The 2026 COLA was announced at 2.8% in October 2025.
Fed projections suggest a potential 2027 COLA in the 2.3% to 2.6% range if CPI tracks slightly above PCE.
Retirees relying on interest income from CDs and savings accounts have seen earnings decline after recent rate cuts.
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The U.S. Federal Reserve’s latest interest rate cut of a quarter percentage point lowered the benchmark federal funds rate to a range of 3.5%-3.75% in mid-December.
This move continues to spark optimism among market participants, as valuations of most risk assets are directly tied to the risk-free rate, at least when it comes to modeling out a company’s discounted future cash flows. Bond yields have also come down considerably in recent months (lower yields mean higher prices), so investors are winning across the board.
But the thing is, millions of Americans unfortunately don’t participate in this market. And for those who are retired, Social Security payments are the key lifeline that puts food on the table.
Accordingly, the Social Security Administration’s (SSA) cost of living adjustment (COLA) each year in October is a big event that millions focus intently on. There’s good reason for this, as this COLA will dictate how much a given senior’s monthly check will increase for the coming year.
Most seniors may already be aware that this cost of living adjustment is tied to inflation, but let’s dive into whether there’s any correlation to how this cut may affect next year’s COLA (2027).
As many investors may be aware, the annual cost of living adjustment (COLA) put forward by the Social Security Administration is aimed at helping seniors navigate rising prices across the economy. There are many factors that measure this rise, but the consumer price index (CPI) is the key factor that plays into how the SSA determines what the cost of living increase will be for an upcoming year.
The connection between the cost of living adjustment (COLA) and the Federal Reserve’s recent interest rate cuts since 2025 centers around inflation management and economic stabilization.
Simply put, lower interest rates could indicate a stabilizing economy, though recent data shows inflation has been somewhat stubborn. Given that COLA adjustments are typically tied to inflation rates, investors can assess via longer-duration bond yields where inflation may come in at over the coming year or two.
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On that basis, looking at the one-year U.S. Treasury, which currently yields around 3.63% at the time of writing, inflation expectations have continued to moderate, though less dramatically than earlier in the cycle (this Treasury note was trading around 4.2% as recently as July 2025). One-year Treasury yields factor in how interest rates will move over time, and reflect an average of where the Federal Funds rate will be in a year’s time. Thus, the 2-year U.S. Treasury may be a better indicator of future inflation and interest rates – this particular bond provides a yield of around 3.54% right now.
Of course, there are many factors that impact 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 does appear that inflation expectations are elevated compared to earlier projections, with the Fed’s latest dot plot forecasting PCE inflation at 2.9% for 2025 (higher than prior estimates), 2.4% for 2026, and 2.1% for 2027. This has translated to a 2026 COLA of 2.8%, announced in October 2025, which is slightly higher than the 2.5% COLA for 2025 but still reflects cooling from peak inflation years. Looking ahead, these projections suggest a potential 2027 COLA in the 2.3-2.6% range if CPI tracks slightly above PCE, though actual figures will depend on 2026 Q3 data.
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The Federal Reserve cuts interest rates to stimulate the economy, which can benefit individuals financially. Stock and bond values often rise with rate cuts, though the impact may already be reflected in current market prices. Homebuyers with variable-rate mortgages see lower monthly payments, while those with fixed-rate loans may refinance for savings. Lower rates also reduce reverse mortgage costs, allowing more home equity when selling. Additionally, credit card and consumer debt may see minimal interest reduction, as much of the expected decreases have already been priced in by the market. It’s also important to consider the benefit that lower rates have for governments, in slowing the growth of interest payments on the national debt.
Millions of retirees who rely on interest income from CDs, savings accounts, or money market funds have likely experienced a decline in earnings after the rate cuts. Similarly, bond investments could increase in value as yields decline. And with many retirees typically choosing a long-term investing mix that’s tilted heavier toward bonds, that’s a great thing.
For Social Security payments on the other hand, lower inflation expectations could mean lower increases each year. However, the age-old advice of investing whatever is left over every month into stocks and bonds continues to hold plenty of credence in this day and age. With recent CPI data showing a 3.0% year-over-year increase as of September 2025 (the latest available full report, as the release for October was canceled due to the government shutdown, and November’s is scheduled for release on December 18), retirees should monitor upcoming releases like December’s CPI (for November) on December 18 and subsequent months through 2026 for further clues on 2027 COLA trends.
It’s my view that the market is currently pricing in moderately elevated inflation expectations amid a resilient economy, with the Fed signaling only one additional rate cut in 2026 and inflation projected to ease gradually to 2.4% by year-end 2026. While a major inflationary resurgence isn’t the base case for most economists, persistent pressures in areas like housing and services could keep COLAs in the 2-3% range. So, seniors may be forced to search for other income sources outside of Social Security to battle healthcare and essentials prices that continue to rise. As we head into 2026, monitoring Fed actions and inflation data will be key to anticipating the 2027 COLA and adjusting retirement strategies accordingly.
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