The Effects of Cutting Social Security COLAs on the Living Standards of the Elderly

On both the campaign trail and Capitol Hill, politicians have recently suggested changing the indexation formula for Social Security benefits. A new report from the Center for Economic and Policy Research (CEPR) suggests that such a change would significantly reduce the living standard of retirees. The report also points out that Social Security benefits relative to lifetime earnings have already been cut for those retiring this year or in the near future.

"The data indicate that a change in the inflation formula would reduce the living standards of current and future retirees who are already getting less back in benefits and paying more into the system than earlier retirees," said Dean Baker, an author of the report and a co-director of CEPR.

The report, "The Impact of Cutting Social Security Cost of Living Adjustments on the Living Standards of the Elderly," examines the effect of using the chained consumer price index or C-CPI-U as the basis for measuring inflation to calculate cost of living adjustments for Social Security benefits. For Social Security beneficiaries, these changes would mean a decrease in benefits of 3 percent in 10 years, 6 percent in 20 years and 9 percent after 30 years of retirement. To assess the effect of these changes on the standard of living of seniors, the authors look at changes to the CPI in the mid and late 1990s and how workers responded to the changes.

The report shows that these changes to the CPI meant that 10 years after these changes went into effect, retirees were receiving a benefit 5 to 7 percent lower than would have been the case without any changes. However, the authors show that the Social Security as a share of total income per retiree actually increased in recent years even though the size of the benefit relative to lifetime earnings did not. And in considering the planned rise in the retirement age to 67, the report indicates an even deeper cut in benefits for future retirees. In addition, these near-retirees have paid a higher share of their income as Social Security taxes than previous retirees.

Since benefits have already been cut, and taxes have already been raised for those nearing retirement, Congress should be very cautious in making further cuts. While some have characterized a changing of the inflation formula for benefits as a "painless" way to generate budget savings, the potential loss in benefits would actually be a substantial portion of most retirees' income.