More than 56 million Americans on Social Security will get raises averaging $19 a month come January, one of the smallest hikes since automatic adjustments for inflation were adopted in 1975, the government announced Tuesday.
Much of the 1.7 percent increase in benefits could get wiped out by higher Medicare premiums, which are deducted from Social Security payments.
At the same time, about 10 million working people who make more than $110,100 will be hit with a tax increase next year because more of their wages will be subjected to Social Security taxes.
The cost-of-living adjustment, or COLA, on payments is tied to a government measure of inflation released Tuesday. It confirms that inflation has been relatively low over the past year, despite the recent surge in gasoline prices.
Social Security recipients received a 3.6 percent increase in benefits this year after getting none the previous two years.
"The annual COLA is critically important to the financial security of the (56) million Americans receiving Social Security benefits today," said Nancy LeaMond, AARP's executive vice president. "Amid rising costs for food, utilities and health care and continued economic uncertainty, the COLA helps millions of older Americans maintain their standard of living, keeping many out of poverty."
Social Security payments average $1,131 a month, or $13,572 a year. A 1.7 percent increase amounts to a $19 increase each month, or about $230 a year.
Payments for retired workers are a little higher on average, about $1,237, so the typical increase will be slightly larger. Disabled workers get a little less on average, about $1,111 a month, so their typical increase will be a little smaller. Social Security also provides benefits to millions of spouses, widows, widowers and children.
About 8 million people who receive Supplemental Security Income, the disability program for poor people, will also receive the COLA. In all, the increase will affect about one in five U.S. residents.
Since 1975, the annual COLA has averaged 4.2 percent. Only five times has it been below 2 percent, including the two times it was zero. Before 1975, it took an act of Congress to increase Social Security payments.
"While this modest increase will help, much of the COLA will be consumed by health care and prescription costs, which continually outpace inflation," LeaMond said.
Medicare Part B premiums, which cover doctor visits, are expected to rise by about $7 per month for 2013, according to government projections. Since the premiums are deducted from Social Security payments, that would eat up more than a third of the average COLA.
The Part B premium is currently $99.90 a month for most seniors. Medicare is expected to announce the premium for 2013 in the coming weeks.
Social Security is supported by a 12.4 percent tax on wages up to $110,100. That threshold will increase to $113,700 next year, resulting in higher taxes for nearly 10 million workers and their employers, according to the Social Security Administration.
The tax increase would amount to $446 for someone who makes at least $113,700. Half the tax is paid by workers and the other half is paid by employers.
Congress and President Barack Obama reduced the share paid by workers from 6.2 percent to 4.2 percent for 2011 and 2012. The temporary cut, however, is due to expire at the end of the year.
By law, the cost-of-living adjustment is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, a broad measure of consumer prices generated by the Bureau of Labor Statistics. It measures price changes for food, housing, clothing, transportation, energy, medical care, recreation and education.
Over the past year, housing costs have gone up 1.4 percent, but home energy costs have dropped by 3.8 percent, according to the CPI-W. Medical costs, which tend to hit seniors harder than younger adults, have increased by 4.4 percent.
Gasoline prices have gone up by 6.8 percent, but much of that increase happened in the past month, so it is not fully reflected in the COLA for Social Security.
To calculate the COLA, the Social Security Administration compares the average price index for July, August and September with the index for the same three months in the previous year. The price index for September — the final piece of the puzzle — was released Tuesday.
If consumer prices increase from year to year, Social Security recipients automatically get higher payments, starting the following January. If prices drop, the payments stay the same, as they did in 2010 and 2011.
Congress has been considering changing the way the COLA is calculated by adopting a new inflation index that would result in lower annual adjustments. Despite fierce opposition from seniors groups, a deficit reduction committee formed by Obama in 2010 recommended the new index, and Obama floated the idea during deficit reduction talks last year.
Those talks failed but the idea could resurface as policymakers look for ways to cut benefits to improve the program's finances and reduce federal spending.
Mitt Romney, Obama's Republican opponent in the presidential election, says he would strengthen Social Security by slowing the growth of benefits for people with "higher incomes." Romney hasn't defined "higher incomes" or explained how he would slow the growth of benefits for such people.
One way would be to reduce their annual COLAs.
Advocates for seniors are fighting back in ad campaigns and at local forums across the country. They say this year's small pay hike is evidence that the COLA shouldn't be shrunk.
"Seniors know all too well their living costs often far outpace the COLA increase, yet incredibly many politicians are proposing a new formula that will erode this inflation protection even more," said Max Richtman, who heads the National Committee to Preserve Social Security and Medicare.
"It's hard to imagine how anyone can argue the current COLA is too generous," Richtman said. "I've asked seniors at town hall meetings nationwide how many think the COLA is too large — laughter is always the response."
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