Social Security flat-rate COLA: Why 80% of beneficiaries could lose purchasing power

Social Security's flat-rate COLA could boost low-income beneficiaries but reduce purchasing power for 80% of recipients, especially middle-income retirees.

An old Social Security idea is getting fresh attention. A proposal from 1987 would give every Social Security beneficiary the same dollar increase in benefits each year instead of giving everyone the same percentage increase.

Social Security beneficiaries could see smaller COLA increases under a flat-rate system. (AFP)

The idea was proposed by former Democratic Rep. Tim Penny of Minnesota in 1987. His proposal was called a “flat-rate COLA.” Under the proposal, the dollar increase would be based on the COLA received by a beneficiary at the 20th percentile. Everyone would then get that same dollar increase, regardless of how much they normally receive. The issue is becoming more important because Social Security is facing a serious funding problem.

AARP estimates that 80% of Social Security beneficiaries could see their purchasing power decline over time under the flat-rate system. The organisation also warned that the effect could become worse as people get older. AARP made these arguments in an analysis of the proposal.

How the current Social Security COLA works

A flat-rate COLA would still use the same basic inflation calculation to determine the annual increase. But instead of applying the percentage increase to every person's benefit, the percentage would first be applied to the benefit of someone at the 20th percentile.

The resulting dollar increase would then become the flat-rate increase for everyone. For example, if the 20th-percentile beneficiary received a $35 monthly increase, every Social Security beneficiary would receive a $35 increase, even if their normal benefit was much higher. This is the biggest difference between the two systems: today's system gives everyone the same percentage increase, while the flat-rate proposal would give everyone the same dollar increase.

Why supporters like the idea

Supporters say the flat-rate COLA would be more progressive, meaning it would give relatively more help to people with lower benefits. The nonpartisan Committee for a Responsible Federal Budget, or CRFB, said a flat-rate COLA based on the 20th percentile could provide full benefits for about two more years than current projections.

Why critics say it could hurt middle-class Americans

The biggest criticism is that the flat-rate COLA would not just affect the richest beneficiaries. It would also affect a large number of middle-income retirees. AARP said beneficiaries between the 20th and 60th percentiles would be among those hurt by the change.

Under the proposal, everyone above the 20th percentile would receive the same dollar increase as the person at the 20th percentile. That means 80% of beneficiaries would receive a smaller increase than they would under the current percentage-based system, according to AARP. AARP used 2026 as an example to show the difference.

If the flat-rate COLA had been in place at the beginning of 2026, the average beneficiary would have received about $34.20 more per month, according to AARP. Under the actual 2026 COLA, the average beneficiary received about $57.90 more per month, AARP calculated. The difference means the average beneficiary would have received about $23.70 less per month under the flat-rate approach, according to USA Today.

AARP said that would have meant a loss of about $285 over the full year for the average beneficiary. AARP also said the $34.20 increase would have been below the actual inflation rate, meaning the benefit would not have fully kept up with rising prices. In simple terms, critics argue that the increase may look like a COLA on paper, but it may not actually protect the purchasing power of most beneficiaries.

Why purchasing power could keep falling

The biggest concern is not only the first year's reduction. The problem could grow over several years. If a beneficiary receives an increase that is smaller than the rise in prices, their Social Security check buys less than it did before. If that happens repeatedly, the loss in purchasing power can build up over time.

AARP warned that the impact of these smaller COLAs would multiply as the years go by. This could leave some beneficiaries struggling more as they age, particularly people who depend heavily on Social Security for their everyday expenses. AARP's concern is therefore that a policy designed to help poorer beneficiaries could also leave a large group of middle-income retirees with weaker inflation protection.

Why 80% could lose under flat-rate COLA

The flat-rate COLA is designed to make Social Security more generous for lower-income beneficiaries while slowing benefit growth for people with higher benefits. Supporters believe this could reduce poverty and help extend Social Security's finances. But critics, including AARP, warn that the same system could mean smaller inflation adjustments for 80% of beneficiaries.

The key issue is therefore who gains and who loses purchasing power. Lower-income beneficiaries could receive relatively larger increases, while many middle-income and higher-income beneficiaries could receive smaller increases than they get under the current system. For retirees already struggling with rising food, housing, healthcare and other costs, even a relatively small annual reduction in the COLA could become significant if it continues for many years.

That is why the flat-rate COLA debate is not simply about changing how Social Security calculates its annual increase. It is ultimately a debate over whether protecting the lowest-income beneficiaries should come at the cost of weaker inflation protection for the majority of beneficiaries.