The increase, which starts in January, is tied to a measure of inflation released Wednesday morning.
About 8 million people who receive Supplemental Security Income will also receive the 3.6 percent cost-of-living adjustment, or COLA, meaning the announcement will affect about one in five U.S. residents.
There was no COLA in 2010 or 2011 because inflation was too low. Those were the first two years without a COLA since automatic increases were adopted in 1975. However, Social Security recipients did receive a one-time $250 payment from the economic stimulus package passed in 2009.
Monthly Social Security payments average $1,082, or about $13,000 a year. A 3.6 percent increase will amount to about $39 a month, or just over $467 a year, on average.
Advocates for seniors said the raise will provide a much-needed boost to the millions of retirees and disabled people who have seen retirement accounts dwindle and home values drop during the economic downturn. Economists say the increase should provide a modest boost to consumer spending, which should help the economy.
Still, many seniors feel like they have been falling behind.
Nancy Altman, co-chair of the Strengthen Social Security Campaign, said she is pleased Social Security recipients will get a raise next year. But, she added, “The COLA is still not enough to keep up with health care costs.”
“Despite the absence of a Social Security COLA, over the last two years out-of-pocket health care costs rose 14.1 percent for seniors and people with disabilities, effectively reducing the value of Social Security benefits,” Altman said.
Most retirees rely on Social Security for a majority of their income, according to the Social Security Administration. Many rely on it for more than 90 percent of their income.
“For many of our seniors, the creeping costs of medical care, food and housing have forced them to stretch their limited incomes to the breaking point,” said Rep. Xavier Becerra of California, the top Democrat on the House Social Security subcommittee. “And after two years without any cost-of-living increases, our seniors are getting some much-needed relief.”
Some of the increase in January will be lost to higher Medicare premiums, which are deducted from Social Security payments. Medicare Part B premiums for 2012 are expected to be announced next week, and the trustees who oversee the program are projecting an increase.
The amount of wages subject to Social Security taxes will also go up next year. This year, the first $106,800 in wages is subject to Social Security payroll taxes. Next year, the limit will increase to $110,100, the Social Security Administration said.
Of the 161 million workers who will pay Social Security taxes next year, about 10 million will get a tax increase from the change, the agency said.
Workers pay a 6.2 percent Social Security tax on wages, which is matched by employers. For 2011, the tax rate for workers was reduced to 4.2 percent. The tax cut is scheduled to expire at the end of the year, though President Barack Obama wants to expand it and extend it for another year.
Several economists said the Social Security increase should provide a modest boost in consumer spending next year. However, David Wyss, former chief economist at Standard & Poor’s, noted that most analysts have already factored the COLA into their growth estimates for next year.
“The COLA will help the economy a bit,” Wyss said. “At least, it is moving in the right direction. But it is not a game-changer.”
Federal law requires the program to base annual payment increases on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Officials compare inflation in the third quarter of each year – the months of July, August and September – with the same months in the previous year.
If consumer prices increase from year to year, Social Security recipients automatically get higher payments, starting the following January. If price changes are negative, the payments stay unchanged.
Social Security payments increased by 5.8 percent in 2009, the largest increase in 27 years, after energy prices spiked in 2008. But energy prices quickly dropped and home prices became soft in markets across the country, contributing to lower inflation in the past two years.
As a result, Social Security recipients got an increase that was far larger than actual overall inflation.
However, they can’t get another increase until consumer prices exceed the levels measured in 2008. Wednesday’s announcement shows that prices have exceeded those measured in 2008, said Polina Vlasenko, an economist at the American Institute for Economic Research, based in Great Barrington, Mass.
Wednesday’s COLA announcement comes as a special joint committee of Congress weighs options to reduce the federal government’s $1.3 trillion budget deficit. In talks this summer, Obama floated the idea of adopting a new measure of inflation to calculate the COLA, one that would reduce the annual increases.
Advocates for seniors mounted an aggressive campaign against the proposal, and it was scrapped. But it could resurface in the ongoing talks.
“The relief expressed by many should serve as a reminder about how important the COLA is – the difference between filling a prescription, cutting back on food or turning the heat up during a cold spell,” said Eric Kingson, co-director of Social Security Works, an advocacy group. “It also should remind those politicians who are talking about cutting all future COLAs that they are playing with fire, the lives of fellow Americans and their own political futures.”