Inflation trouble could turn into a win for Social Security recipients - The COLA twist explained
Inflation in the U.S. has been on the rise as a consequence of the ongoing conflict with Iran but that could mean a bigger bump to Social Security benefits.
Every year the Social Security Administration automatically boosts the monthly amount that it sends each beneficiary in the nation through the Cost-of-Living-Adjustment, better known as COLA. Early predictions of how big the annual increase will be in 2027 forecast that it could be the largest in four years.
Current estimates by The Senior Citizens League (TSCL) project that the 2027 COLA will be 3.9%, when it’s announced in October, far surpassing the 2.8% that took effect at the beginning of this year. If this prediction holds, it would give Social Security benefits a significant bump when the SSA sends out January 2027 payments.
However, the SSA won’t determine the 2027 COLA until after the third quarter of this year. The agency uses inflation data from July through September, comparing prices this year to last year, in order to calculate the COLA.
“Inflation is a huge wild card, especially with the potential for repercussions from the Iran war affecting prices of a wide range of products in the coming months,” notes TSCL, a non-profit organization that advocates for seniors. “Don’t be surprised if COLA estimates for 2027 rise this summer based on new inflation data.”
What is behind the rising inflation in the U.S.?
This possibly substantial increase to benefits is the result of rising inflation being driven by the ongoing faceoff between Iran and the U.S. over the Strait of Hormuz, where a fifth of the world’s oil and natural gas flows.
Whereas on average around 140 ships used to pass through the strategic maritime trade route each day in either direction, traffic came to a standstill when Israel and the U.S. attacked Iran in late February. Since the ceasefire between Washington and Tehran just a trickle of ships has transited the strait as they’ve had to gain clearance from the Islamic Revolutionary Guard Corps to pass safely, the first time this has ever happened.
The reduced flow of energy resources and other raw materials like helium and fertilizer has pushed up inflation to levels not seen since mid-2023. Especially, the higher fuel costs are rippling through the rest of the economy.
How is the COLA calculated?
The SSA compares the average CPI-W for July, August, and September of the current year to the same period in the previous year. The percentage difference determines the COLA, which is applied to Social Security and Supplemental Security Income (SSI) payments starting in January of the following year.
Unfortunately for seniors, TSCL highlights that the COLA increase doesn’t fully fulfil its mission of keeping benefits in line with inflation. This is due to the use of the CPI-W to calculate the annual boost to benefits but this indicator doesn’t necessarily cover the household price increases that seniors experience.
The non-profits said in a 2024 report that the average Social Security payment has lost around 13.7% of its buying power since 2016. Furthermore, seniors have already had to deal with the effects of inflation over the year before receiving their first payment with the COLA boost seen in their January benefits.
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