The new cost-of-living adjustment (COLA) announcement means that Social Security recipients, especially retirees, may get bad news.
The Federal Reserve has warned that these important payments may be cut even more in the coming years, which will mean that pensioners will have to deal with smaller increases in their Social Security income.
Since prices are going down, it is possible that big increases in Social Security benefits will stop happening soon. The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is used by the Social Security Administration (SSA) to figure out COLA.
By helping Social Security benefits keep up with inflation, the changes are meant to protect retirees’ purchasing power over time.
Due to high inflation, the pandemic has caused economic uncertainty, which has caused pensioners’ benefits to rise by 18.8% over the last three years.
But the Federal Reserve’s ability to keep inflation in check could mean that big COLA increases are over for now. As a result, people who get Social Security should expect smaller changes in the coming years as inflation goes down.
FED has warned millions of retirees about the future of Social Security benefits
When the Federal Reserve lowered the Federal Funds rate by 50 basis points in September 2024, it was the first time in four years that rates were lowered. The new rate was in the range of 4.75% to 5%.
The fact that the central bank made this choice shows that they think inflation is currently under control. The Federal Reserve’s efforts to keep inflation in check are good for the economy as a whole, but they could be bad news for seniors who depend on Social Security.
Since the SSA may not have to raise benefits as much when inflation goes down, it may be harder for retirees to keep up with rising living costs.
This rate cut does not have a direct effect on the 2025 COLA, but it does show that the economy has changed, which is what caused the recent rise in Social Security benefits.
Right now, we can guess what the 2025 COLA will be based on two months’ worth of CPI-W data from July and August. From what CBS News says, if these numbers stay the same, the COLA for 2025 will likely be around 2.6%, which is a big drop from previous years.
In July, the CPI-W went up by 2.87 percent, but in August, it only went up by 2.35 percent.
The last COLA for 2025 might not be more than 2.6% in September if the trend toward lower inflation continues. Energy prices, especially oil, have dropped below $70 a barrel, the lowest level in more than a year.
This is one of the main reasons for the trend. Since energy prices have a big impact on the overall rate of inflation, their drop means that annual inflation will keep going down, which makes it even less likely that the COLA will go up.
The FED projects a lower COLA increase for retirees in 2026
Since the Federal Reserve’s long-term goal is 2%, they think that inflation will continue to go down in the future. The inflation rate is going to drop to 2.1% by the end of 2025. It will be about 2.3% by the end of 2024.
This means that the COLA may only reach 2.2% in 2026 instead of the 2.6% that was expected in 2025. Retirees will need to plan ahead for these smaller COLA changes.
It is true that the COLA increases are meant to help retirees keep up with inflation, but the statistics are from the past and may not fully reflect the money problems pensioners are currently facing, like rising costs for things like food and electricity.
Could lower interest rates help retirees in the long run?
It may be too scary to think about getting a smaller Social Security check, but there is one possible benefit: the Federal Reserve’s plans to lower interest rates could make it cheaper to borrow money.
People who are retired and have debt, like mortgages or car loans, may find that lower interest rates help them pay their bills.
Lower interest rates on loans may help make up for lower COLA adjustments, giving retirees more financial freedom.
The general drop in inflation may also help to keep seniors’ spending stable, even though the COLA is mostly a reactionary adjustment based on past inflation.
If inflation is lower, retirees might not see the sharp rise in living costs that they have seen in the past few years.
