Are President Donald Trump's Tariffs Impacting Social Security's 2026 Cost-of-Living Adjustment (COLA) Estimate? We Have a Clear Answer ...
Sean Williams, The Motley Fool
7 min read
Key Points
No announcement is more anticipated by Social Security's more than 52 million retired beneficiaries than the annual cost-of-living adjustment.
The April report from the U.S. Bureau of Labor Statistics clearly answers whether President Donald Trump's tariffs are affecting the prevailing rate of inflation.
Inherent flaws with Social Security's inflationary index have led to a persistent loss of buying power for seniors.
You might not realize it, but the average Social Security benefit for retired workers is on the verge of making history. In April, more than 52 million retired workers brought home an average Social Security check totaling $1,999.97. Due to new retirees entering the beneficiary pool on a monthly basis, May should mark the first time in history that the average retired-worker payout has topped $2,000.
Though this might sound like a relatively modest amount of money, it often proves vital to helping seniors make ends meet.
In each of the previous 23 years, pollster Gallup has conducted a survey to determine how reliant retirees are on their Social Security income. Without fail, 80% to 90% of respondents have deemed this income necessary, in some capacity, to cover their costs.
President Donald Trump. Image source: official White House photo by Shealah Craighead, courtesy of the National Archives.
Considering how foundational Social Security income is to the financial well-being of aging Americans, it should come as no surprise that the annual reveal of the cost-of-living adjustment (COLA) in October is the most-anticipated announcement of the year for beneficiaries. But there's a potentially interesting twist being added to this years' COLA calculation: President Donald Trump's global tariff policy.
What purpose does Social Security's COLA serve?
Before diving into what Trump's tariff policy entails and how it may or may not affect the monthly payouts for beneficiaries, it's important to understand what purpose the program's COLA serves, as well as how it's calculated.
The goal of Social Security's cost-of-living adjustment is to keep benefits on par with inflation. For example, if a large basket of goods and services regularly purchased by seniors increases in cost by 3% from one year to the next, Social Security benefits would need to climb by the same percentage to ensure no loss of buying power. The COLA is effectively the tool that accounts for rising prices.
Prior to 1975, COLAs were entirely arbitrary and passed along by special sessions of Congress. But since 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has been the program's annual inflationary measure.
The CPI-W has north of 200 different spending categories, all of which have their own unique weightings. These weightings are the key to presenting the CPI-W as a single figure each month, which can then be easily compared to the previous month or year to determine if prices are, collectively, rising (inflation) or falling (deflation).
Although the CPI-W is calculated monthly, only readings from the third quarter (July though September) are used in the COLA calculation. If the average third-quarter reading in the current year is higher than the comparable period of the previous year, inflation has taken place and beneficiaries are due for a higher payout in the upcoming year.
In other words, the COLA is really all about the prevailing rate of inflation, which is something Trump's tariff policy is expected to affect.
Have President Trump's tariffs altered the estimate for the 2026 cost-of-living adjustment?
On April 2, a day the president referred to as "Liberation Day," he unveiled a 10% global tariff, as well as dozens of higher "reciprocal tariff rates" on countries that have historically run trade imbalances with America.
Just a week later, on April 9, Trump paused most reciprocal tariffs, save for China, for a period of 90 days. The U.S. and China have since worked out a deal to drastically reduce most of their higher reciprocal tariffs for 90 days, as well.
The million-dollar question is: Have these tariffs affected the domestic rate of inflation to the point where it's altered Social Security's 2026 cost-of-living adjustment estimate? Based on data from the April inflation report, released on May 13 by the U.S. Bureau of Labor Statistics (BLS), the clear answer is no, it hasn't.
April inflation data from the BLS showed the Consumer Price Index for All Urban Consumers (CPI-U) -- the CPI-U is a similar inflationary measure to the CPI-W -- rose by 2.3% on a trailing-12-month basis. It's the lowest year-over-year increase in collective prices since February 2021, and slightly below the consensus expectations of economists.
In an interview with CNBC, the Navy Federal Credit Union's corporate economist Robert Frick postulated that "non-tariffed goods are still in the pipeline, and perhaps some importers have absorbed their tariff costs for now."
Despite no discernible evidence that Trump's tariffs are affecting Social Security's 2026 COLA thus far, estimates for next year's "raise" are climbing. Nonpartisan senior advocacy group The Senior Citizens League (TSCL) upped its 2026 COLA forecast from 2.3% following the March inflation report to 2.4%.
Meanwhile, independent Social Security and Medicare policy analyst Mary Johnson, who retired from TSCL last year, increased her 2026 COLA prediction from 2.2% to 2.4% following the BLS inflation report.
Though no specific culprit was listed by TSCL or Johnson for their modestly upped forecasts, it may well be tied to shelter expenses, which are stubbornly higher by 4% over the last 12 months, per the CPI-U.
Image source: Getty Images.
Trump's tariffs are a secondary concern to the CPI-W's shortcomings
Based on the 2026 cost-of-living adjustment estimates from TSCL and Johnson, a 2.4% "raise" next year would increase the average retired-worker benefit check by about $48 per month. Nevertheless, it would also represent the smallest COLA since beneficiaries received a paltry 1.3% bump in 2021.
Uncertainty caused by President Trump's tariff policy does have the potential to increase Social Security's 2026 COLA, according to some economists. But the possibility of next year's COLA vacillating because of tariffs is dwarfed by the inherent flaws of the inflationary measure designed to protect the buying power of seniors.
As its full name implies, the CPI-W is an index that tracks the spending habits of urban wage earners and clerical workers. These are typically working-age Americans who aren't currently receiving a Social Security benefit. More importantly, they spend their money differently than the seniors who make up the overwhelming majority of program beneficiaries.
For instance, education, apparel, and transportation costs are important expense categories to urban wage earners and clerical workers. In comparison, seniors spend a higher percentage of their monthly budget on shelter and medical care than working-age Americans. But since the CPI-W tracks the spending habits of the former and not the latter, the actual inflationary headwinds seniors are contending with aren't being accurately reflected by the CPI-W or the annual COLA.
Based on an analysis published by TSCL in July 2024, the purchasing power of a Social Security dollar for seniors has plunged by 20% since 2010. Even if Donald Trump's tariff policy modestly lifts the 2026 COLA, the 4% rise in shelter costs and the 3.5% hike in medical care services (both over the trailing year) practically ensure that Social Security income will continue to lose buying power next year.
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