The Fed’s December Rate Cut Brings Bad News and Good News On the Social Security COLA

Core Insights - The purchasing power of Social Security benefits has declined due to inadequate Cost of Living Adjustments (COLAs) that fail to keep pace with inflation, particularly affecting retirees who have different spending habits compared to urban wage earners [1][2] - Social Security benefits are a primary income source for many retirees, but their value has decreased to approximately $0.80 on the dollar compared to 2010 levels [2] - The Federal Reserve's recent interest rate decisions, including a quarter-percentage-point cut, could significantly influence future COLAs for retirees [3][5] Economic Impact - The December 2025 rate cut by the Federal Reserve marks the end of three rate reductions for the year, lowering the benchmark rate to a range of 3.5%-3.75% [5] - In 2026, retirees are projected to receive a 2.8% COLA, but this may not be sufficient given the inflation trends, with estimates for 2027 potentially dropping to between 2.3% and 2.6% [6][7] - The Federal Reserve's decision to cut rates suggests a belief that high inflation will not persist, which may lead to more modest COLAs in the near future [8][9] Future Projections - The COLA for 2027 is expected to be lower due to the Fed's recent rate cuts and forecasts of Personal Consumption Expenditures inflation at 2.4% for 2026 and 2.1% for 2027 [7][12] - While a smaller COLA may seem negative, it could indicate a stabilization in prices that would alleviate financial stress for retirees [11][12]