On Monday, Iran shot down a U.S. Apache helicopter flying near the Strait of Hormuz. This prompted the U.S. to conduct retaliatory strikes, which in turn provoked drone and missile attacks by Iran on U.S. military bases in the Middle East.
How do these two developments impact retirees? Here’s why the Iran war could deliver the biggest Social Security raise in years.
Image source: Getty Images.
Connecting the dots
The escalating conflict between the U.S. and Iran wasn’t the only major news in recent days. On Wednesday, the U.S. Bureau of Labor Statistics (BLS) released its May inflation report. The Consumer Price Index (CPI) jumped 4.2% year over year, the biggest increase since 2023.
These headlines are related. And they both have a direct connection with the 2027 Social Security cost-of-living adjustment (COLA).
Following the initial attack by the U.S. and Israel on Iran on Feb. 28, 2026, traffic through the Strait of Hormuz came to a virtual standstill. Around 20% of petroleum liquids consumed globally flows through this critical passageway.
Unsurprisingly, oil prices skyrocketed. When energy costs rise, so does the CPI. BLS reported that its energy index for May rose 23.5% over the previous 12 months, with the gasoline index soared 40.5%. Higher energy costs accounted for over 60% of the overall CPI increase.
The important metric for the Social Security COLA is the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). It jumped 4.4% year over year in May, slightly above the CPI increase. The bottom line is that the Iran war is driving up energy prices, which is driving up inflation, which — if unchecked — will lead to a larger 2027 Social Security benefits increase.
On track for the highest COLA since 2022
Importantly, the Social Security COLA is calculated solely from third-quarter CPI-W figures for the current and prior years. It’s possible that inflation could wane between now and then. But don’t count on it.
Independent Social Security and Medicare policy analyst Mary Johnson projected a 2027 COLA of 4.2% even before the latest inflation report was released. Johnson’s take, based on the April CPI-W increase of 3.9%, was that the spike in gasoline, energy, and fresh produce prices would keep inflation elevated.
Some might be encouraged that the May inflation numbers weren’t too bad, excluding the surge in energy prices. However, a 2023 analysis conducted by the Netherlands’ central bank found that higher energy costs can cause the prices of other products to be higher for up to two years. The longer that traffic through the Strait of Hormuz is disrupted, the more serious the problem could be.
Inflation appears likely to remain elevated through the next three months — the exact period the 2027 Social Security COLA calculation will use. If Johnson’s 4.2% COLA estimate is correct, it would be the highest Social Security increase announced since 2022, when post-pandemic inflation was rampant. A 4.2% adjustment would also be the fourth-highest increase this century.
It isn’t good news for retirees.
President Trump proclaimed to reporters after the May CPI report was released, “I love the inflation.” However, higher inflation and a corresponding higher Social Security COLA aren’t good news for retirees.
For one thing, retirees must pay the higher product costs now but won’t receive a benefit increase until next year. The Social Security COLA doesn’t account for the time value of money.
Even worse, the Social Security benefit adjustment often isn’t enough to offset the full impact of inflation on seniors’ budgets. In particular, the CPI-W is viewed as flawed by many experts because it underweights the costs of healthcare in retirement and other expenses that affect older Americans more than younger Americans.
Many retirees are already pinching pennies because of soaring prices. Unfortunately, a prolonged conflict with Iran could make things worse before they get better.
