Social Security COLA 2025 will probably disappoint you. The Fed says 2026 could be even worse.

The days of growing Social Security checks are probably over.

Over the past three years, Americans have seen their Social Security checks increase by 18.8% overall because the COLA, or cost-of-living adjustment, is linked to inflation using the CPI-W ratio, so it increases when inflation rises.

However, the Federal Reserve appears to have finally brought inflation to heel. After two years of high interest rates, the Fed announced its first rate cut in four years on Wednesday, dropping the Federal Funds rate by 50 basis points to a range of 4.75% to 5%.

This news does not have a direct impact on the 2025 COLA, but it shows that the Federal Reserve believes that inflation has been tamed and will likely continue to decline toward its 2% target. It is 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 cutting interest rates too quickly.

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How COLA 2025 is shaping up

The Social Security Administration uses third quarter readings for the Consumer Price Index for Urban Wage and Service 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 and educated guess as to what the 2025 COLA will be.

The CPI-W rose 2.87% in July and only 2.35% in August, so if only those two months of data were used, the COLA would be 2.6% for 2025.

Looking at the facts surrounding September’s inflation number, it seems more likely to lower the COLA than move it up. First, the comparison favors inflation slowing year-on-year, as CPI-W rose 0.23% from August to September in 2023. The last time the index rose this quickly was in April, so inflation month-on-month looks likely to be weaker, meaning year-on-year inflation would be lower than it was in August.

Second, one of the most volatile price categories, energy, is down this month. Oil prices have fallen to their lowest levels in over a year, falling below $70 a barrel at the start of the month, and are currently down about 20% from a year ago. This will significantly slow inflation, especially since the price of oil influences so many goods and services. In other words, year-over-year inflation looks set to be even lower in September than it was in August, meaning 2.6% is likely the COLA’s peak.

Why 2026 will probably be worse

The Federal Reserve remains focused on getting inflation down to 2%, and according to the preferred measure, the personal consumption expenditures (PCE) index was still at 2.5% in July.

The Federal Reserve is focused on supporting the labor market to achieve maximum employment, but 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 the Summary of Economic Projections, or “dot plot” forecast, the central bank sees PCE inflation ending this year at 2.3% and falling to 2.1% by the end of 2025. If this forecast holds, the 2026 COLA should be around 2.2% or lower than likely from 2025.

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The reason for retirees

While the 2025 COLA will be a far cry from the 8.7% increase Social Security recipients received in 2023, retirees are ultimately better off with inflation under control and interest rates falling again.

After all, COLA is a reactive, backward-looking figure. The adjustment is driven by inflation that has already happened, some of it over a year ago, and those costs, like energy and food, are very real for retirees. COLA only compensates for them after they have already happened.

In addition, lower interest rates will make it easier to borrow money and refinance debt, such as a mortgage or car loan, allowing for more financial flexibility.

Finally, retirees tend to favor dividend stocks because of the income they provide, and dividend stocks tend to rise as interest rates fall as bond investors rotate back into dividend stocks. For Social Security recipients who own dividend stocks, this is good news.

While your check from Uncle Sam may not grow as much as you’d like, Social Security recipients will benefit in other ways from lower inflation and lower interest rates. A normalized COLA is generally a good thing.