Fed projections suggest a potential COLA for 2027 in the range of 2.3% to 2.6% if CPI is slightly above PCE.
Retirees who rely on interest income from CDs and savings accounts have seen their earnings drop after recent rate cuts.
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The US 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 because the valuations of most risky assets are directly tied to the risk-free rate, at least when it comes to modeling a company’s discounted future cash flows. Bond yields have also fallen sharply in recent months (lower yields mean higher prices), so investors are winning across the board.
But the thing is, unfortunately, millions of Americans do not participate in this market. And for retirees, Social Security payments are the key lifeline that puts food on the table.
As a result, the Social Security Administration’s (SSA) Cost of Living Adjustment (COLA) each October is a big event that millions of people pay close attention to. There is a good reason for this, as this COLA will dictate how much a given senior’s monthly check will increase for the next year.
Most seniors may already be aware that this cost of living adjustment is tied to inflation, but let’s see if there is any correlation to how this cut may affect next year’s (2027) COLA.
As many investors know, the annual cost-of-living adjustment (COLA) proposed by the Social Security Administration is intended to help seniors navigate rising prices in the economy. There are many factors that measure this increase, 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 a future year.
The link between the cost of living adjustment (COLA) and the Federal Reserve’s recent 2025 interest rate cuts focuses on inflation management and economic stabilization.
Simply put, lower interest rates could indicate a stabilizing economy, although recent data shows that inflation has been somewhat stubborn. Since COLA adjustments are typically tied to inflation rates, investors can gauge from longer-dated bond yields where inflation may be headed in the next year or two.
On this basis, with the one-year US Treasury currently yielding around 3.63% at the time of writing, inflationary expectations have continued to moderate, albeit less dramatically than at the start of the cycle (this Treasury note was trading around 4.2% as recently as July 2025). One-year Treasury yields influence how interest rates will move over time and reflect an average of the federal funds rate over one year. Thus, the 2-year US Treasury may be a better indicator of future inflation and interest rates—this particular bond is yielding about 3.54% right now.
Of course, there are many factors that influence bond yields other than inflationary expectations. General GDP growth forecasts and demand for government bonds are other key factors that can drive short-term movements in these securities. But for retirees, it appears that inflationary expectations are elevated compared to previous forecasts, with the Fed’s latest dot chart forecasting PCE inflation at 2.9% for 2025 (higher than previous estimates), 2.4% for 2026 and 2.1% for 2027. This announced the 2028% COLA, in October. 2025, which is slightly higher than the 2.5% COLA for 2025, but still reflects the cooling from the peak inflation years. Looking ahead, these projections suggest a potential COLA for 2027 in the 2.3-2.6% range if CPI is slightly above PCE, although the actual numbers will depend on Q3 2026 data.
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The Federal Reserve lowers interest rates to stimulate the economy, which can benefit individuals financially. Stock and bond values often rise with rate cuts, although 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 can refinance for savings. Lower rates also reduce reverse mortgage costs, allowing for more equity to sell. Additionally, credit card and consumer debt may see a minimal rate cut, as many of the expected declines have already been priced in by the market. It is also important to consider the benefit that lower rates have for governments in slowing the rise in interest payments on the national debt.
Millions of retirees who rely on interest income from CDs, savings accounts or money market funds likely experienced a drop in earnings after the rate cuts. Similarly, bond investments could increase in value as yields fall. And given that many retirees typically choose a long-term investment mix that leans more heavily toward bonds, that’s a great thing.
On the other hand, for Social Security payments, lower inflation expectations could mean smaller increases each year. However, the old advice to invest whatever is left each month in stocks and bonds still holds a lot of credence in this day and age. With recent CPI data showing an increase of 3.0% year-on-year since September 2025 (the latest full report available as the October release was canceled due to the government shutdown and the November release is scheduled to be released on December 18), retirees should monitor future releases such as the December CPI (for November) on December 18 and the following 26 months through 2020202020 subsequent trends.
My view is that the market is currently pricing in moderately high inflation expectations amid a resilient economy, with the Fed signaling only one more rate cut in 2026 and inflation expected to gradually ease to 2.4% by the end of 2026. While a major inflationary rebound is not the base case for most economists, lingering pressures in areas such as housing and services could keep it in the ranges3. So seniors may be forced to look to other sources of income outside of Social Security to combat the rising prices of health care and essentials. 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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