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

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.