Social Security benefits will go up by 3.6 percent next year, the first increase since 2009 for the one in five Americans who rely on government retirement and disability programs.
The higher benefits will provide relief to more than 60 million people, many who have seen their retirement accounts dwindle, home values drop and out-of-pocket medical costs rise in the years since their last raise.
Starting in January, 55 million Social Security recipients will get increases averaging $39 a month, or just over $467 for the year. In December, more than 8 million people who receive Supplemental Security Income, the disability program for the poor, will get increases averaging $18 a month, or about $216 for the year.
It may not sound like much, said Max Richtman, president and CEO of the National Committee to Preserve Social Security and Medicare. "But for millions of American seniors already suffering in this economy and facing years of rising costs, shrinking returns on their savings and no cost-of-living increases, today's COLA announcement lets them know there's some relief around the corner."
AARP Executive Vice President Nancy LeaMond said the increase "underscores the importance of Social Security as the only guaranteed, lifelong and inflation-adjusted source of retirement income for most Americans."
The annual cost-of-living adjustment, or COLA, is tied to an inflation measure released Wednesday. The measure, which was adopted in the 1970s, produced no COLA in 2010 or 2011 because inflation was too low. Those were the first two years without a COLA since automatic increases were enacted in 1975. Social Security recipients did, however, receive a one-time $250 payment from the economic stimulus package passed in 2009.
Economists say higher Social Security payments should provide a modest boost to consumer spending next year, which should help the economy. President Barack Obama is pushing for more robust measures, but he is having little luck getting Congress to agree.
This year, Social Security will pay out $727 billion in benefits to retirees, disabled people, surviving spouses and children, the agency said. Monthly Social Security payments average $1,082, or about $13,000 a year.
The COLA would add $25 billion to $30 billion to those payments next year, providing additional spending money for retirees and disabled people.
"It is not a magic bullet for the economy, but it will certainly be a positive for households on fixed incomes," said Mark Zandi, chief economist at Moody's Analytics.
David Wyss, former chief economist at Standard & Poor's, said most analysts have already factored the COLA into their growth estimates for next year. Wyss foresees the economy growing at a sluggish rate of around 2 percent in 2012, while Zandi thinks the economy will grow by 2.6 percent.
"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."
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, resulting in a tax increase for about 10 million workers, the Social Security Administration said. This year, the first $106,800 in wages is subject to Social Security payroll taxes. Next year, the limit will increase to $110,100.
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 Obama wants to expand it and extend it for another year.
Federal law requires the program to base annual payment increases on the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. Officials compare consumer prices 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 prices drop, 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 in 2009 that was far larger than actual inflation. However, they couldn't get another increase until consumer prices exceeded the levels measured in 2008. This year, consumer prices in July, August and September were 3.6 percent higher than those measured in 2008, resulting in the COLA.
The COLA announcement comes as a special joint committee of Congress weighs options to reduce the federal government's growing 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.
Support for the COLA "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," said Eric Kingson, co-director of Social Security Works, an advocacy group.
Associated Press writers Chris Rugaber and Martin Crutsinger contributed to this report.
Social Security Administration's COLA site: http://www.ssa.gov/cola/