Bad news for US retirees, and that is that they are going to receive news that they are not going to particularly like. And that is that, although they have received some increases in their pensions with inflation… the Federal Reserve (FED) is considering changing these increases. Well, inflation is already under control, so the COLA (cost of living adjustments) will once again be a little more modest, which, of course, will affect the pockets of millions of beneficiaries of these pensions.
Let’s go step by step, what is the COLA?
It is an adjustment made by Social Security (SSA) so that beneficiaries can maintain the same purchasing power while we overcome this process of inflation. This amount of money is calculated using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) (this is an index that measures changes in the prices of services and goods used by a specific segment of the population, such as wage earners or clerical workers).
How does the CPI-W work?
This index looks at the prices of many services (considered essentials), such as food, drinks, the price of housing, the price of gasoline, transportation, how much each individual spends on health care, and how much money they spend in their free time.
Those last three years and after the COVID pandemic, retirees have seen their Social Security deposits rise by up to 18.8% due to the period of inflation we are experiencing. However, they will now have to stabilise again as the country has also stabilised.
A warning that was not in vain
Last September the Fed already warned that they were going to start reducing rates, and in fact, they reduced the federal funds rate by 50 basis points, from 4.75% to 5%. It is clear that there are many retirees who have felt “disappointed” to see their money reduced and, having become accustomed to having X amount of money in their pockets, it will take them a little longer to return to normal.
The future of the COLA
For 2025 and 2026, the COLA will be marked by a 2.6% drop, but this is not bad news because inflation is estimated to drop to 2.2% by the end of 2026.
However, retirees will have to “tighten their belts” because they will receive less money, since this money is adjusted to the country’s standard of living, as we have said before.
Is there anything that explains the drop in the COLA?
Of course… One of the main factors that has contributed to low inflation (and, therefore, to a lower COLA adjustment), is the drop in energy prices. Let’s explain this. Oil, for example, has dropped to less than $70 per barrel, its lowest level in more than a year! And, we already know that energy prices are the ones that have the greatest impact on a state economy, and, as this fact has dropped, the rest of the products called “essential” have dropped too. Such a great news, don’t?
Could lower interest rates benefit retirees?
Although Social Security adjustments may worry us, lower interest rates from the Federal Reserve could help by reducing the costs of loans such as mortgages. Let us explain it in another way: if you have debts such as a mortgage, it will leave you more money each month, and, as inflation falls, the price of basic products will also fall more (which means you will spend less!)
Although at first it may seem that they are taking money from us, what good news is that our country is finally emerging from this inflation that was so overwhelming us!