Trump’s Tariffs: Impacts on Social Security and Inflation in 2025

President Trump has returned to the White House for a second term, signaling a significant change in Washington’s trade policy within just two months. The administration has implemented or plans to impose various tariffs, including:

• A 10% tariff on goods imported from China, effective February 4, followed by an additional 10% import tax on March 4.
• A 25% tariff on goods imported from Canada and Mexico, imposed on March 4, with certain exemptions remaining until April 2.

While these tariffs might strengthen the U.S. economy over time, they present immediate challenges for Social Security beneficiaries. Here’s why.

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Understanding Inflation Expectations Amid Tariffs

Predicting the tariffs’ ultimate impact on the U.S. economy is challenging; it largely hinges on foreign trade partner responses. Economists widely expect a one-time inflation spike, the severity of which depends on various factors including the duration and specific tariffs enacted.

The Federal Reserve Bank of Boston estimates core inflation (excluding food and energy) could rise by as much as 0.8 percentage points if tariffs on China, Canada, and Mexico persist until 2025. If more severe tariffs are imposed, core inflation could jump by 2.2 percentage points.

Assuming inflation rises, higher tariffs will likely require a larger cost-of-living adjustment (COLA) for Social Security recipients next year. While this may seem beneficial, past adjustments have struggled to keep up with actual inflation, leading to diminished purchasing power. According to the Senior Citizens League, Social Security’s buying power has decreased by 20% from 2010 to 2024.

Issues with Current COLA Calculations

COLA adjustments are calculated based on a subset of the Consumer Price Index called CPI-W, which measures the retail prices affecting working-age adults. Some experts argue this approach is flawed because CPI-W does not adequately reflect the spending patterns of retirees.

Many suggest that COLAs should be linked to the CPI-E, a category that tracks prices based on expenditures of adults aged 62 and older. This demographics overlap more closely with those reliant on Social Security, thus providing a potentially more accurate inflation measure for retirees.

Higher Inflation Challenges for Retired Workers

Historically, CPI-E inflation surpasses CPI-W inflation by about two-tenths of a percentage point annually. Over the last decade, Social Security payments have increased by 32% due to CPI-W-based COLAs. However, had COLAs been calculated based on CPI-E, the increase would have been 34%.

For perspective, the average retired-worker benefit was $1,331 in January 2015. Now, that same retiree receives $1,757 per month, but the payout would be $1,784 if CPI-E had been used, resulting in a difference of $27 monthly or $324 annually by 2025.

Notably, CPI-E inflation is again exceeding CPI-W inflation as of January 2025; CPI-E increased by 3.1%, while CPI-W grew by 3%. If CPI-E accurately reflects pricing pressures for retirees, this implies Social Security may continue to lose purchasing power this year. While tariffs could exacerbate the issue, higher inflation will undoubtedly strain retired workers’ finances. COLAs merely restore lost purchasing power, and during high inflation periods, retirees face significant financial challenges as benefits erode faster.

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