Key Points
-
The annual Social Security COLA is determined using inflation data from the third quarter of each year.
-
President Trump’s inability to fully open the strait could keep oil prices elevated, driving up inflation during that quarter.
-
The official COLA number is expected to be released on Oct. 14.
- The $23,760 Social Security bonus most retirees completely overlook ›
After announcing a cease-fire deal in June, the conflict in the Middle East is back on, with strikes resuming and U.S. President Donald Trump reimposing a naval blockade. On July 13, oilprice.com reported that oil prices jumped “more than 8%” after Trump announced the blockade.
Aside from the immediate price jump, Trump’s stance on the Strait of Hormuz and the seemingly inevitable oil price hikes the instability will cause is likely to have a trickle-down effect on Social Security benefits next year. Recipients are likely to see the largest cost-of-living adjustment (COLA) in recent years. Though that’s not necessarily good news.
The connection between rising prices and the annual COLA
The annual COLA is based on the CPI-W, an inflation measure that tracks the cost of goods and services such as housing, food, and energy (including oil). Not all CPI-W data is relevant, though; only the figures from the third quarter (July, August, and September) are included in the Social Security COLA calculation.
It’s a three-step process:
With the blockade resuming and oil prices rising right now — during a month that will be used to calculate next year’s COLA — there’s a good chance the CPI-W average will lead to a higher-than-usual COLA in 2027. Higher oil prices are reflected at the gas pump, but they also drive up the costs of groceries and retail goods because of the transportation that is required.
A 3.8% bump?
President Trump’s stance on Iran has flip-flopped plenty of times, so there’s no reason to believe this time will be any different. Previously, however, the U.S. government has been able to tap the U.S.’s reserves to keep oil prices relatively stable, but it’s now reported that the reserves are at their lowest levels since 1983.
Brent Crude Oil Wholesale Spot Petroleum Price data by YCharts
The COLA this year was 2.8%, but 2027’s is on pace to be at least a percentage point higher at the current rate of inflation, according to trusted advocacy group The Senior Citizens League. A 3.8% COLA would be the third-highest in the past decade.
- 2026: 2.8%
- 2025: 2.5%
- 2024: 3.2%
- 2023: 8.7%
- 2022: 5.9%
- 2021: 1.3%
- 2020: 1.6%
- 2019: 2.8%
- 2018: 2%
- 2017: 0.3%
While a higher COLA sounds good it, of course, is the result of inflation. So if things cost more that means a larger Social Security check won’t necessarily buy more.
Any estimates for the 2027 COLA are just that: estimates. We won’t know an official figure until CPI-W data is in for the whole third quarter and the Social Security Administration makes the announcement, which is expected on Oct. 14.
The annual COLA is more of a reactive measure, so it doesn’t necessarily help seniors deal with the inflation they’re experiencing now and may continue to experience. However, it does help retirees keep some of their purchasing power going forward.
The $23,760 Social Security bonus most retirees completely overlook
If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income.
One easy trick could pay you as much as $23,760 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we’re all after. Join Stock Advisor to learn more about these strategies.
The Motley Fool has a disclosure policy.
