, it is a help to those who rely on Social Security to pay the bills.

"People who receive Social Security benefits rely on [the COLA] heavily to protect their buying power," said Mary Johnson, an independent Social Security and Medicare analyst who has been tracking benefit adjustments for almost 30 years. "It is one of the only forms of retirement income we have that offers inflation adjustment." There are insurance products that offer inflation protection, such as annuities, but retirees have to pay for the perk, she said.

There isn't enough money going into Social Security's trust funds to sustain the program, and experts expect the funds to be depleted in the next six years. If that happens, all beneficiaries could see a cut to benefits of about 26%, and without any legislative changes, those cuts would deepen as the years go on. Congress has not yet seriously deliberated on ways to fix this insolvency issue, but policymakers and experts have floated ideas about eliminating the income-tax cap, raising the Full Retirement Age or finding other ways in which workers and retirees alike can be taxed.

Another possibility: Alter the cost-of-living adjustment.

Revamping the system

One avenue is to incorporate a flat-rate COLA. In a 1987 proposal from former Rep. Tim Penny, a Democrat who represented Minnesota from 1983-1995, the flat-rate strategy would use a benchmark determined by the dollar amount the beneficiary in the 20th percentile received. Put another way, if all Social Security recipients were to be arranged by the amount of their benefit, this strategy would take the bottom 20% and set the rate to the highest benefit in that quintile, leaving 80% of beneficiaries with a smaller adjustment, said Rich Johnson, vice president of financial security at the AARP Public Policy Institute.

Johnson used the 2026 COLA as an example. In 2026, beneficiaries received a 2.8% hike to benefits. The actual monthly COLA for the average beneficiary in January 2026 was $58, but if the program used the flat-rate method instead, the adjustment would have only been $34. Comparatively, it would cover a 1.7% inflation rate, he said.

Using this type of flat rate structure would significantly decrease the amount that beneficiaries receive over their lifetimes.

"These cuts would continually take place year after year," AARP's Johnson said. "They accumulate over time." If this change happened in 1998, for example, it would have cost the average beneficiary $78,000 over the past 28 years. "That is the power," he said. "That is why the COLA matters."

Older people receiving Social Security would not see as much of an impact as newly retired individuals who have a longer horizon for receiving benefits, Johnson added. Younger Americans wouldn't be affected at first, but their lifetime benefits would weaken under a reduced COLA system.

This change alone wouldn't solve Social Security's financing problems. There will likely have to be a package of provisions to solve the program's insolvency issue. A flat-rate COLA using the 20th-percentile figure and enacted in 2027 would close half of the program's 75-year shortfall, according to the Committee for a Responsible Federal Budget, using calculations from Urban Institute's Karen Smith. If it were at the 30th percentile, it would close two-fifths of the shortfall.

Capping the COLA

Under a capped COLA system, recipients would still receive an increase every year, but those with the highest benefits would receive a limited amount.

Anyone above a certain income cutoff would have their COLA capped, and anyone below it, would receive the full increase. The Committee for a Responsible Federal Budget gave an example: If the cap was set at $900 in 2035 and a retiree receiving $50,000 in benefits would have received a $1,000 COLA under the current system, they would receive $900 instead.

If the cap was set at the COLA for retirees in the 75th percentile, thus affecting the highest quarter of beneficiaries, it would close about 10% of Social Security's 75-year shortfall, saving $115 billion over the span of 10 years.

"A COLA cap would generate immediate savings and meaningfully reduce Social Security's funding gap," the CRFB wrote in an analysis on the proposal.

Switching from CPI-W to CPI-E

Right now, the COLA calculation is linked to CPI-W, the consumer price index for urban workers, and not CPI-E, which tracks the spending of adults 62 and older. Some experts and policymakers have proposed switching to CPI-E, arguing that doing so would better align COLA with retirees' actual spending and potentially provide them with a higher benefit.

The cost of healthcare greatly contributes to how much seniors spend every year, but rapidly growing prices also affect the disparity between the CPI-W and CPI-E, Mary Johnson said. Older Americans spend roughly twice as much on healthcare than younger urban workers, she said.

CPI-E historically outpaces CPI-W, but there have been years, such as 2022 and 2023, when gas prices soared, the COLA was higher than it would have been if it were tied to senior spending.

Switching to CPI-E would be more expensive. If the COLA were calculated using CPI-E beginning in December 2028, the adjustments would expand the long-range shortfall by 7%.

Other options

Another switch could be to a chained COLA, which is a more complicated way to calculate annual adjustments. Then-president Barack Obama included this suggestion in his 2014 budget, but it received pushback and was later dropped.

CPI-W measures the same goods and services, no matter what they cost, but a chained COLA accounts for buyers' substitutions. For example, shoppers at the supermarket may pick up chicken instead of beef if it has become too expensive for them.

This strategy could paint a more accurate picture of how consumers make purchases, but it would also limit the increases to COLA, and that would ultimately result in lower payments as well. A chained CPI starting next year would cut $188 billion of spending between 2027 and 2036 and close about 12% of Social Security's 75-year actuarial shortfall, according to the Cato Institute. "Benefits would generally continue to rise to keep pace with inflation, but more slowly than under the current law," according to its analysis.

Other proposals suggest straightforward cuts, such as reducing the COLA by 0.5 or 1 percentage points. With this strategy, the COLA would be calculated as usual before the reduction occurred, and then cut. The more extreme measure, cutting the COLA by one percentage point, would eliminate 44% of the 75-year shortfall if it began in December 2027, the Social Security Administration said.

Maintaining purchasing power

Legislators will have to strike a delicate balance between keeping Social Security's trust funds afloat and not lowering the COLA too severely. The first automatic COLA was introduced in 1975, in an effort to thwart aggressive inflation the country saw in the 1960s and 1970s.

But the relationship many retirees have with Social Security has changed in the decades since, and retirees are relying much more heavily on the program than ever before, said Robert Conzo, a certified financial planner and chief executive officer of financial advisory firm The Wealth Alliance. "They're using Social Security as their primary source of income," he said. "It was never designed for that."

At least approximately 14% of recipients 65 and older rely on Social Security for 90% or more of their family income, according to a 2024 Census Bureau's Center for Economic Studies report.

Protecting the COLA should be a priority for older Americans, Mary Johnson said. "It is better that we are grateful that we even have one because there are certainly efforts to reduce it or eliminate it altogether for some people," Johnson said. "We want to stick together on this and protect this benefit."

-Alessandra Malito

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10-26-26 1319ET