The Fed’s December Rate Cut Means Social Security Retirees Could Be In for a COLA Surprise

Core Points - The Federal Reserve cut interest rates for the third consecutive time, reducing the benchmark rate by a quarter point to a range of 3.50% to 3.75% as of December 10, 2025, reflecting a total drop of 0.75% since January 2025 [1][2] - The decision to cut rates was made with a split vote of 9-3, indicating some internal disagreement, and future rate cuts may be paused as the Fed will assess incoming data and evolving economic conditions [2][7] - The rate cut may lead to a lower Cost of Living Adjustment (COLA) for Social Security benefits in 2027, with early projections suggesting a COLA increase in the range of 2.3% to 2.6%, which would be the smallest increase since 2020 [4][7] Economic Impact - The Fed's decision to lower rates could have significant implications for retirees who depend on Social Security, as it may result in a smaller benefits increase than they have become accustomed to [4][6] - The formula for calculating Social Security benefits is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which means the Fed's actions indirectly influence the inflation rate that affects these benefits [5][6] - The Fed aims to maintain a stable inflation rate of around 2% while supporting a strong labor market, which is a key aspect of its monetary policy [6]