President Trump returned the White House for a second term less than two months ago, but he has already signaled a dramatic shift in Washington’s trade policy. Specifically, the Trump administration has imposed or plans to impose numerous tariffs, including the following:

• A 10% tariff on goods imported from China was implemented on Feb. 4, and an additional 10% import tax was added on March 4.
• A 25% tariff on goods imported from Canada and Mexico was imposed on March 4, but certain exemptions apply until April 2.

While the administration’s tough stance on international trade could strengthen the U.S. economy in the long run, the tariffs imposed by Washington are still bad news for Social Security beneficiaries today. Here’s why.

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Economists expect inflation to increase as tariffs take effect

How tariffs will ultimately affect the U.S. economy is hard to predict because it depends on how foreign trade partners respond. Economists generally anticipate a one-time increase in inflation, but the magnitude depends on numerous factors, including which tariffs are imposed and for how long.

The Federal Reserve Bank of Boston estimates core inflation (which excludes food and energy) could increase up to 0.8 percentage points if the tariffs on China, Canada, and Mexico remain in place through 2025. However, Fed officials estimate core inflation could rise 2.2 percentage points if the Trump administration levies more extreme tariffs.

Assuming inflation increases, tariffs will necessitate a larger cost-of-living adjustment (COLA) for retirees on Social Security next year. That may sound like good news, but COLAs have arguably failed to keep pace with inflation over time. The Senior Citizens League, a nonpartisan advocacy group, says the buying power of Social Security fell 20% between 2010 and 2024 for that reason.

Additionally, retired workers could still face more inflation-driven financial pressure in 2025 even if next year’s COLA does keep pace with inflation.

The problem with how Social Security’s COLAs are calculated

The Social Security Administration calculates COLAs based on changes in a subset of the Consumer Price Index known as the CPI-W. Some experts see that as problematic because the CPI-W tracks prices based on the purchase habits of working-age adults, who tend to be younger and spend money differently than retired workers on Social Security.

As a result, some experts think COLAs should be tied to a different subset of the Consumer Price Index known as the CPI-E, which tracks prices based on the purchase habits of adults aged 62 and older. Because the focus population overlaps to a greater degree with retirees on Social Security, it is arguably a much better measure of inflation for those individuals.

Higher inflation is bad news for retired workers on Social Security

The CPI-E tends to outpace the CPI-W by two-tenths of a percentage point per year. Indeed, Social Security payments have increased 32% in the last decade due to COLAs based on CPI-W inflation, but they would have risen 34% had COLAs been based on CPI-E inflation.

For context, the average retired-worker benefit was $1,331 in January 2015. Social Security payouts have since increased 32%, meaning that same retiree now gets $1,757 per month. But they would get $1,784 per month had COLAs been based on CPI-E inflation. Put differently, anyone receiving the average retired-worker benefit in January 2015 would get an extra $27 per month from Social Security in 2025 ($324 for the full year).

Importantly, CPI-E inflation is again outpacing CPI-W inflation in 2025. The former increased 3.1% in January, while the latter increased 3%. Therefore, if CPI-E inflation is truly a better gauge of pricing pressure for retired workers, then Social Security is once again on pace to lose purchasing power this year.

Tariffs could reinforce that trend, but the prospect of higher inflation is bad news for retired workers either way. That’s because COLAs are a reimbursement mechanism that restores the buying power benefits lost in the prior year. Consequently, retirees are always behind the curve to some degree, but they are most likely to feel financial strain during periods of high inflation simply because benefits lose buying power more quickly during those times.

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