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How the Strait of Hormuz could affect Social Security checks as rising oil prices may boost 2027 COLA
Strait of Hormuz tensions and rising oil prices could push the 2027 Social Security COLA higher, but inflation may reduce the benefit of bigger checks.
Fighting in the Middle East has started again even after a ceasefire was announced in June, with new strikes taking place and US President Donald Trump reimposing a naval blockade. The renewed tensions have raised fears that oil supplies moving through the Strait of Hormuz, one of the world's most important oil routes, could be disrupted.
Oil prices reacted immediately to the latest developments. They jumped by more than 8% after Trump announced the blockade, according to OilPrice.com. Higher oil prices could have an unexpected impact on millions of Americans who receive Social Security. The reason is that rising oil prices can increase inflation, and higher inflation can lead to a bigger Cost-of-Living Adjustment (COLA) for Social Security benefits next year, according to The Motley Fool.
Social Security COLA
COLA is the yearly increase added to Social Security payments to help retirees keep up with rising prices. The Social Security Administration calculates COLA using an inflation measure called the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W tracks the prices of everyday goods and services like housing, food, transportation and energy, including gasoline and oil.
How COLA is calculated
Only inflation data from July, August and September is used to calculate the next year's COLA. The COLA calculation follows three main steps, according to The Motley Fool:
- It averages the CPI-W data for July, August and September.
- It compares that average with the same three months from the previous year.
- The percentage increase becomes the next year's COLA. If prices do not rise, there is no COLA.
Also read: Why are US gas prices rising again? Iran conflict sparks fresh fuel price fears
Because oil prices are rising during July, which is part of the calculation period, there is a higher chance that the 2027 COLA could be larger than usual. Rising oil prices do not only make gasoline more expensive. They also increase transportation costs, which can push up the prices of groceries and many other products. President Trump has changed his position on Iran several times in the past, meaning the situation could still change.
2027 COLA estimate
In earlier periods of high oil prices, the US government was able to use oil from the country's Strategic Petroleum Reserve to help keep prices under control, according to The Motley Fool. However, US oil reserves are now reported to be at their lowest level since 1983, making it harder to use that option if prices continue rising. This year's Social Security COLA was 2.8%. The advocacy group The Senior Citizens League estimates that the 2027 COLA could reach around 3.8% if inflation continues at its current pace.
If the estimate proves correct, a 3.8% COLA would be the third-highest annual increase in the past 10 years, according to The Motley Fool. Previous Social Security COLA increases were listed as:
- 2026: 2.8%
- 2025: 2.5%
- 2024: 3.2%
- 2023: 8.7%
- 2022: 5.9%
- 2021: 1.3%
- 2020: 1.6%
- 2019: 2.8%
- 2018: 2.0%
- 2017: 0.3%
Higher checks, higher prices
A bigger Social Security check may sound like good news, but it also means inflation has pushed prices higher, so retirees may not actually be able to buy more with the extra money. The current predictions for the 2027 COLA are only estimates and could still change depending on inflation over the next few months.
The official 2027 COLA will only be announced after all third-quarter inflation data is available, with the Social Security Administration expected to make the announcement on October 14, according to The Motley Fool. The COLA is a reaction to inflation, not a way to stop it. It helps retirees recover some of the money lost to higher prices, but only after inflation has already increased the cost of living.
