Social Security Payments Could Get a Major Boost Due to the Iran War

Retirees who depend on Social Security senior benefits may see a bump in their checks for 2027, and the war with Iran could be a major reason behind the increase. The Social Security Cost of Living Adjustment (COLA) helps ensure that the benefit amounts keep pace with inflation. Since the war has disrupted global oil markets and driven inflation higher, the COLA may also increase to reflect the higher cost of living.

Here's what to know if you or a loved one receive Social Security.

What the war means for the 2027 COLA

The 2026 COLA came in at 2.8%, but the war's impacts may push the 2027 significantly higher. Iran's closure of the Strait of Hormuz drove Brent crude oil prices past $120 per barrel in April. In 2022, former Federal Reserve Chair Jerome Powell explained that every $10 increase in the oil price drives up inflation by 0.2 percentage points and brings down Gross Domestic Product growth by 0.1 percentage point, meaning the war's impact on the economy may be long-lasting.

Those impacts are already being seen in energy prices. In April, energy prices rose 17.9% year-over-year, and in May, energy costs increased 23.5% year-over-year. Gasoline prices increased 40.5% year-over-year, accounting for more than 60% of the overall May 4.2% year-over-year consumer price increase.

How the Social Security COLA is calculated

That surge in inflation is poised to drive up the 2027 COLA. The COLA is calculated based on an increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which is calculated by the Bureau of Labor Statistics. Only data from the third quarter of each year is used, and it's compared to the data from the third quarter of the last year in which a COLA went into effect. If the CPI-W has increased, a COLA percentage is applied and benefits are increased for the duration of the next year.

Since the COLA calculation is based on data from July, August, and September, the current inflation data doesn't impact the calculation. The official 2027 COLA should be announced in October.

How COLA projections are shifting

Though the data to be used to calculate the COLA isn't yet available, analysts are already adjusting their COLA projections as inflation climbs throughout the year. Independent analyst Mary Johnson revised her 2027 COLA projection from 1.2%, based on January data, to 3.2%, based on March's inflation data and climbing gasoline prices.

In June, as the annual inflation rate reached the highest level in three years, Johnson again revised her projection, increasing it to 4.7%. Also in June, the Senior Citizens League revised its COLA projection, lowering it from 3.9% predicted in May to 3.8%.

Even a 3.8% COLA would be significantly higher than the 2.8% 2026 COLA. There is still plenty of time for the actual COLA to potentially climb if inflation and energy prices continue to increase into the third quarter.

What a higher COLA actually means

At first glance, a higher COLA might seem like a positive change, since it means beneficiaries may receive larger Social Security checks in 2027. But a higher COLA isn't actually a win.

A COLA isn't designed to outpace inflation, but to ensure that benefits keep up with inflation. A 2027 COLA won't go into effect until January, meaning until then, retirees are left to cope with this year's inflation without an extra benefits boost. Since the cost of energy, food, health care, and housing is already climbing, retirees have many months to go before their benefits may increase. That's a long time to stretch a budget that doesn't account for inflation.

Could the COLA come up short

The COLA may not accurately reflect the expenses that retirees face. Since retirees often spend a large portion of their budgets on health care, which often outpaces inflation, the COLA may not result in a benefits increase large enough to keep up with the climbing costs retirees face.

The COLA calculation also doesn't reflect any inflation that could occur during the fourth quarter. If the war with Iran continues through the end of the year, it's possible that inflation could continue to climb, and the 2027 COLA wouldn't account for increases that occur from October through December.

Bottom line

Oil markets are volatile, and the final COLA calculation won't be revealed until October. At this point, all COLA projections are just estimates, and how inflation increases or decreases over the next three months should shape the 2027 COLA and any potential benefits increases.

Until then, focus on near-term strategies to help build your financial stability. Work to reduce discretionary spending, build up your savings, and explore utility assistance programs to save money in retirement, rather than counting on a future COLA to close the gap.