Recently, I responded to claims from Paul Krugman that raising the Social Security retirement age was “hugely regressive” because higher income people live longer. Krugman’s claim was incorrect, in part because low earners are more likely to claim Disability Insurance benefits, which wouldn’t be affected by raising the retirement age. But based on Krugman’s logic, the latest Social Security reform proposal, to base Cost of Living Adjustments (COLAs) on the lower “chain weighted” version of the Consumer Price Index, should be progressive: Rich people live longer, and the longer you live the more a lower COLA affects you. But a “diet COLA” turns out not to be progressive, and for the same reason: Disability.
Using the Policy Simulation Group’s Social Security models, I projected lifetime benefits under current law for members of the 1990 birth cohort. I then projected benefits under the assumption that COLAs would be 0.3 percentage points lower, approximately the difference between the chained CPI and the CPI-W that’s currently used to calculate COLAs.
The blue bars in the graph above show the reduction in all Social Security benefits by lifetime earnings quintile (the 1st quintile represents the bottom 20% of the earnings distribution, and so on). From this point of view, a COLA cut is regressive: The bottom earnings quintile sees its lifetime benefits cut by 4.4% while the top quintile loses only 3.7%. But why? I suspected the main reason was disability: While poor retirees don’t survive as long as rich ones, many truly low-income individuals will spend a very long time collecting DI benefits, since they may claim while young but—due to the low mortality of disabling ailments such as depression and back pain—collect into old age. The longer you claim benefits, the bigger the impact of lower COLAs.
So I tried simulating a diet COLA that would apply only to retirement benefits. This wouldn’t exempt the disabled entirely, since under current law DI beneficiaries switch to the retirement program at age 66. But they’d receive the standard COLA based on the CPI-W at least through the full retirement age. This produces the results you’d expect: The lowest quintile of earners see only a 2.7% lifetime benefit cut while the top fifth of earners see their benefits cut by 3.4%.
So a COLA fix can be progressive and it can protect the disabled. But that comes at a cost: The all-inclusive COLA fix would cut Social Security’s 75-year deficit by around 19%, while exempting disability benefits would reduce the shortfall by only around 16%.