This may be one silver lining from the recent turmoil.
Social Security Trust Fund is projected to be depleted within 10 years
The main trust fund used to pay Social Security benefits is projected to be depleted by 2033 unless lawmakers make changes to the system.
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While admittedly a little early, the most notable prediction is that retirees will receive a similar cost-of-living adjustment (COLA) from Social Security in 2027. The latest forecast is for next year’s COLA to be 2.8%, which is the same as what retirees will receive in 2026, according to the Alliance on Seniors.
However, there may be certain cost increases that result in a higher-than-expected COLA. We explain what it is, how it could affect your COLA in 2027, and why it will take some time to know for sure.
COLA may rise due to rising energy prices
Energy prices are a key component of the inflation measure used to calculate Social Security COLA, CPI-W. And the published estimates do not reflect recent trends in the energy sector.
Specifically, the Iran conflict and the uncertainty surrounding it have caused oil prices to rise significantly. Oil prices have increased a staggering 65% so far this year, and 35% in the first 12 days of March alone.
Energy is generally one of the most volatile components of inflation data, and until recently was a catalyst in the other direction. For example, CPI data for February showed gas prices were down year-over-year, and that was before the recent spike.
How much difference would it make?
The potential impact of energy surges is somewhat difficult to quantify accurately. What we do know is that energy makes up 6.2% of the CPI-W formula, roughly split between transportation fuels (such as gasoline) and household energy. This may seem like a relatively small weight, but even if energy costs rise by, say, 40%, it can have a significant impact on the overall inflation calculation.
Moreover, rising energy prices do not necessarily affect only energy category. Rising fuel costs could push up prices for food and manufacturing, which could face higher transportation costs (and be passed on to consumers).
There’s a lot we don’t know yet
One important point is that the 2027 Social Security COLA is based on: 3rd quarter inflation data. That means the Social Security Administration will compare July, August, and September inflation numbers to last year’s inflation numbers.
There is no way of knowing whether the rise in crude oil prices will continue until then. If the conflict is largely over by then, prices could plummet. If the Strait of Hormuz is closed for an extended period of time, prices could rise further from here.
In short, if the rise in oil prices continues into the summer, it could have a significant impact on Social Security COLA in 2027. But a lot can happen in the coming months, so it’s too early to know exactly what will happen.
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