In less than two weeks, the new cost of living adjustment (COLA) will be released, but it will disappoint Social Security recipients, particularly retirees. Furthermore, the Fed stated that Americans may face even worse conditions in 2026.
Unfortunately, the days of big Social Security payouts are over. Because the cost-of-living adjustment, or COLA, is based on the CPI-W report and rises in reaction to fluctuations in inflation, Social Security benefits for retirees have grown by a total of 18.8% during the last three years. Nonetheless, the Federal Reserve appears to have successfully managed inflation.
The Federal Reserve announced its first rate cut in four years on Wednesday, lowering the Federal Funds rate by 50 basis points to a range of 4.75% to 5% after two years of high interest rates. Although the Federal Reserve believes that inflation has been contained and will most likely continue to fall toward its objective of 2%, this news has no direct impact on the 2025 COLA.
Furthermore, it suggests that the economy and labor market have stabilized to the point where the central bank is less concerned about taking the risk of decreasing interest rates too soon.
The 2025 COLA is Likely to be Disappointing for US Retirees
The Social Security Administration uses the third-quarter values of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to compute the annual COLA. We currently have two-thirds of the data required to swiftly and reliably predict the 2025 COLA because we know the CPI-W for July and August.
If only the first two months of CPI-W statistics were utilized, the 2025 COLA would be 2.6%, as the CPI-W increased 2.87% in July but only 2.35% in August. According to the available data, it appears more likely that the September inflation rate would decrease rather than boost the COLA.
First, given that the CPI-W increased by 0.23% in August and September 2023, the comparison indicates a slowing in year-over-year inflation. The last time the index grew this quickly was in April, thus month-over-month inflation is expected to be slower, implying that year-over-year inflation would be lower than in August. Second, notoriously volatile energy prices fell this month.
Oil prices have fallen below $70 per barrel earlier this month and are now at their lowest levels in more than a year. They are also down approximately 20% from a year ago.
Given how much products and services are affected by the price of oil, this will drastically lower inflation. In other words, year-over-year inflation appears to be heading even lower in September than it was in August, implying that the COLA’s maximum level is likely to be 2.6%.
Retirees Might Wish to Plan Financially for 2026
The Federal Reserve’s inflation objective remains at 2%, and as of July, the preferred measure of personal consumption expenditures (PCE) was 2.5%. While the Federal Reserve is committed to assisting the job market in reaching full employment, it will keep a watchful eye on any potential return of inflation.
The only way the 2026 COLA may exceed the 2025 adjustment is if inflation rises. According to its Summary of Economic Projections, the central bank anticipates PCE inflation to reach 2.3 percent this year and reduce to 2.1 percent by the end of 2025. If this forecast is correct, the 2026 COLA should be around 2.2%, which is lower than the predicted 2025 number.
Even if retirees receive an 8.7% increase in 2023 above the 2025 COLA, they will ultimately profit from reduced interest rates and controlled inflation. After all, the COLA is a reactionary, backward-looking metric. The adjustment is established by past inflation, some of which occurred more than a year ago, and pensioners face very real costs such as power and food.
As a result, the COLA only provides compensation for past occurrences. Furthermore, reduced interest rates will make it easier to borrow money and refinance debt, such as a mortgage or auto loan, providing you with more financial flexibility.