The 2026 COLA was announced in October 2025 at 2.8%.
Fed projections suggest a possible 2027 COLA in the 2.3% to 2.6% range if CPI tracks PCE slightly higher.
Retirees who rely on interest income from CDs and savings accounts have seen their income drop after the recent rate cut.
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The US Federal Reserve’s latest interest rate cut of a quarter of a percentage point lowered the benchmark federal funds rate to a range of 3.5%-3.75% in mid-December.
The move continues to inspire optimism among market participants, as the valuations of many risk assets are directly linked to the risk-free rate, at least when it comes to modeling a company’s discounted future cash flows. Bond yields have also fallen significantly in recent months (lower yields mean higher prices), so investors are winning across the board.
But the thing is, millions of Americans unfortunately do not participate in this market. And for retirees, Social Security payments are the main lifeline that puts food on the table.
Accordingly, the Social Security Administration’s (SSA) Cost of Living Adjustment (COLA) every October is a big event that millions pay attention to. There’s good reason for this, as this COLA will determine how much a given senior’s monthly check will increase for the coming year.
Most seniors may already know that this cost of living adjustment is tied to inflation, but let’s dive into how this reduction might affect next year’s COLA (2027).
As many investors may be aware, the Social Security Administration’s proposed annual cost-benefit adjustment (COLA) is intended to help the economy navigate rising prices. There are many factors that measure this increase, but the Consumer Price Index (CPI) is the main factor that the SSA determines what the cost of living will be for the coming year.
The relationship between the cost of living adjustment (COLA) and the Federal Reserve’s recent interest rate cuts through 2025 center around inflation management and economic stability.
Simply put, low interest rates may indicate a stable economy, although recent data suggest inflation remains somewhat stagnant. Given that COLA adjustments are typically tied to inflation rates, investors can gauge where inflation is likely to come from over the next year or two through long-term bond yields.
On that basis, looking at the one-year US Treasury, which currently yields around 3.63% at the time of writing, inflation expectations continued to moderate, albeit less dramatically than earlier in the cycle (this Treasury note was trading around 4.2% as recently as July 2025). One-year Treasurys factor in how interest rates will move over time, and reflect an average of where the federal funds rate will be over a one-year period. As such, the 2-year US Treasury can be a good indicator of future inflation and interest rates – this particular bond currently offers a yield of around 3.54%.
Of course, there are many factors that affect bond yields other than inflation expectations. Overall GDP growth projections and demand for government bonds are other key factors that can drive short-term moves in these securities. But for retirees, it looks like inflation expectations are rising compared to previous estimates, with the Fed’s latest dot plot predicting PCE inflation at 2.9% for 2025 (higher than previously estimated), 2.4% for 2026, and 2.1% for 2027. 2025, which is slightly higher than the 2.5% COLA for 2025 but still reflects cooling from the peak inflation years. Looking ahead, these estimates suggest a potential 2027 COLA in the 2.3-2.6% range if CPI tracks PCE slightly higher, although actual figures will depend on 2026 Q3 data.
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The Federal Reserve lowers interest rates to stimulate the economy, which can benefit individuals financially. Stock and bond prices often rise with rate cuts, although the impact may be reflected in current market prices. Homebuyers with variable-rate mortgages see lower monthly payments, while those with fixed-rate loans can refinance for savings. Lower rates also reduce reverse mortgage costs, allowing more home equity when selling. Additionally, credit cards and consumer loans may see minimal interest reductions, as much of the expected reduction has already been priced into the market. In slowing the growth of interest payments on the national debt, it is also important to consider the benefits to governments of lower rates.
Millions of retirees who rely on interest income from CDs, savings accounts, or money market funds have experienced a drop in income since the rate cut. Similarly, bond investments may increase in value as yields fall. And since many retirees typically choose a long-term investment mix that’s heavily skewed toward bonds, that’s a big deal.
For Social Security payments, on the other hand, lower inflation expectations may mean lower increases each year. However, the age-old advice of investing in stocks and bonds that is outstanding every month holds plenty in this day and age. With the most recent CPI data showing a 3.0% year-over-year increase as of September 2025 (the most recent full report available, the release for October was canceled due to the government shutdown, and is scheduled for release on December 18), retirees should monitor upcoming releases such as December’s CPI (for November) on December 18 and subsequent months through 2020 via CO26L. tendencies.
My view is that the market is pricing in moderately high inflation expectations amid a resilient economy, with the Fed forecasting only one additional rate cut in 2026 and inflation expected to gradually reach 2.4% by the end of 2026. While the revival of core inflation is not as pressing in most sectors as in core sectors. Accommodation and services can keep the COLA in the 2-3% range. So, seniors may be forced to seek other sources of income outside of Social Security to cope with rising costs of health care and essential goods. As we head into 2026, monitoring Fed actions and inflation data will be critical to anticipating the 2027 COLA and adjusting retirement strategies accordingly.
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