By Howard Schneider and Neil Irwin
Washington Post Staff Writers
Thursday, October 18, 2007
Payments to Social Security recipients and most federal retirees will increase 2.3 percent in January. It is the smallest cost-of-living adjustment since 2003, reflecting a lower rate of inflation.
The adjustment will increase the average monthly Social Security retirement benefit by $24, to $1,079. It is based on the rise in the consumer price index in the third quarter, a figure the Labor Department released yesterday.
The increase directly affects the finances of about 50 million people, including more than 31 million Social Security retirees and 11 million people who receive disability or other supplemental income from the Social Security Administration.
It is also a significant number to the more than 4 million federal government and military retirees, about 500,000 of whom live in the Washington region. The pensions of most civil service, foreign service and military retirees will match Social Security's 2.3 percent increase. Government workers covered by the newer Federal Employees Retirement System who are age 62 or older will receive an adjustment of 2 percent under the rules of that program.
The Social Security Administration announced another closely watched figure yesterday, raising to $102,000 from $97,500 the figure below which earnings are subject to Social Security taxes. By law, the cutoff is set using a formula based on the change in average wages. Yesterday's recalculation will increase taxes for about 12 million of the 164 million workers expected to pay into the Social Security system in 2008, the agency said.
Retirees are generally better off with low inflation, even if it means a smaller increase in their Social Security benefits, said David Certner, legislative policy director of AARP. That is because Social Security is the only source of many retirees' income that automatically rises with inflation. During periods of high inflation, they might get a higher Social Security adjustment, but if their savings and other sources of income stay the same, they are harder hit by increases in what they have to spend.
Moreover, the price increases that retirees routinely face are frequently higher than the Social Security cost-of-living adjustment because older families spend more of their incomes on health care and energy than the overall U.S. population. Those costs have been rising faster than prices in general.
"Energy and health care are just far outstripping these COLA numbers," Certner said.
After two years of relatively steep cost-of-living adjustments, this year's increase was modest because of easing energy costs and lower prices for clothing and some other goods. The COLA was 2.7 percent in 2004, 4.1 percent in 2005 and 3.3 percent in 2006.
The cost-of-living calculation was based on a report from the Bureau of Labor Statistics that indicated inflation over the past year was contained but jumped significantly from August because of rising energy prices. Food costs continued to rise steadily, as did prices for medical care and housing.
Overall prices rose 0.3 percent in September from August on a seasonally adjusted basis. Excluding food and energy prices, a measure more closely watched by the Federal Reserve as it guides the nation's economy, the consumer price index rose 0.2 percent in September and 2.1 percent over the previous 12 months.
Economists said that level of consumer inflation, while a bit higher than Fed leaders prefer, is not high enough to tie the central bank's hands as it heads into its next policymaking meeting Oct. 31.
Staff writer Stephen Barr contributed to this report.