Social Security COLA to Rise 1.7% in 2013

Average monthly benefit will rise to $1,261, but this may not cover increases in Medicare costs

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Social Security benefit payments will rise by only 1.7 percent in 2013, down sharply from a 3.6 percent increase in 2012's cost of living adjustment (COLA). That boost followed two years of no COLA increase. The Social Security Administration said next year's COLA would raise the average monthly benefit payment by $21, to $1,261 from $1,240.

Retirees are likely to get smaller monthly payments using this new measure of inflation

For people still working, the COLA increase will also translate into a higher earnings ceiling for Social Security payroll taxes. The ceiling was raised this year to $110,100 and will increase in 2013 to $113,700. Social Security payroll taxes are expected to further increase because of the scheduled lapse of the cut in employee payroll taxes—to 4.2 percent from 6.2 percent of covered wages—that's been in effect in 2011 and 2012.

The COLA change also affects numerous other Social Security benefits, including the tax treatment of outside income earned by recipients, disability payments, and how much money working people need to earn each quarter of the year to qualify to earn credits for Social Security payments when they retire. These changes are spelled out in an online fact sheet.

Social Security payments also are linked to Medicare premiums. The 2013 Part B premium for physician and other outpatient expenses is expected to be announced later this month by the U.S. Centers for Medicare & Medicaid Services.

The Part B premium is now $99.90 a month for most people. Higher-income taxpayers who report more than $85,000 in taxable income ($170,000 for married couples) pay higher Part B premiums. The government says less than 5 percent of Medicare recipients pay such higher premiums.

By law, the Part B premium can't rise by more than any annual COLA. However, prescription drugs are not covered by Part B. And some Medicare prescription drug plans (part D of Medicare) are raising out-of-pocket spending requirements by much more than the amount of the COLA. Medicare experts advise consumers to shop very carefully for their 2013 prescription drug coverage. The open enrollment period for 2013 Medicare plans began October 15 and extends to December 7.

"The anticipated increase in the monthly premiums for the Medicare Part B and Medicare Part D drug coverage will eat up all of the COLA of some beneficiaries and much of it for many," according to the Social Security Works and the Strengthen Social Security Coalition, a Washington, D.C., group that supports improved benefits for seniors.

The Social Security COLA is based on a version of the U.S. Consumer Price Index tailored for people who work. It's called the CPI for Urban Wage Earners and Clerical Workers, or the CPI-W. Every year, Social Security looks at the CPI-W average during the third quarter of the year, compares it with the average during the previous year's third quarter, and designates any percentage increase as the following year's COLA.

Some Social Security reform proposals support reducing program funding pressure by using a less-generous CPI formula to calculate the COLA. Senior advocacy groups, however, say the current formula should be adjusted up, not down. They generally support use of an experimental "elder" CPI that is designed to measure what older Americans spend. It provides a heavier weight to medical expenses.

"In 2009, individuals aged 65 or older spent 12.9 percent of their incomes on health care, compared with 5.3 percent spent by people ages 25-64," according to the Coalition. "What is more, health care costs have increased 50 percent more than prices overall since 1989."

"You shouldn't penalize seniors on fixed incomes for simply trying to maintain the purchasing power of what is a very modest benefit," says Nancy Altman, co-director of the Coalition.

Twitter: @PhilMoeller