Social Security recipients have received a wave of bad news due to the Fed’s rate cut in December.
The Federal Reserve cut rates by 0.25 percent with a 9-3 vote and also indicated that future cuts could be paused in the near term. This could indirectly lead to a lower Social Security cost-of-living adjustment in 2027.
Why It Matters
More than 70 million Americans rely on Social Security payments each month. However, their exact benefit amount depends on the cost-of-living adjustment, which changes every year based on inflation data.
Fed rates are key in signaling what the inflation rate and subsequent COLA will be for the following year.
What To Know
Moving into 2026, the Fed’s benchmark rate will range from 3.5 to 3.75 percent. That’s a 0.75 percentage point drop from the beginning of the year, with the rate set to a 4.25 to 4.50 percent target range in January, according to the Federal Reserve.
The Fed’s decisions can reflect in the future Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This index is used to measure inflation and determine the COLA for next year’s Social Security payments.
Based on estimates from 24/7 Wall Street, the COLA for 2027 could be as low as 2.1 percent. In 2026, the COLA was set to 2.8 percent after a 2.5 percent boost in 2025.
The Fed continually sets interest rates in an attempt to target an inflation rate of 2 percent.
“Right now, policymakers and economists are expecting inflation to stay relatively muted this year, assuming tariffs or supply shocks don’t show up in a meaningful way. If inflation stays lower, COLA adjustments will likely be smaller too,” Kevin Thompson, the CEO of 9i Capital Group and the host of the 9innings podcast, told Newsweek.
What People Are Saying
Alex Beene, a financial literacy instructor for the University of Tennessee at Martin, told Newsweek: “While many Americans are celebrating the Fed finally starting to lower rates from the highs the rose to in the post-pandemic years, that also can come with a surprise for Social Security recipients. The COLA rise in recent years has been significant due to ongoing inflationary pressures that drove interest rates higher. Now that those same rates are falling, that also could equate to a smaller COLA adjustment in the checks millions of seniors receive.”
9i Capital Group CEO Kevin Thompson told Newsweek: “CPI measures the rate of inflation, not the level of prices. So even if your COLA goes up, that doesn’t mean prices are coming down. It just means they’re rising more slowly off of already higher levels.”
What Happens Next
While a lower COLA would mean lower Social Security payments for seniors, it could also indicate lower inflation and lower expenses in the long run.
“At the same time, that smaller increase is supposed to be in alignment with the needs of many Americans and should translate to less need for more money to cover expenses,” Beene said.
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