Social Security is facing a financial crunch, and a new plan to limit annual cost-of-living adjustments (COLA) for high earners could play a big role in keeping benefits flowing for everyone. This proposal targets wealthier retirees with the goal of reducing the risk of major cuts for all beneficiaries in the next decade.
What Is COLA and Why Is It Important?
- COLA stands for Cost-of-Living Adjustment, an automatic increase in Social Security payments each year based on inflation.
- In 2026, COLA is set at 2.8%, meaning the average retiree will get about $54 more per month.
Why Is a COLA Cap Being Proposed?
- Social Security’s trust fund is projected to run out by 2032, threatening a 24% across-the-board cut in benefits if nothing changes.
- There are more retirees collecting benefits, but fewer young workers paying in through payroll taxes.
- Tax changes like larger senior deductions are also reducing income for Social Security, making financial pressures even worse.
How Would the COLA Cap Work?
- The plan would place a cap on the dollar amount of the COLA increase for retirees receiving the largest Social Security benefits.
- Example: If a retiree’s calculated COLA increase is $1,000 but the cap is $900, they would only get a $900 bump.
- The cap could be set at different levels, such as covering the top 25% or 50% of benefit recipients, impacting those with the highest lifetime earnings.
Projected Impact and Savings
- Capping COLA at the 75th percentile would save an estimated $115 billion over ten years.
- A stricter cap at the 50th percentile could save $385 billion; a looser one at the 90th percentile still saves $35 billion.
- Most average retirees would not be affected, as they receive benefits below the proposed cap threshold.
Who Would Be Affected?
- Retirees with the highest monthly benefits—often those with long, high-earning careers or who delayed retirement—would see their yearly increases limited.
- The average monthly benefit in 2026 is $2,071, but the maximum is over $4,000 per month. The cap mostly affects those closer to the max.
Pros and Cons of the Proposal
Pros:
- Could help avoid across-the-board benefit cuts in 2032.
- Makes Social Security more progressive by asking the wealthiest beneficiaries to accept smaller annual increases.
- Provides full inflation protection for average and lower earners.
Cons:
- Some say even high earners face rising healthcare and living costs, so limiting their COLA could slowly erode real benefits.
- Critics suggest focusing on raising more revenue or changing how inflation is calculated.
What Should Retirees Do?
- Average and lower-income retirees likely won’t be affected and can expect COLA increases as usual.
- High earners should plan on smaller annual increases in the future and consider private financial planning options.
Conclusion
The proposed Social Security COLA cap is intended to shore up the system by focusing cuts on the retirees most able to afford them, while preserving full inflation protection for the majority. With the trust fund facing a shortfall within the decade, policymakers are looking at targeted approaches like the COLA cap as part of a broader fix. The debate continues—but if adopted, the cap could help avoid large, sudden cuts for everyone and keep Social Security sustainable for years to come.