Social Security beneficiaries to receive 3.6% increase

Fifty-five million Social Security beneficiaries will receive a 3.6% cost-of-living adjustment next year, the U.S. government said last week. Taxpayers will also be able to set aside up to $17,000 in 401(k) accounts and other similar retirement plans in 2012, a $500 increase over this year, according to the Internal Revenue Service. The agency last week also announced cost-of-living adjustments for other retirement and pension provisions. The 401(k) limits affect contributions to similar accounts, including the 403(b) plans of school employees and nonprofit workers, and the Thrift Savings Plan for federal employees. In addition, the IRS has changed the income thresholds that govern whether taxpayers can make contributions to Roth individual retirement accounts, under which taxes are paid in the current year and earnings are tax-free. Next year, the range of adjusted gross income in which the benefit shrinks and disappears will be $173,000 to $183,000 for married couples, up from the current range of $169,000 to $179,000. The COLA increase, the first since 2009, takes effect in January. Eight million Americans participating in the Supplemental Security Income program, which aids the blind and disabled, will receive the same 3.6% increase. Benefits in both programs are automatically adjusted for inflation so that recipients don't fall behind as prices rise. For the last two years, though, inflation has been too low to trigger an increase. The “announcement is welcome news for millions of Americans who rely on Social Security to pay their bills,” said Nancy LeaMond, executive vice president of AARP, the advocacy group for older Americans. “This COLA will help to ease the financial hardship many older Americans face today.” The increase will mean $43 more each month for the typical retired worker, according to the Social Security Administration, bringing average monthly benefits to $1,229. About 10 million Americans will pay more into the program next year, the agency said, because the cap on the amount of income subject to the Social Security payroll tax will increase to $110,100, from $106,800.

PAYROLL TAX RATE

The cost-of-living increase isn't likely to have a significant effect on the U.S. economy, said Joel Prakken, senior managing director of Macroeconomic Advisers LLC, a con-sulting firm. His firm already takes such increases into account when making projections, he said. Lawmakers are debating whether to cut the payroll tax rate as well as the COLAs for Social Security recipients, veterans and federal retirees. President Barack Obama has called for extending and expanding a payroll tax break that is scheduled to expire at the end of this year. The tax was temporarily reduced this year in a bid to jog consumer spending. If Congress doesn't act, the rate paid by workers next year will return to the usual 6.2%, from 4.2%. Mr. Obama wants to reduce that further to 3.1%, while also halving the 6.2% payroll tax paid by employers. The proposal has run into skepticism from lawmakers from both parties who question its effectiveness as well as its impact on Social Security's finances.

INFLATION MEASURE

At the same time, some lawmakers are calling for changing the way the government measures inflation. They say the current formula exaggerates the rate at which prices rise, which means that the government pays too much in cost-of-living adjustments. Advocates for the elderly reject that idea, saying that the government's inflation gauge actually understates the price increases that older Americans face, as they spend a larger-than-average share of their budgets on medical care. “With the decline in housing values, deep losses in retirement and savings accounts, and skyrocketing health and prescription drug costs, millions of older Americans continue to struggle to make ends meet,” Ms. LeaMond said. “AARP will continue to fight with the strength of our millions of members to protect Social Security against benefit cuts.”