The Fed’s December Rate Cut Means Social Security Retirees Could Be In for a COLA Surprise
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The Fed cut rates by 0.25% in December 2025 with a 9-3 vote split and signaled future cuts may pause.
Early projections suggest the 2027 Social Security COLA could fall to 2.3% to 2.6% range.
A 2.3% COLA would mark the smallest Social Security increase since 2020.
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The Federal Reserve had its last meeting of 2025 on December 10 and, as FedWatch predicted, the Central Bank delivered its third straight interest rate cut. This time, rates dropped by a quarter point, which means we go into 2026 with the benchmark rate in the 3.50% to 3.75% range. This reflects a three-quarters of a percentage point drop from the start of the year, when the benchmark rate was set 4.25% to 4.50% target rate in January.
The Fed was split in its decision to cut rates, with a 9-3 vote in favor, and the rate cut may be the last for a while as the post-meeting statement said “In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.”
The Fed was also acting with incomplete data, as the prolonged government shutdown earlier this year meant it had to rely on research from outside sources, including a report from payroll provider ADP, as unemployment and inflation data from government sources were delayed.
Still, the decision will impact many aspects of the economy — and it could mean that retirees are in for a COLA surprise in the upcoming year.
For many retirees who rely on Social Security benefits as a primary income source, the Fed’s decision is most notable because of what it could mean for the Cost of Living Adjustment (COLA) that applies to Social Security benefits. Specifically, the Fed’s choice to reduce rates could mean that seniors are going to get a lower benefits increase in 2027 than the amount they’ve become used to.
The Federal Reserve’s rate decision does not directly impact the amount of Social Security benefits retirees collect, as the formula used to calculate these benefits increases is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). When CPI-W data from the third quarter of the year demonstrates rising prices, retirees get a COLA equal to the year-over-year percentage increase.
However, the Fed’s decision is notable because a key part of the central bank’s core mandate is to keep inflation stable. The Fed has a target inflation rate of 2%, and it sets monetary policy with the goal of both keeping price increases to around this level and maintaining a solid labor market with low unemployment rates.
When the Fed believes inflation needs to be brought under control, raising interest rates is one mechanism by which it does that. Since the Fed is lowering rates instead, it’s a strong indicator that the Central Bank is feeling confident that the persistently high inflation that’s been plaguing the country in the post-pandemic era is beginning to stabilize.
Since CPI-W is a measure of inflation, if inflation is lower, then the COLA is going to be smaller. In fact, based on the Fed’s latest data plot forecasting Personal Consumption Expenditures inflation at 2.4% for 2026, and 2.1% for 2027, early projections would put the 2027 COLA in the 2.3-2.6% range, assuming CPI tracks slightly above PCE.
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Based on these early COLA projections, retirees may be in for an unpleasant surprise — especially if the COLA comes in at the lower end of this range. That’s because retirees have grown used to bigger raises since COVID-19. A 2.3% COLA would be the lowest raise since 2021, as this is what the benefit increases have looked like in recent years:
2026: 2.8%
2025: 2.5%
2024: 3.2
2023: 8.7%
2022: 5.9%
2021: 1.3%
A smaller raise is never welcome news, but retirees should remember that COLAs are not like traditional raises and are actually just benefit increases intended to help them maintain buying power.
Lower COLAs, which indicate lower overall inflation, can be good news for seniors when you dig a little deeper, since it means retirees aren’t facing the potential erosion of their buying power from other sources that don’t have inflation-protection built in. Still, retirees should prepare now for the fact that a low 2026 COLA may be coming based on the Fed’s latest move so it doesn’t come as a shock when the COLA news comes.
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