The days of soaring Social Security checks are likely over.
Over the last three years, Americans have seen their Social Security checks jump a total of 18.8% as the COLA, or cost-of-living adjustment, is pegged to inflation using the CPI-W report so it jumps when inflation jumps.
However, the Federal Reserve seems to have finally brought inflation to heel. After two years of elevated interest rates, the Fed announced its first rate cut in four years on Wednesday, lowering the Federal Funds rate 50 basis points to a range between 4.75% and 5%.
That news doesn't directly impact the 2025 COLA , but it shows that the Federal Reserve believes that inflation has been tamed and will likely continue to fall toward its goal of 2%. It's also a sign that the labor market and the economy have cooled to the point where the central bank is not afraid of the risk of lowering rates too fast.
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How the 2025 COLA is shaping up
The Social Security Administration uses the third-quarter readings for the Consumer Price Index for urban wage earners and clerical workers (CPI-W) to determine the annual COLA.
Since we already know the CPI-W for July and August, we have two-thirds of the information needed to make an easy, educated guess as to what the 2025 COLA will be.
The CPI-W rose 2.87% in July and just 2.35% in August, so if just those two months of data were being used, the COLA would be 2.6% for 2025.
Looking at the facts around September's inflation number, it seems more likely to bring the COLA down, rather than move it up. First, the comparison favors slowing year-over-year inflation, as the CPI-W rose by 0.23% from August to September in 2023. The last time the index rose that rapidly was in April, so month-over-month inflation seems likely to be weaker, meaning year-over-year inflation would be lower than it was in August.
Second, one of the most volatile price categories, energy, is trending down this month. Oil prices have fallen to their lowest levels in over a year, going below $70 a barrel earlier in the month, and they're currently down about 20% from a year ago. That will meaningfully slow inflation, especially since the price of oil factors into so many goods and services. Year-over-year inflation, in other words, seems on track to be even lower in September than it was in August, meaning that 2.6% is likely the highest that the COLA would be.
Why 2026 will probably be worse
The Federal Reserve is still focused on bringing inflation down to 2%, and according to its preferred measure, the personal consumption expenditures (PCE) index was still at 2.5% as of July.
The Federal Reserve is focused on shoring up the labor market to achieve maximum employment, but it will also be vigilant against a potential rebound in inflation. The only way the 2026 COLA would be higher than the 2025 adjustment is if inflation reaccelerates.
According to its Summary of Economic Projections, or "dot plot" forecast, the central bank sees PCE inflation finishing this year at 2.3% and falling to 2.1% by the end of 2025. If that forecast holds, the 2026 COLA should be around 2.2%, or lower than the likely 2025 one.
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The silver lining for retirees
While the 2025 COLA will be a far cry from the 8.7% increase Social Security recipients got in 2023, ultimately, retirees are better off with inflation being under control and interest rates coming back down.
After all, the COLA is a reactive, backward-looking figure. The adjustment is determined by inflation that has already taken place, some of it over a year ago, and those costs, such as energy and food, are very real for retirees. The COLA only offsets them after they've already happened.
Additionally, lower interest rates will make it easier to borrow money and refinance debt like a mortgage or an auto loan, allowing for more financial flexibility.
Finally, retirees tend to favor dividend stocks due to the income they provide, and dividend stocks tend to increase as interest rates come down because bond investors rotate back into dividend stocks. For Social Security beneficiaries holding dividend stocks, that's good news.
While your check from Uncle Sam might not be going up as much as you'd like, Social Security recipients will benefit in other ways from falling inflation and lower interest rates. A normalized COLA is a good thing overall.
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