The new cost of living adjustment (COLA) will be released in less than two weeks. However, it will be bad news for people who get Social Security, especially retirees. The Fed also said that things could get even worse for Americans in 2026. It’s too bad that the days of getting big Social Security checks are over.
Social Security payments for retirees have gone up by 18.8% over the last three years. This is because the cost-of-living adjustment, or COLA, is based on the CPI-W report and goes up when inflation does. Still, it looks like the Federal Reserve has been able to keep inflation in check.
After two years of high interest rates, the Federal Reserve lowered the Federal Funds rate by 50 basis points on Wednesday. This was the first rate cut in four years. The new rate will be between 4.75% and 5%. The Federal Reserve thinks that inflation is under control and will likely keep going down until it reaches its goal of 2%.
However, this information has no direct effect on the 2025 COLA. This also means that the economy and job market have become stable enough that the central bank is less worried about the risk of cutting interest rates too quickly.
The 2025 COLA will likely be disappointing for US retirees
SSA figures out the annual COLA based on the values of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for the third quarter. Being aware of the CPI-W for July and August gives us two-thirds of the information we need to quickly and correctly guess the 2025 COLA.
The 2025 COLA would be 2.6% if only the first two months of CPI-W figures were used. This is because the CPI-W rose 2.87% in July and only 2.35% in August. From what we know so far, it looks like the September inflation rate will likely go down instead of up, which would mean that the COLA will go up.
First, the fact that the CPI-W went up 0.23% in August and September 2023 shows that year-over-year inflation is slowing down. The index hasn’t gone up this quickly since April, so inflation from one month to the next is expected to be slower.
This means that inflation from one year to the next would be lower than it was in August. Second, energy prices, which are one of the most unstable types of prices, went down this month.
Oil prices are now the lowest they’ve been in more than a year, having dropped below $70 per barrel earlier this month. Also, they are about 20% less than they were a year ago. Because many goods and services rely on the price of oil, this will make inflation a lot lower.
In other words, year-over-year inflation looks like it will be even lower in September than it was in August. This means that 2.6% is probably the highest amount that the COLA could go up to.
Retirees might want to prepare financially for 2026
As of July, the Federal Reserve’s preferred measure of personal consumption expenditures (PCE) was still 2.5%, and its inflation goal stayed at 2%. The Federal Reserve wants to help the job market get to full employment, but it will also keep a close eye on any signs of inflation coming back.
If prices go up, that’s the only way the 2026 COLA could be higher than the 2025 increase. The central bank says in its Summary of Economic Projections that PCE inflation will end this year at 2.3% and drop to 2.1% by the end of 2025. The COLA for 2026 should be about 2.2%, which is less than what was expected for 2025 if this prediction comes true.
Even if retirees got an 8.7% increase in 2023 compared to the 2025 COLA, they would still gain from lower interest rates and inflation that is kept in check. The COLA is, after all, a reactive and backward-looking number.
The change is based on inflation that has already happened, some of it more than a year ago, and retirees have to pay real costs like food and energy. Because of this, the COLA only makes up for things that have already happened.
Also, it will be easier to borrow money and refinance debt like a mortgage or car loan when interest rates are low. This will give you more financial freedom.
Also See:- Millions of retirees will get more money from Social Security—Full Support Confirmed