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The Impact of a Social Security Cost-of-Living Adjustment Reduction on the Income Distribution of the Elderly in the United States

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  • Wade Pfau

Abstract

In previous research, I find that a reduction of the cost-of-living adjustment has performed quite well in comparisons among different Social Security reform proposals. While a COLA reduction contains many positive features, there is some concern that it would push the most vulnerable members of the population into further poverty. In this paper, I use the Current Population Survey to simulate the effects of a COLA reduction on the incomes of a sample of aged units. I also consider modified COLA reduction plans that would apply only to certain ranges of ages. I find that COLA reductions can create significant effects on the incomes of the population, as once the COLA reduction is fully in effect, the incomes of some of the poorest elderly could be as much as 10% lower than at present. Nonetheless, the news is not entirely discouraging, as the savings of the COLA reduction to the Trust Fund are many times greater than the increased poverty that the COLA reduction would create. This leaves fertile ground to fashion a COLA reduction plan that includes income guarantees for the poorest members of the population, while also relieving a great deal of the future funding problems expected for the Trust Fund.

Suggested Citation

  • Wade Pfau, 2004. "The Impact of a Social Security Cost-of-Living Adjustment Reduction on the Income Distribution of the Elderly in the United States," Econometric Society 2004 Far Eastern Meetings 694, Econometric Society.
    • Handle: RePEc:ecm:feam04:694
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    References listed on IDEAS

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    1. Casey B. Mulligan & Xavier Sala-i-Martin, 1999. "Gerontocracy, retirement, and social security," Economics Working Papers 383, Department of Economics and Business, Universitat Pompeu Fabra.
    2. Johnson, Richard W., 1999. "Distributional Implications of Social Security Reform for the Elderly: The Impact of Revising COLAs, the Normal Retirement Age, and the Taxation of Benefits," National Tax Journal, National Tax Association;National Tax Journal, vol. 52(3), pages 505-530, September.
    3. Angus S. Deaton & Christina Paxson, 1998. "Measuring Poverty among the Elderly," NBER Chapters, in: Inquiries in the Economics of Aging, pages 169-204, National Bureau of Economic Research, Inc.
    4. Mulligan, Casey B. & Sala-i-Martin, Xavier, 1999. "Gerontocracy, Retirement, and Social Security," Working Papers 154, The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State.
    5. Johnson, Richard W., 1999. "Distributional Implications of Social Security Reform for the Elderly: The Impact of Revising COLAs, the Normal Retirement Age, and the Taxation of Benefits," National Tax Journal, National Tax Association, vol. 52(n. 3), pages 505-30, September.
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    More about this item

    Keywords

    Social Security Reform; Income Distribution;

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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