As we approach the end of the year, the U.S. government is thinking of methods that change how Social Security benefits increase each year. As it stands, the annual Cost-of-Living Adjustment (COLA) is meant to help retirees keep up with the rising costs of inflation.
The new would make the Social Security system be split into two tiers. This simply means that most would still be protected from inflation but those who receive higher benefits would be subject to a certain limit on how much their increase can be.
How the Two-Tier COLA System Would Work
Simply put, Social Security benefits are recalculated every year to keep up with the rising costs of goods and services. The new proposal would actually limit the increase for those who receive higher benefits.
That means:
- Lower- and middle-income retirees would still get the full COLA increase.
- Higher-income retirees would experience a limit on their increase.
This creates a “two-tier” system.
Why Supporters Say It’s Fair
There are many supporters of this approach:
- Supporters say that the limit will only affect people who are receiving larger benefits as many of them are receiving higher income, therefore they don’t rely on Social Security as their financial lifeline.
- The majority of pensioners are protected. Majority of Social Security recipients will be protected from the increase in inflation, particularly those who rely significantly on Social Security.
- By intending on saving money from high income earners, the government can save money within the Social Security system and make it last longer.
- This reform would begin to improve Social Security’s finances relatively quickly since it could go into effect immediately.
What the Numbers Show
As per the Committee for a Responsible Federal Budget (CRFB), Over the next ten years, it would save almost $115 billion to put the COLA cap around the 75th percentile, which would only apply to the top 25% of income. In doing this, it could close approximately 10% of the
Should the cap be set around the 50th percentile, the savings would be even greater.
Data also suggests that most retirees won’t be affected:
- The bottom 60% of earners would see no change.
- Moving to the next 20%, they may only see a small change.
- The 20% at the top may only see smaller increases as there are receiving higher benefits.
The Potential Drawbacks
Of course, no plan is perfect. Critics have pointed out a few concerns:
- Law officials are concerned that even though the cap will help, it’s not something that would completely solve the funding issue that the Social Security is currently facing.
- The manner in which the cap is set is important.
- Retirees may not be happy about this. Unfortunately, people want what they worked hard for and even small changes to benefits may cause negative responses from retirees.
- It’s also important to remember that if inflation increases quickly, it may become difficult for those who are capped, to keep up with the rising costs.
Finding a Balance for the Future
At the end of the end, this two-tier system is meant to protect retirees and attempt to sustain the Social Security program and protect it from a funding crisis. Unfortunately, higher income earners would have to bear the brunt of it by having their increase capped, but this will also allow for the program to remain strong for future generations.
There are many officials who are concerned that it may not solve the Social Security funding issue completely, but it would be a great help.
There are many questions, such as how much the cap would be, when will it be effective and what are other solutions to be done with this. The best option for retirees is to keep updated and make smart decisions regarding their financial future.