Fed Rate Cuts Are Back, But the Social Security COLA Is Still the Real Problem

During the latter part of 2025, the Fed made three consecutive cuts to its benchmark interest rate. Those cuts came on the heels of cooling inflation and slowing economic growth.

The Fed’s rate cuts might seem like good news to seniors on Social Security. But in reality, Social Security recipients may be in for a tough year ahead, financially speaking. And an insufficient cost-of-living adjustment (COLA) is the reason for that.

Why the Fed’s rate cuts may seem like good news for seniors

Many seniors are at a point in life where they no longer seek to borrow money. But for those who have variable interest debt, or who need a loan, rate cuts could provide a world of relief.

The Fed does not set consumer interest rates directly. Rather, it oversees the federal funds rate, which is what banks charge each other for overnight borrowing.

But when the Fed’s benchmark interest rate falls, consumer interest rates tend to follow suit. Banks can take their savings from lower rates and pass them along to consumers by charging less for loans and credit card balances. So for seniors with debt, rate cuts can be a positive thing.

For seniors with money in the bank, though, rate cuts aren’t necessarily fantastic. It’s common for retirees to keep cash on hand for emergencies, or to cover living expenses when the stock market tumbles and it’s a bad time to tap a retirement portfolio. Lower interest rates mean seniors on Social Security may start earning less money on their cash.

Social Security’s COLA is still a major issue

In 2026, Social Security recipients are getting a 2.8% COLA. That’s a larger raise than the 2.5% COLA that came through at the beginning of 2025.

The problem is that Social Security’s 2.8% COLA may not hold up well in the coming 12 months. If tariffs drive costs higher, Social Security recipients may find that inflation outpaces their 2.8% raise.

Part of the problem stems from how Social Security COLAs are calculated. They’re based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, which reflects the spending patterns of workers — not Social Security recipients.

Social Security recipients tend to spend more of their income on healthcare than workers do broadly. That disconnect often leads to insufficient COLAs.

Plus, this year there’s a double whammy to contend with — rising Medicare costs. Part B hikes will eat into many seniors’ COLA, leaving them with less.

The Fed’s rate cuts don’t solve the problem

While the Fed’s rate cuts may be good news for seniors looking to borrow or see their credit card minimums decrease, they don’t solve the problem of an insufficient COLA. Those rate cuts may help the economy broadly, especially at a time when spending seems to be slowing. But rate cuts have little to do with Social Security COLAs directly.

Lawmakers need to realize that the current system for calculating COLAs does not protect seniors’ buying power in an adequate fashion. Until a change is made, future COLAs are also likely to fall short — regardless of what interest rates look like at the time.