Social Security benefits to rise by 1.5 percent

WASHINGTON – Social Security benefits will rise 1.5 percent in January, giving millions of retired and disabled workers an average raise of $19 a month to keep up with the cost of living.

The increase is among the smallest since automatic adjustments were adopted in 1975, and reflects the fact that consumer prices haven’t gone up much in the past year. The annual cost-of-living adjustment, or COLA, is based on a government measure of inflation that was released Wednesday.

Automatic COLAs were adopted in 1975 so that benefits for people on fixed incomes would keep pace with rising prices. Some advocates for older Americans, however, complain that the COLA sometimes falls short, especially for people with high medical costs.

The COLA affects benefits for more than one-fifth of the country: nearly 58 million Social Security recipients, as well as benefits for millions of disabled veterans, federal retirees and people who get Supplemental Security Income, the disability program for the poor.

Social Security pays retired workers an average of $1,272 a month. A 1.5 percent raise comes to about $19.

Benefits are based on lifetime earnings. The more you make, the higher your benefit – to a point. For someone who retired this year at age 66, the maximum monthly benefit is $2,533. That person will get a raise of about $38 a month.

The amount of wages subject to Social Security taxes is also going up. Social Security is funded by a 12.4 percent tax on the first $113,700 in wages earned by a worker, with half paid by employers and the other half withheld from workers’ pay.

The wage threshold will increase to $117,000 next year, the Social Security Administration said. Wages above the threshold are not subject to Social Security taxes.

By law, the cost-of-living adjustment is based on the consumer price index for urban wage earners and clerical workers, 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.

Since 1975, annual Social Security raises have averaged just over 4 percent. There was no COLA in 2010 or 2011 because inflation was too low.

To save money, Congress has considered adopting a new measure of inflation called the chained CPI, which would, on average, result in slightly smaller COLAs most years. President Barack Obama has supported the idea in previous budget talks with House Speaker John Boehner, R-Ohio, making it one of the few issues the two agree on.

Many economists argue that the chained CPI is more accurate because it assumes that as prices increase, consumers switch to lower-cost alternatives, reducing the amount of inflation they experience. The White House has called it a “technical change,” though many advocates for older Americans are pledging to fight it.