The Federal Reserve has recently raised concerns about Social Security payments because they might not work the same way they do now. Since the new cost-of-living adjustment (COLA) was confirmed, it may be bad news for retirees in particular.
The Federal Reserve has warned that these important benefits could be cut even more in the coming years, leaving pensioners to deal with smaller increases in their Social Security payments.
Now that inflation is under control, the time when Social Security benefits went up by a lot may be coming to an end. To figure out COLA, the Social Security Administration (SSA) uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
What you need to know about the Federal Reserve warning and the future of Social Security payments
The changes are meant to help Social Security benefits keep up with inflation, which will protect pensioners’ purchasing power over time. Since high inflation and the pandemic have made the economy less stable, retirees’ benefits have gone up by 18.8% over the last three years.
Still, the Federal Reserve’s ability to keep inflation in check could mean that big COLA increases are over. As a result, people who get Social Security should expect fewer changes in the years to come as prices go down.
A range of 4.75% to 5% was set for the Federal Funds rate by the Federal Reserve in September 2024. This was the first rate cut in four years. This move shows that the central bank is sure that inflation is now under control.
The Fed’s efforts to keep inflation in check are good for the economy as a whole, but pensioners who depend on Social Security may be let down.
So, if inflation goes down, the SSA might not have to raise payments as much. This makes it harder for retirees to keep up with the rising cost of living.
But if inflation keeps going down, the final COLA for 2025 may not be more than 2.6% in September. One main reason for this trend is the drop in energy prices, especially oil prices, which have dropped below $70 a barrel, the lowest level in almost a year.
It is less likely that the COLA will go up because energy prices are going down, which has a big effect on the overall rate of inflation. This means that annual inflation is likely to keep going down.
The Federal Reserve has also said that inflation is likely to keep going down in the future. Its long-term goal is to keep inflation at 2%.
By the end of 2025, inflation should have gone down to 2.1%, down from 2.3% at the end of 2024. This means that the COLA might be as low as 2.2% in 2026 instead of the 2.6% that was planned for 2025.
People who are retired will need to set aside some money for these small COLA changes.
The numbers come from past economic data, so they might not accurately show the money problems retirees are currently facing, like rising prices for things like food and electricity.
This is true even though the COLA increases are meant to help retirees keep up with inflation.
Will lower interest rates eventually benefit retirees?
Even though it is likely that Social Security checks will go up less, one benefit could be that the Federal Reserve’s interest rate cuts will make it cheaper to borrow money.
Lower interest rates may help retirees who still owe money on things like mortgages or car loans.
Lessening the cost of borrowing money could give retirees more financial freedom by offsetting the lower COLA adjustments.
Also, the overall drop in inflation may help seniors keep their spending stable, even though the COLA is mostly a reactionary adjustment based on historical inflation.
If inflation were lower, retirees might not have to deal with the huge rise in living costs that they have been dealing with lately.
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