The Surprising Way Fed Rate Cuts Could Impact Social Security

If everything goes the way the Federal Reserve board hopes it will, the pace of inflation will moderate despite its quarter percentage point cut in interest rates. In this scenario, prices in 2026 and 2027 won't rise as fast as they did in much of 2025, but it could also mean that Social Security recipients in 2027 will receive the lowest cost of living adjustment, or COLA, in about five years, according to a recent report from 24/7 Wall St. In fact, the COLA increase for Social Security beneficiaries is projected to be as low as 2.3% in 2027. If that's the case, the 2027 COLA hike would be lower than the official Social Security COLA increase for 2026 of 2.8%, the 2025 official COLA of 2.5%, and past COLA increases that took place in 2024 (3.2%), 2023 (8.7%), and 2022 (5.9%). Indeed, you'd have to go back to 2021 for a Social Security bump when the COLA was a mere 1.3%, according to figures from the Social Security Administration (SSA).

However, the 2.3% estimate is on the low end of a possible spectrum that could go as high as 2.6%, 24/7 Wall St. reported. And it could go even higher. The National Association of Registered Social Security Analysts projected that the COLA could be as much as 3%, according to U.S. News & World Report. 

Social Security's COLA is calculated annually by how prices move in accordance with the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This is how the U.S. Bureau of Labor Statistics (BLS) measures expenses for households who make at least half of their income through clerical or wage-paying jobs for at least 37 weeks of the year. If there is no change in the CPI-W, or if the CPI-W falls, then there is no COLA adjustment, which is what happened in the years 2010, 2011 and 2016.

The Social Security Administration has used CPI-W to calculate Social Security COLAs since 1973, when it was utilized by the BLS to measure inflation. It has stayed in use even after the BLS came out with the CPI-U, which covered all urban workers.

Today, there's debate as to whether the CPI-W or some other measurement should be used to calculate COLA increases, according to the Bipartisan Policy Center. Indeed, in November 2025, Senator Elizabeth Warren argued that the 2.8% Social Security COLA was not enough to cope with high inflation, which was why she introduced legislation that would provide retirees even bigger Social Security checks than the average $56 a month the 2026 COLA would provide. 

While most projections show the CPI-W below 3% for 2027, it's still far from certain what the state of inflation, or the economy, will be in 2027. Usually, lower interest rates cause higher inflation because it's cheaper for banks to lend money.

Nevertheless, the Federal Reserve recently lowered interest rates from the 4.25-to-4.5% range to between 3.5% and 3.75% in response to rising unemployment. President Donald Trump wants to see interest rates fall even further to improve the housing market and heat up the economy. But more important to The Federal Reserve is keeping inflation at around 2%, and some board members fear that lowering interest rates too fast will cause costs to soar, especially with new tariffs threatening to increase the price of essential household goods and other consumer items.

Aside from interest rates and tariffs, inflation and Social Security's COLA for 2027 might also be influenced by the impact of the One Big Beautiful Bill Act, which may herald bigger tax refunds in 2026. Corey Briggs, director of wealth planning at the Plaza Advisory Group with Steward Partners in St. Louis, told U.S. News and World Report that the tax cuts "will be inflationary long-term" because they'll increase spending, which causes prices to go up. At the same time, job losses caused by artificial intelligence may slow consumer spending and bring inflation down, Briggs added.