Will the Recent Surge in Oil Prices Lead to Higher Social Security Paychecks in 2027?

Oil prices have surged this year due to the Iran war, with crude oil futures at one point topping $110. As of this writing on April 9, Iran and the U.S. had announced a two-week ceasefire, though the agreement appeared fragile.

Still, West Texas Intermediate crude oil futures, a good benchmark for U.S. oil, had plummeted by more than 15% to roughly $95, which is still significantly higher than where they started the year.

While higher oil prices serve as a tax on consumers and increase the cost of doing business for corporations, they may have unintended consequences for Social Security benefits. Could surging oil prices lead to higher Social Security checks next year?

How Social Security COLAs work

Before I discuss why surging oil prices could lead to higher Social Security checks next year, it's important for people to understand how benefits and annual increases work. Each year, there is a cost-of-living adjustment (COLA) for benefits, so retirees can ideally maintain their purchasing power and keep up with inflation.

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The COLA is specifically calculated based on inflation data. While the market focuses on the Consumer Price Index for All Urban Consumers (CPI-U), which tracks the prices on a basket of consumer services and goods, the Social Security Administration (SSA) uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), a subset of the CPI-U and supposedly a better reflection of prices impacting working class Americans.

In the third quarter of each year, the SSA takes the average CPI-W for July, August, and September and compares it to the average CPI-W for the same period the year prior.

The percentage difference represents the following year's COLA. There can't be a negative COLA, so if prices actually decline, the COLA for the following year is simply zero. Here are the COLAs for the last five years:

2022 -- 5.9%

2023 -- 8.7%

2024 -- 3.2%

2025 -- 2.5%

2026 -- 2.8%

Why the COLA may be higher than expected in 2027

The reason surging fuel prices may affect Social Security checks next year is that both the CPI-U and the CPI-W include energy costs, so if energy prices lead to higher CPI-W readings in the third quarter of the year, then they're likely to result in a larger COLA, and therefore a higher Social Security check in 2027.

The big question is whether energy prices will remain elevated through July, August, and September. After all, there are still several months between then and now. One thing that could prevent them from coming down is the fragile relations between the U.S., Iran, Israel, and other countries in the Middle East. If the ceasefire breaks (more then they already have) and tensions rise, leading Iran to once again close the Strait of Hormuz, oil prices could rise.

But even if the ceasefire holds, that doesn't mean oil prices will drop overnight, or even next week. It can take several weeks to transform crude oil into gasoline, and many gas stations also buy supply in advance, forcing them to keep prices higher until it runs out.

According to Business Insider, a strategy team at Saxo Bank recently wrote that even "if the ceasefire holds, a return to 'normal' could still take months given the time it takes to reopen shuttered wells, and before crews and vessels are in the right places, and refineries are fully repaired and restocked."

It remains to be seen what will happen to gas prices and other energy-associated costs, but in January, the non-partisan Senior Citizens League predicted the 2027 COLA would be 2.8%.

If oil prices remain higher than they were at the start of the year, retirees are looking at a higher COLA than expected.

The ideal situation for the COLA would be for energy prices to remain at least somewhat elevated through September and then return to where they were heading into 2026. Yes, retirees would face higher costs in the near term, but then receive a higher Social Security check in perpetuity.

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