This Estimate of Social Security's 2026 Cost-of-Living Adjustment (COLA) Was Just Revised. Here's How Tariffs Could Impact Your Benefits.

Yahoo

18-04-2025

Millions of American seniors rely on Social Security to make ends meet. Half of households with someone age 65 or older rely on the government program for the majority of their incomes, according to data reviewed by the Social Security Administration.
That makes the annual cost-of-living adjustment, or COLA, an extremely important number for households trying to keep up with the rising costs of goods and services. While we're still about six months away from determining the exact raise Social Security beneficiaries will receive in 2026, early data suggests seniors might be disappointed with next year's increase.
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Tariffs could change all of that. Here's where things stand today and how tariffs could impact your benefits next year.
The cost-of-living adjustment, as the name implies, is designed to help keep Social Security in line with the cost of living. While Social Security began sending out monthly checks in 1940, Congress didn't automate the system for calculating the COLA until 1975.
The COLA is now based on a measure of inflation called the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This is a single number released by the Bureau of Labor Statistic each month aggregating price changes in over 200 spending categories. The number changes based on whether prices went up or down for each category.
In order to calculate the COLA in time for January benefits checks, the Social Security Administration uses the average year-over-year increase in the CPI-W during the third quarter. That number becomes the following year's COLA. If it's negative, seniors won't see any adjustment.
Many argue the CPI-W doesn't reflect the true costs seniors face today. The Bureau of Labor Statistics developed a new CPI reading in 1987, which weighs the various spending categories to align with the expenses of Americans age 62 and older. It's called the Consumer Price Index for the Elderly, or CPI-E, and many feel the COLA should be based on those readings, instead.
While the CPI-E and CPI-W can vary considerably from year to year, over the last 15 years, they've produced similar cumulative results. For now, Social Security is still using the CPI-W, and one forecast suggests it could result in a disappointing COLA for 2026.
Senior advocacy group The Senior Citizens League publishes updates to its forecast for the COLA after every monthly CPI release from the Bureau of Labor Statistics. The most recent release came on April 10, which showed March CPI-W came in 2.2% higher than the same month last year. That's a marked slowdown from February's 2.7% increase and January's 3% increase.
Despite the slowdown, The Senior Citizens League increased its estimate for the 2026 COLA to 2.3%. That's still less than the 2025 COLA of 2.5% and a significant slowdown from 2021 through 2024. Many seniors may find it's not enough for their budgets.
March showed very little impact from President Trump's tariff policies. As a result, The Senior Citizens League estimate doesn't include the potential changes to the COLA that could stem from higher prices on imported goods.
While the government paused most of the massive tariffs it planned to impose on countries with large trade surpluses to the United States, it's maintained a 10% tariff on all imports, 25% on auto parts, and 25% tariffs on Mexico and Canada. Tariffs against Chinese imports haven't received any reprieve and sit at 145%, as of this writing.
These tariffs could impact the price of just about everything American's consume. From cars to groceries to clothing to prescription drugs, the United States relies heavily on cross-border trade.
While some argue that tariffs will provide relative strength to the dollar, which would offset the tariffs, most economists expect the new taxes to increase inflation. It's worth noting the U.S. Dollar index has fallen to a three-year low following the tariff announcement.
The impact of the tariffs won't be felt right away, but it seems likely it'll hit consumer's wallets by summer. That's exactly when the CPI numbers start counting for next year's cost-of-living adjustment.
That could mean a higher COLA for seniors, but it would come at a significant cost. Remember, there's a significant lag time between the CPI reading and the COLA going into effect -- up to six months. That means seniors could be struggling to keep up with tariff-induced inflation while hoping for a COLA big enough to help them catch up in 2026.
Seniors should prefer slow and steady inflation, which allows the COLA to accurately reflect the increase in their costs. Unfortunately, that's an unlikely scenario with tariffs in place.
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This Estimate of Social Security's 2026 Cost-of-Living Adjustment (COLA) Was Just Revised. Here's How Tariffs Could Impact Your Benefits. was originally published by The Motley Fool