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The Federal Reserve raised interest rates 2 weeks ago. Almost 76 million Americans are about to get their biggest Social Security raise since 2023. Those two facts get linked in headlines all the time, and the link is mostly wrong. The rate hike did not cause this raise. It can't change it. What it can change is the raise you get the year after and the one after that.
Let me start with what's actually known. On September 16th, the Fed voted 12 to nothing to lift its benchmark rate by %. It was the first hike since July of 2023. Chair Kevin Warsh said inflation has been too high for too long, and the Fed's own projections point to roughly one more hike before the year ends.
Meanwhile, Social Security's cost of living adjustment, the COLA, is tracking toward about 3.4%. Last year's was 2.8. The year before, 2.5. So, the Fed is raising rates to fight inflation, and the inflation it's fighting is the very thing handing retirees a bigger check. That's the tension in this story.
If you're on Social Security, is a Fed that's tightening good for you or bad for you? The honest answer has has three parts. And the first is how this number actually gets built. The COLA isn't based on the inflation number you see on the news. It uses a different index called CPIW, which tracks the spending of urban wage earners and clerical workers.
Then it takes the average of that index for just 3 months, July, August, and September. It compares that average to the same 3 months a year earlier and the percentage gap rounded to one decimal is your raise. Here's where we are. The index average 317.265 last summer. July of this year came in at 327.104 and August at 328.481.
September is the only piece missing and it's a piece we can estimate. If September's index simply matches August, the the average out to about 328.0 and the cola comes out at 3.4%. For it to round up to 3.5, September would need to jump roughly two tenths of a percent from August. For it to drop to 3.3, September would have to fall about a tenth of a percent.
So, the range is narrow. The Fed can't move it because the quarter is already almost entirely over. A rate decision on September 16th has no way to reach back and rewrite July and August prices. The number gets announced on October 14th when the Labor Department releases September's inflation report.
Not before. So, what's driving this raise? If you assume it's the broad price increases everyone's complained about for years, look closer. Overall consumer prices were up 3.4% over the past year through August. But strip out food and energy and that falls to 2.4%. That's the lowest reading since early 2021.
The gap is energy. Energy prices are up 16% over the past 12 months and gasoline alone is up more than 27%. That follows a spike earlier this year tied to conflict in the Middle East. In March, the energy index jumped nearly 11% in a single month. Think about what that means for a retiree. Part of the raise you're about to get is basically a reimbursement for a gasoline shock.
It's real money and gas really did cost more. But it's a different kind of inflation than rents and groceries climbing steadily, which is what a central bank can actually do something about. Which raises the obvious question. If oil is the problem and a rate hike doesn't produce a single barrel of crude, why is the Fed hiking?
Here's the Fed's case and it deserves to be stated fairly. Unemployment is about 4.1%, which is low. Growth has held up and Warsh's argument is that headline inflation looks tame in some measures, but too many categories are still running above 3%. The Fed's own projection has the preferred inflation gauge, the one called PCE, at 3.7% this year.
It only falls to about 2.3 next year. Their worry is that an energy shock, if it lasts long enough, leaks into wages and expectations and stops being a one-time event. Once people expect higher prices, they behave in ways that make it true. That's a legitimate fear. It's also the part I'm least sure the data supports right now.
And I'll come back to that. There's one name worth bringing in here because it sits behind this story. Stanley Druckenmiller, the legendary investor, has worked with Warsh since 2011, when Warsh left the Fed and became a partner at Druckenmiller's family office. When Warsh was nominated in January, Druckenmiller told the Financial Times the idea that Warsh is always a hawk was not correct.
He said he'd seen him go both ways. That's a documented statement and it's all I'll attribute to him. Now, a hike 12 to nothing doesn't prove that statement wrong. Warsh didn't hike because he's a hawk by temperament. By his own account, he hiked because of strong labor data above target inflation and a conflict that keeps pushing oil around.
If you take Druckenmiller at his word, it suggests Warsh follows conditions. The question for retirees is whether those conditions justify what he did. And that brings us to what a rate hike actually does to a person living on social security. Start with the good side. Higher rates mean higher yields on what a retiree holds.
Savings accounts, money market funds, certificates of deposit, short-term Treasuries. In mid-August, the two-year Treasury yield was around 4.2% and the 10-year near 4.7. For someone with cash sitting in a savings account, that's a better world than the near-zero years. A retiree with $50,000 in a money market fund earns noticeably more now than a few years ago.
That's a real offset and it's one the cable headlines never mention. Now, the bad side. The hike makes borrowing more expensive. If you carry a credit card balance, it costs more. If you were hoping for mortgage rates to fall so you could move or refinance, a Fed that's raising rates is a Fed that's not helping.
One caution here, the Fed sets the overnight rate. It doesn't set the 30-year mortgage rate directly, so the link isn't one-for-one. But the direction matters. Bond funds are the other side of the ledger. When rates rise, the price of existing bonds falls. A retiree with a bond fund can see a paper loss even while the fund pays more income going forward.
How much depends on the fund's duration, which is just a measure of how sensitive its price is to rate changes. Longer duration means a bigger hit. So far, mixed. But here's where the story actually changes because we've been talking about the check you get in January. Let's talk about the check you get in January 2028.
