Social Security COLAs: What You Need to Know After the Fed’s Rate Cut
Maurie Backman
Sun, December 14, 2025 at 12:11 PM EST
4 min read
Quick Read
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Social Security COLAs are tied to CPI-W inflation data from July through September, not to Federal Reserve interest rate decisions.
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The 2026 COLA is locked at 2.8% and will not change due to recent Fed rate cuts.
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Lower rates could stimulate spending and raise inflation in 2026, potentially increasing the 2027 COLA.
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There's a reason the Federal Reserve has been all over the news this week.
On Dec. 10, the Fed concluded its final interest rate policy meeting of the year. And as economists expected, the central bank decided to move forward with its third consecutive rate cut, lowering its benchmark interest rate by a quarter of a point.
If you're a retiree on Social Security, you may be wondering how this change might affect your upcoming cost-of-living adjustment, or COLA. Here's what you need to know.
How Social Security COLAs work
The purpose of Social Security COLA is to allow benefits to keep up with inflation. It used to be that lawmakers had to meet to approve COLAs on a one-off basis. Now, benefits are eligible for a COLA automatically each year.
COLAs are measured based on third quarter changes to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). When there's a rise in the CPI-W in the months of July, August, and September compared to the previous year's quarter, Social Security benefits go up.
The reason it's important to understand how this system works is to recognize that the Federal Reserve's interest rate decisions do not have a direct impact on Social Security COLAs. COLAs are not tied to interest rates. Rather, they're tied to inflation.
Of course, the Fed's interest rate decisions can have an impact on inflation. But the Fed does not directly set Social Security COLAs. And so the fact that the Fed just lowered rates won't change the 2.8% COLA Social Security recipients are in line for in 2026.
How the Fed's recent rate cut could affect future COLAs
While the Fed does not set Social Security COLAs and the upcoming 2.8% raise is set in stone, the Fed's actions could indirectly have an impact on future COLAs. If the economy seems to be slowing down, the Fed can cut rates in order to stimulate consumer activity.
Lower rates tend to spur consumer purchases because it costs less to finance them. But if lower interest rate result in a significant uptick in consumer spending, that could drive prices higher. That, in turn, could push CPI-W numbers up, leading to larger Social Security COLAs.
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So all told, the Fed's recent rate cut may not have much of an influence on Social Security in the near term. But if that cut encourages spending in 2026 and inflation rises, seniors on Social Security could be in for a larger COLA in 2027.
It's also worth noting that the Fed has signaled at least one interest rate cut for 2026. Whether there are more will depend on whether consumer spending holds steady or starts to decline. It will also depend on how inflation trends.
But if the Fed makes another rate cut in 2026, that, combined with its three recent cuts, could help fuel the economy. And that could set seniors on Social Security up with a larger raise in 2027 than what they're getting in 2026.
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