What President Trump's Tariff Turmoil Could Mean for Your Next Social Security COLA

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).

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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.

Tariffs could even impact the prices of products made in the U.S. One way this can happen is when components used in those products are imported from countries impacted by high tariffs. Another is if U.S. companies raise their prices to take advantage of an opportunity to make more money when their foreign rivals' prices are higher.

Many economists project higher inflation if the president's tariffs remain in effect. Predictions vary for just how much higher inflation will go. For example, Comerica Bank chief economist Bill Adams told CNBC he thinks tariffs could cause inflation to jump 2% this year from 2.8% to 4.8%. EY Chief Economist Gregory Daco expects a smaller impact, telling CBS News recently that he expects inflation will rise by 1% to nearly 4%.

The potential for a higher Social Security COLA might sound good to some retirees. However, benefit adjustments don't always fully keep up with price increases incurred by older Americans. Also, higher-than-anticipated COLAs could cause the Social Security trust funds to run out of money sooner than projected.

Don't put the cart before the horse

There are several potential scenarios wherein inflation doesn't rise in the third quarter of this year. The president could again pause tariffs or reduce them as he did last week. A lawsuit claiming that President Trump's tariffs are unconstitutional could be affirmed by federal courts. Some economists think steep tariffs could cause a recession, which could hold inflation down.

Retirees shouldn't count on higher Social Security COLAs yet. However, the president's tariffs could very well impact your next COLA.

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