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The Federal Reserve cut rates by 0.25% in December 2025 in a split 9-3 vote and signaled that future cuts could be paused.
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Early projections suggest that the Social Security COLA for 2027 could fall to a range between 2.3% and 2.6%.
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A 2.3% COLA would mark the smallest Social Security increase since 2020.
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The Federal Reserve held its last meeting of 2025 on December 10 and, as FedWatch predicted, the Central Bank made its third consecutive interest rate cut. This time, rates fell a quarter point, meaning we enter 2026 with the benchmark rate in the 3.50% to 3.75% range. This reflects a drop of three-quarters of a percentage point since the beginning of the year, when the reference rate was set between 4.25% and 4.50% in January.
The Fed was divided in its decision to cut rates, with a vote of 9 to 3 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 further adjustments to the target range for the federal funds rate, the Committee will carefully evaluate incoming data, evolving outlooks, and the balance of risks.”
The Federal Reserve was also operating on 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 lagged.
Still, the decision will affect many aspects of the economy and could mean that retirees will be in for a surprise at COLA next year.
For many retirees who rely on Social Security benefits as their primary source of income, the Federal Reserve’s decision is most notable for what it could mean for the Cost of Living Adjustment (COLA) that applies to Social Security benefits. Specifically, the Federal Reserve’s decision to cut rates could mean that seniors will get a smaller benefit increase in 2027 than the amount they are accustomed to.
The Federal Reserve’s rate decision does not directly affect the amount of Social Security benefits that retirees collect, since the formula used to calculate these benefit increases is based on the Consumer Price Index for Urban Wage Earners and Office Workers (CPI-W). When CPI-W data for the third quarter of the year shows an increase in prices, retirees get a COLA equal to the year-over-year percentage increase.
However, the Federal Reserve’s decision is notable because a key part of the central bank’s central mandate is to keep inflation stable. The Federal Reserve has a target inflation rate of 2% and sets monetary policy with the goal of keeping price increases around this level. and maintain a strong labor market with low unemployment rates.
