Many retirees are watching their 401(k) and individual retirement account (IRA) balances sink further seemingly daily. Whatever you might think about President Donald Trump's steep tariffs, they're indisputably wreaking havoc on the stock market.
Could tariffs even impact retirees' Social Security benefits? The answer just might be "yes." Here's what President Trump's tariff turmoil could mean for your next Social Security cost-of-living adjustment (COLA).
Calculating the COLA
To understand how the president's tariffs could impact your next Social Security COLA, we must first delve into how the COLA is calculated. The good news is that the formula is simple, and the math is easy.
For decades after Social Security was created, any adjustment to benefits required an act of Congress. However, an automatic annual adjustment went into effect in 1975. This adjustment was intended to keep Social Security benefits from being eroded by inflation.
With this goal, it makes sense that inflation would be the key factor used to calculate the COLA. Economists use several inflation metrics. However, the Social Security Administration (SSA) uses one called the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This inflation metric measures price changes for primarily blue-collar workers in urban areas.
The CPI-W is published monthly by the U.S. Bureau of Labor Statistics. The SSA calculates the COLA using the difference between the average CPI-W for the third quarter of the current year and the average for the same period in the prior year, rounded to the nearest one-tenth of a percent. If the Q3 average CPI-W for the current year is less than the Q3 average for the previous year, no adjustment is made to Social Security benefits.
How tariffs could impact your next Social Security COLA
President Trump's tariffs will impact your next Social Security COLA if and only if they affect the CPI-W in the third quarter of 2025. Could that happen? It's a definite maybe.
Some might think tariffs are paid by the countries on which they're levied. However, that's not how tariffs work. Instead, the companies importing products from other countries must pay the U.S. government any tariffs due.
The big question relates to how those importers handle the higher costs incurred. Some importers might absorb most of the tariffs as a cost of doing business in the U.S. Others, though, could pass the higher costs along to their customers. When this happens, the prices of imported products increase. This could lead to a higher inflation rate, which could then cause the next Social Security COLA to be higher than it would otherwise be.