Nearly 50 million Social Security recipients to get 2.3 percent adjustment

WASHINGTON -- Social Security benefits for nearly 50 million people will rise 2.3 percent starting in January, the smallest increase in four years. The typical retiree will face the challenge of using the extra $24 to cover higher costs for everything from gasoline and food to medical care.

The new cost-of-living figure announced Wednesday by the Social Security Administration means the typical retired worker's benefit check will go from $1,055 per month to $1,079.

The increase is the smallest since a 2.1 percent rise in 2004 and is a full percentage point lower than the 3.3 percent adjustment for 2007. In 2006, benefits rose by 4.1 percent.

The adjustment is based on the change in consumer prices from this July through September compared with the same three-month period last year. Benefit payments have been tied to inflation since 1975.

In the past two years, retirees have benefited from the time frame the government uses to set the adjustment for the next year. The 2006 increase picked up a jump in energy prices that occurred in September 2005, reflecting the effect of Hurricane Katrina on production at Gulf Coast refineries.

This year, however, retirees may be penalized because energy costs, which moderated over the summer, are expected to pick up again during the final three months. In addition, food prices and medical prices have climbed rapidly.

But those gains have been offset somewhat by moderation in categories of goods that older people to buy less; they include computers, consumer electronics and clothing.

"Retirees are going to feel a disconnect this year between the COLA increase and the reality of the inflation they face," said Mark Zandi, chief economist at Moody's Economy.com. "If this calculation were done in another three months, it would be measurably higher."

Advocates for the elderly said the small increase highlighted the need to revamp the cost-of-living adjustment to better reflect prices paid by retired people, including the money they spend on health care.

The Senior Citizens League said a study it has done showed that in eight spending areas, people over age 65 have lost 40 percent of their purchasing power since 2000. This finding reflects factors such as big increases for gasoline, home heating oil and prescription drugs.

Shannon Benton, the group's executive director, said it supports legislation that would base the adjustment on a special gauge of the Consumer Price Index, the most closely followed inflation barometer. It would be weighted to better reflect the goods and services that older people are buying.

David Sloane, director of government relations for AARP, which represents people 50 and older, said the cost-of-living adjustment is critical because so many depend on Social Security for most of their retirement income.

"Just under one in three older Americans count on Social Security for nearly all of their income and almost two-thirds of beneficiaries count on Social Security for at least half of their income," he said.

Part of the Social Security increase will be eaten up by a rise in the cost of Medicare, the health care program that covers the elderly and disabled. The government said this month that Medicare premiums will rise 3.1 percent next year, which comes to $2.50 to $96.40 per month. That is the lowest Medicare premium increase in six years.

Next year's cost-of-living increase will go to more than 54 million people. Nearly 50 million receive Social Security benefits; the rest get Supplemental Security Income payments for the poor.

The average retired couple, both receiving Social Security benefits, will see their monthly check go from $1,722 to $1,761, an increase of $39.

The standard SSI payment for an individual will go from $623 per month to $637.

The average monthly check for a disabled worker will go from $981 to $1,004.

The government said nearly 12 million wage earners will pay higher taxes next year because the maximum amount of Social Security earnings subject to the payroll tax will rise from $97,500 currently to $102,000. In all, an estimated 164 million workers will pay Social Security taxes in 2008.

The Social Security Administration on Monday had a ceremony to highlight the opening wave of baby boomer retirements, a generation of 78 million people born from 1946 to 1964. The first of those boomers will turn 62 next year, making them eligible for Social Security benefits. An estimated 10,000 people per day are becoming eligible for Social Security benefits over the two decades, putting a severe strain on the pension program.

If no changes are made, the Social Security trust fund is projected to deplete its reserves in 2041 and will begin paying out more in benefits that it collects in payroll taxes in 2017. Medicare is facing even greater problems because of the rapidly rising cost of health care.

President Bush pledged to make changes to Social Security the top priority of his second term. But his plan to provide private accounts for younger workers went nowhere in Congress and Republicans and Democrats remain deadlocked.

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