While retirees and beneficiaries from Social Security await the cost-of-living adjustment (COLA) statistic announcement of the 10th October which will determine the increase in payments for 2025, the Federal Reserve System (FED) has their own announcement. However, the FED’s news is not as uplifting. According to the FED, retirees need to start preparing that there could be reductions in Social Security payments as early as 2026.
Federal Reserve’s first rate cut in years occurred this year
For the first time in four years, the Federal Reserve announced a 50-basis point interest cut for federal fund rates in September this year. The cut signals that the Federal Reserve is prioritizing a recession risk over an inflation risk. The move highlights that the Federal Reserve is feeling confident that inflation is beginning to stabilize since the COVID19 pandemic in 2020.
Federal fund rates refer to the interest rates which depository institutions, like banks, charge other depository institutions for short-term loans to meet their reserve requirements. These interest rates have major economic impact as they signal the Federal Reserve’s attitude towards the current economic status of the nation. These rates impact consumer loans and credit interest rates and the stock market.
A decrease in the Federal Reserve Rate highlights a need to stimulate economic growth.
For the past four years, the Federal Reserve has held the interest rate steady, indicating a prioritization of economic stability. The lowered rate highlights that the Federal Reserve wants to promote economic spending to prevent a recession. Conversely, higher rates indicate a strategy to combat inflation. The lowered rate may however come as a disappointment to some retirees who receive Social Security.
While the lowered rate does not impact the COLA statistic directly, it indicates that future COLA rates will most likely be lower. This means retirees can expect lower adjustments in the future. While retirees will need to start preparing for the lower COLA statistics, it is important to remember that it is a good thing that COLA is lower as it highlights that inflation and cost-of-living is stabilizing.
The adjusted rate will impact retirees more than COLA
An important thing to bear in mind is that COLA is always a reactionary statistic. The adjustment is made only after events within the previous year have happened. However, the Federal Reserve’s adjustments are made in anticipation of long term expectations towards the economy. While retirees may be worried about the reduced payments they may receive in the future, the Federal Reserve’s outlook will be more beneficial.
A lower Federal Reserve rate means that beneficiaries can expect short term loan rates to be reduced as well as credit interest rates. Further, it signals that costs should become lower overall. Despite the majority of Social Security beneficiaries using their Social Security payments to live off of each month, the income is intended to be a supplement. Therefore, no matter how much payments may increase by, it will consistently remain a difficulty to afford daily expenses on Social Security alone.
Current workers are encouraged to start saving as early as possible. Ensure that you have an emergency fund saved in a high-yield savings account which can be enough for you to live off of for ideally 6 months in cases on unemployment. Once you have established an emergency fund, investing in low risk units trusts are a great way to build up additional retirement savings in addition to you Social Security contributions.
As cost-of-living begins to hopefully stabilize in the new year, Americans can hope for a some ease of financial discomfort which has been affecting a wide array of citizens since the COVID19 pandemic and the war in Ukraine.
