Change to Social Security COLA Would Reduce Retirees' Standard of Living

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A new report from CEPR suggests that changing the indexation formula for Social Security benefits — a cost-cutting suggestion often brought up on the campaign trail and in D.C. — would actually significantly reduce the living standard of retirees. The report, written by Dean Baker and David Rosnick, 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 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. Since the vast majority of retirees rely on Social Security for the bulk of their retirement income, this cut in the cost-of-living adjustment would imply a substantial reduction in the standard of living of retirees, unless they offset it by saving more during their working years or retiring later in life.

Since it's difficult to predict how workers in future years will adjust their behavior to a cost-of-living adjustment, Dean and David looked at changes to the CPI in the mid and late 1990s and how workers responded to those changes. The report shows that these changes to the CPI meant that 10 years after they went into effect, retirees were receiving a benefit 5 to 7 percent lower than would have been the case without any changes.