For the sake of fairness and fiscal propriety, cap Social Security’s cost-of-living adjustments at average wage growth.
Starting next year, seniors receiving Social Security will see an increase in their benefit checks of 3.6 percent, or by approximately $75 per month on average. That is thanks to the program’s automatic Cost-of-Living Adjustment, or COLA, which raises benefits every year in accordance with inflation.
That seems fair: If the cost of living has gone up, retirees’ incomes should, too. But when inflation is running high, as it presently is, the adjustment imposes an enormous fiscal cost. Back-of-the-envelope calculations show that existing beneficiaries will receive more than $60 billion in additional funds in 2027. All that money has to be borrowed. Social Security is already scheduled to go insolvent by 2032, and shortfalls already add to the publicly owned national debt.
One problem with COLA is that it uses the regular Consumer Price Index (CPI) to measure the cost of living, but the index is really meant to capture general inflation across a fixed market basket of goods and services. Social Security should instead use the “Chained CPI,” which accounts for consumers substituting cheaper products for more expensive ones when shopping, as they do in real life. That would result in only a slightly smaller boost each year — usually a small fraction of a percentage point, such as 0.1 percent this year — but save hundreds of billions of dollars over time.
Another worthwhile reform would cap the absolute-dollar rise in benefits at a certain percentile of retirees according to their existing benefits. If the cap were set at the 50th percentile, for example, a retiree getting the maximum Social Security benefit of $49,824 per year would see no greater increase than the average retiree who receives $25,140 per year, rather than nearly twice as much ($1,794 vs. $905 per year) to accommodate living larger. Currently, the bulk of COLA expenditures go to those already receiving the highest benefits — despite them being the most likely to hold financial assets that already appreciate with inflation.
As a matter of fairness and fiscal propriety, perhaps the soundest reform would be to cap COLA at the level of annual wage growth, ensuring that Social Security recipients get no larger raise than the people who are funding their benefits. Using the period that COLA tracks, hourly wages in the United States (which includes salaried workers) rose by an average of 3 percent in fiscal year 2026. That means real wages, adjusted for inflation, declined by 0.6 percent over the past twelve months.
When wages don’t keep up with inflation, let alone rise faster than prices, Social Security’s tax base doesn’t expand enough to fund a benefit increase based on the CPI. Therefore, COLA isn’t truly neutral. The residual expense is a hidden wealth transfer from younger Americans, who will have to finance the added debt, to wealthier seniors.
As a matter of cosmic justice, retirees shouldn’t be penalized by inflation just because workers’ real wages fall behind. But in the real world of limited resources, where every dollar of Social Security must come from current workers one way or another, seniors should only get a full cost-of-living adjustment when everyone else can afford to pay it.