Millions of retirees relying on Social Security payments have received concerning news following the confirmation of a new cost-of-living adjustment (COLA). In coming years, retirees might face reduced increases in Social Security income as the Federal Reserve warns that inflation control could lead to smaller COLA adjustments. Historically, such adjustments have allowed benefits to keep up with rising living costs, as demonstrated by the 18.8% increase in pensions during the past three years spurred by high inflation levels due to pandemic-related economic factors.
The Social Security Administration (SSA) calculates the COLA using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). With inflation now seemingly under control, the Federal Reserve’s more successful economic measures suggest that large COLA increases could become less common. This development is significant for retirees who depend on these increments to maintain their purchasing power. Accordingly, beneficiaries should brace for smaller adjustments in the coming years as inflation declines.
According to recent announcements, in September 2024, the Federal Reserve lowered its Federal Funds rate for the first time in four years by 50 basis points, moving it to a range of 4.75% to 5%. This decision reveals the Fed's confidence that inflation is being managed effectively. Although this move is good news for the economy, it may not bode well for retirees who heavily rely on Social Security. As inflation decreases, there is less pressure on the SSA to significantly increase benefits, making it challenging for retirees to keep pace with rising living costs.
Currently projecting the COLA for 2025, based on CPI-W data from July and August, suggests a potential COLA of approximately 2.6%—a sizable drop from recent years. During this period, the CPI-W increased by 2.87% in July but only 2.35% in August. Should this downward inflation trend continue, the final COLA for 2025 may not exceed 2.6%. This shift is partly attributed to a reduction in energy prices, including oil, now at its lowest level in over a year at less than $70 per barrel. Lower energy prices typically signal reduced inflation rates, which lessens the likelihood of significant COLA increases.
Looking further ahead, the Federal Reserve has predicted further reductions in inflation with a long-term goal of 2%. By the end of 2024, inflation is expected to drop to approximately 2.3%, followed by 2.1% by the end of 2025. Consequently, the predicted COLA for 2026 might only be 2.2%, a step down from the projected 2.6% in 2025. Retirees should plan for smaller COLA adjustments and consider their budgeting strategies. These statistics are based on past economic data, which might not fully align with current financial challenges retirees face, such as rising costs for essentials like food and energy.
However, there could be a silver lining: the Fed's lower interest rates might lessen borrowing costs, providing some financial respite for retirees dealing with debts like mortgages or car loans. This potential decrease in borrowing costs may balance out the diminished COLA increments, offering retirees more financial leeway. Moreover, a broader decline in inflation could help stabilize retirees' spending, potentially alleviating some of the financial strain experienced in recent years.
