What a New Flat-Rate Social Security COLA Would Mean for Retiree Taxes
Lawmakers are floating several ideas about how to shore up Social Security. One involves changing the annual cost-of-living adjustment.
Question: What if a smaller Social Security benefits increase for many retirees also meant a smaller federal tax bill for some?
That's one potential consequence of proposals floating to replace Social Security's current cost-of-living adjustment (COLA) with a flat-dollar increase. Instead of raising monthly benefits by a matching percentage for everyone, a flat-rate cost-of-living adjustment gives each recipient the same flat dollar amount.
Nonprofit organization AARP opposes such a change, arguing it would cut benefits for roughly 80% of retirees. The Committee for a Responsible Federal Budget says a flat COLA could help close Social Security's long-term financing gap.
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Then there's the question of tax impact. A smaller increase means less money for retirees but may also result in a smaller tax bill for those who pay federal income tax on their benefits.
That doesn't make the flat COLA proposal a tax cut. But as lawmakers consider how to shore up Social Security, with the retirement trust fund projected to deplete its reserves in 2032, the effect on retirees' finances is more complicated than the benefit reduction alone. Here's more to know.
Flat-rate Social Security benefit?
Under the current Social Security system, the annual cost-of-living adjustment is a percentage based on inflation. The same percentage applies to each beneficiary's monthly benefit, so the dollar increase varies with the benefit amount.
However, under a flat-rate SS COLA, the inflation-adjusted annual increase would be converted into a dollar amount based on the benefit of someone around the 20th percentile of the benefit distribution. Every beneficiary would then receive that same dollar increase.
As a result, people with smaller benefits would receive a larger increase relative to their existing benefit, while people with larger benefits would receive a smaller increase.
The nonpartisan Committee for a Responsible Federal Budget (CRFB) says a flat-rate cost-of-living adjustment could improve Social Security's finances by directing more benefit growth toward lower-income retirees.
By setting the Social Security COLA at the level for beneficiaries around the 20th percentile, larger benefits would grow more slowly, while people with smaller benefits would receive a larger increase relative to their existing benefits.
However, some lower-income beneficiaries could still receive smaller benefits over time than they would under the current COLA. CRFB estimates the approach could close about half of Social Security's projected 75-year financing shortfall.
AARP opposes a flat-rate COLA. The organization, which advocates for the interests of millions of adults age 50 and older, argues the proposal would amount to a benefit cut for most beneficiaries because their benefits would grow more slowly than under the current system.
- Under the existing 2.8% COLA, the average retired worker reportedly received about a $58 monthly increase.
- Under the flat-rate approach, AARP estimates the increase would have been about $34.
- That's about a $24 monthly difference for the average retired worker in that year.
That may not seem like a lot, but Social Security benefits can often be paid for 15 to 20 years or more, and differences in annual increases compound over time.
Based on those estimates, a person who retired at 65 in 1998 could have received $77,900 less in cumulative benefits by age 93 under the flat-rate COLA proposal.
Smaller Social Security checks can mean less taxable income
A smaller Social Security increase would mean less money in a retiree’s pocket. But for some retirees, it could also mean a slightly smaller federal tax bill.
That’s because Social Security benefits can be taxable when a retiree has enough other income. The IRS uses "combined income," calculated as Adjusted Gross Income (excluding Social Security benefits) + tax-exempt interest + 50% of your annual Social Security benefits.
Depending on income, up to 85% of Social Security benefits may be taxable.
The income thresholds for Social Security taxation, however, haven't changed since they were established in 1983: $25,000 for single filers and $32,000 for married couples filing jointly.
As a result, roughly half of Social Security beneficiaries now pay federal income tax on some portion of their benefits. A flat-rate COLA could affect those retirees differently depending on their other income.
Someone who relies almost entirely on Social Security may already be below the tax thresholds. So a smaller COLA would mean less money to spend.
But someone receiving a pension, taking traditional IRA withdrawals, or earning other taxable income could see part of the lost benefit increase offset by a smaller tax bill.
For them, a smaller COLA reduces overall combined income, which can lower the percentage of Social Security benefits added to taxable income or keep them from crossing into a higher tax threshold.
The tax savings wouldn't fully offset the reduction in Social Security income, and the difference could vary considerably from one household to another.
Also worth noting: The tax picture has also changed for older adults due to the 2025 Trump tax law. For tax years 2025 through 2028, eligible taxpayers age 65 and older qualify for a "senior bonus deduction" of up to $6,000 per person, subject to income limits.
That deduction, which can be claimed whether you itemize or take the standard deduction, can also reduce overall taxable income for some retirees who receive taxable Social Security benefits.
Bottom line: Will Social Security remain solvent?
A flat-rate COLA is just one of the ideas being discussed as lawmakers look for ways to address Social Security’s long-term solvency. Other proposals seek to raise payroll taxes, change the retirement age, adjust benefits in other ways, or combine several approaches.
It’s also important to keep in mind that taxes on Social Security benefits provide revenue to the Social Security and Medicare trust funds. The Committee for a Responsible Federal Budget estimates that taxing benefits generated roughly $99 billion in 2025, making that revenue an increasingly important part of the programs’ future.
For now? Retirees are looking at a projected 3.4% to 3.6% COLA for 2027, with the official COLA announcement coming mid-October. Stay tuned.
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