Social Security recipients, particularly retirees, might feel like they’re not getting a “raise to the occasion” after the latest cost-of-living adjustment (COLA) announcement. Looking ahead, the Federal Reserve has hinted at slimmer payouts, leaving pensioners to “tighten their belts” with smaller boosts to their Social Security income. With inflation now under control, the era of large increases in Social Security benefits may be winding down. The Social Security Administration (SSA) calculates COLA using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

These adjustments are designed to help Social Security benefits keep up with inflation, ensuring retirees maintain their purchasing power over time. Over the past three years, economic uncertainty from the pandemic led to an 18.8% rise in pensions, driven by unusually high inflation rates.

While the Federal Reserve’s success in taming inflation might be “cooling things down,” it also means the days of hefty COLA increases could be “frozen in time.” Beneficiaries may need to “adjust their expectations” as falling inflation leads to more modest adjustments in the years to come.

FED gives a warning about Social Security’s future

In September 2024, the Federal Reserve cut interest rates for the first time in four years, reducing the Federal Funds rate by 50 basis points to a range of 4.75% to 5%. This move signals the central bank’s confidence that inflation is now under control.

While efforts to rein in inflation benefit the overall economy, they might not be as welcome for retirees who depend on Social Security. With inflation slowing, the SSA may have less reason to increase benefits, potentially making it harder for retirees to keep up with rising living costs.

While this rate cut doesn’t directly affect the 2025 COLA, it reflects changing economic conditions that contributed to the recent rise in Social Security benefits. Currently, CPI-W data from July and August gives us a glimpse of what to expect for the 2025 adjustment.

If these trends hold steady, the 2025 COLA is likely to be around 2.6%—a noticeable drop compared to recent years. In July, the CPI-W rose by 2.87%, but by August, that increase had slowed to 2.35%.

If inflation continues to ease, September’s final COLA for 2025 is unlikely to exceed 2.6%. A key driver behind this trend is the drop in energy prices, particularly oil, which has fallen below $70 per barrel—the lowest it’s been in over a year. Since energy costs play a significant role in overall inflation, their decline suggests that annual inflation will keep slowing, making a larger COLA even less likely.

Lower inflation, ergo lower COLA increases for 2026

The Federal Reserve has its eyes on the prize—a long-term inflation goal of 2%. Projections suggest inflation will ease to 2.3% by the end of 2024 and dip slightly to 2.1% by late 2025. This means that after the anticipated 2.6% COLA in 2025, retirees might see a modest 2.2% adjustment in 2026. These smaller bumps in benefits may require retirees to “pinch their pennies” to make ends meet.

While COLA increases aim to help retirees “keep pace with inflation,” they’re based on past data and may not fully capture the financial challenges of the present, like the rising costs of essentials such as groceries and electricity. It’s a classic case of trying to “catch up” while inflation plays a tune just a step ahead.

Can lower interest rates give retirees a breather?

Though smaller Social Security check increases might feel like a tough pill to swallow, there’s a silver lining: the Federal Reserve’s rate cuts could make borrowing less expensive. With lower interest rates, retirees carrying debt—like a mortgage or car loan—might find some welcome relief in their monthly payments. It’s a case of “less stress, more rest” when it comes to managing those financial burdens.

Lower borrowing costs could help balance out smaller COLA increases, giving retirees a bit more wiggle room in their budgets. Plus, with inflation cooling down, seniors might find their spending habits settling into a more predictable rhythm, even if COLA adjustments are more of a “looking-back” calculation based on past inflation. The upside? Retirees may be spared the steep climbs in living costs they’ve had to face in recent years, making life a little less of an uphill battle.