That's the part most coverage skips. A cola only looks backward. It tells you how much prices rose in the past year. It does nothing to guarantee your check keeps pace with what prices do next. And a rate hike if it works, is designed to slow prices. If it works, the COLA you get after this one gets smaller.
Think about what that means. The Fed is, in a very direct way, trying to shrink the raise that retirees will see in the future. That isn't a conspiracy. It's the entire point of fighting inflation. A smaller COLA is just the visible signal that prices have stopped climbing as fast. A retiree who benefits from falling inflation will, in the short run, see it as a smaller raise.
In the long run, they're better off because each smaller raise comes with less erosion of everything their money buys. That's the thing most people get backwards. A big COLA feels like good news, but it is the receipt for inflation that already happened. The check goes up because your costs went up first.
Now, let's talk about what's going to happen to some of that raise before it ever reaches your bank account. Medicare Part B premiums come out of most retirees Social Security checks automatically. The Trustees report projects the standard Part B premium rising from $202.90 this year to $209.50 That's an increase of $6.60 a month.
The official number won't be set until later in the fall. And past projections have often come in too low. So, treat that as a floor rather than a promise. Here's the math for the average retired worker who receives about $2,086 a month. A 3.4% raise is about $71. Subtract the Part B increase and you're left with roughly $64.
The raise is real. It's just smaller than the headline. Now, there's a deeper problem hiding under this whole thing and it's the one that makes the COLA double-edged number. Every COLA comes out of the same trust fund. According to this year's Trustees report, the combined Social Security funds will run out of reserves in 2034.
At that point, incoming payroll taxes would cover about 83% of scheduled benefits. The retirement fund on its own is projected to run short a bit earlier in the last quarter of 2032. The combined reserves fell by $160 billion last year and ended at 2.56 trillion. Costs have exceeded income every year from 2026 on in the Trustees projections.
A larger COLA adds cost. If this year's raise comes in higher than the Trustees assumed, it nudges those depletion dates closer. How much depends on assumptions I can't see from the outside, and one year's adjustment is small compared to the structural gap. But it points in one direction. Here's the second-order twist, though, and it's the strange one.
The trust fund holds special Treasury securities. As older ones mature and get replaced, the new ones pay higher interest if rates stay high. So, higher rates can help the trust fund a little. Not nearly enough to close the gap, but the direction is worth knowing. The same Fed decision that makes borrowing costlier for households slightly raises the interest the program earns.
That's a small effect, and I wouldn't lean on it. Now, let me do what I said I would and challenge my own framing. The strongest case against this hike goes like this. Core inflation is 2.4% and falling. The big driver, energy, comes from a geopolitical shock the Fed can't influence. Raising rates into a supply shock risks slowing a healthy economy to fight a problem that may fade by itself.
Gasoline went up in August, but it fell in July, and energy prices swing. If oil settles down, the Fed will have tightened for a problem that was already solving itself. That argument has teeth. A rate hike works through demand by making people and businesses borrow and spend less. It does nothing for supply.
If the cause of inflation is oil, hiking doesn't fix oil. But the Fed's answer isn't foolish, either. A 30-year retiree remembers the 1970s. Energy shocks then did leak into wages and expectations, and the inflation lasted a decade. Warsh is clearly concerned about repeating that pattern. The analogy has limits because today's labor market and energy intensity are different, and the 1970s had other causes.
But policymakers get criticized far more for waiting too long than for acting a quarter point early. And there's a plain fact on the Fed's side. The preferred inflation measure is projected at 3.7% this year, well above target. So, which is right? I don't think the data settles it yet. And I'd rather say that than pretend otherwise.
What would settle it? Three things, and all of them are measurable. First, September's CPI report on October 14th. That's the day the COLA is official. If September's index lands near flat, you'll see 3.4. A hot reading pushes it to 3.5. A drop pulls it toward 3.3. It also tells you whether August gasoline jump was a blip or a trend.
Second, the path of gasoline. If energy prices keep rising, the Fed's concern about leakage looks right. If they fall back, the hike looks less necessary. Third, the Fed itself. Its next meeting is at the end of October, and the median projection already points to about 4.1% by year end, and no change through 2027.
Markets expect more hikes into next year. If core inflation keeps sliding while the Fed keeps raising, that's the signal the central bank may be overcorrecting. If core starts rising again, that's the signal Warsh was right to move. So, let's put it together. What actually happened? The rate hike didn't create this COLA.
The COLA is a record of past prices, mostly gasoline, and it's headed for about 3.4% with an official announcement on October 14th. After Medicare, the average retiree keeps roughly $64 of a $71 raise. What does the evidence support? That the Fed's hike helps savers earn more on cash, makes borrowing costlier, and if it works, produces smaller raises in the years ahead, which is a sign of success rather than failure.
What remains uncertain? Whether this hike was necessary at all. Core inflation says maybe not. The Fed's own projections say yes. Both can't be right, and the next few months of data will say which. And here's the thing worth remembering. A COLA is a receipt, not a gift. You're being paid back for prices that already went up.
The only version of this story where retirees come out ahead is the one where the receipts get smaller. If you want to follow how this plays out, the September inflation report on October 14th is the next piece. Subscribe, and I'll walk through what the number says the moment it lands.
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