NEW YORK (CNN/Money) - Social Security beneficiaries will see an average of nearly $25 a month more next year under a cost-of-living adjustment announced Tuesday, but almost half of that increase will be taken up by higher Medicare premiums.
The cost-of-living adjustment will increase benefits by 2.7 percent over the current year, the Social Security Administration said. The 2004 COLA, which took effect in January, was an increase of 2.1 percent, which raised the average benefit of retired workers by $19 to $922 a month.
For retirees receiving lower benefit levels, the increase would be less, even though some costs, such as medical premiums, will rise by just as much. But no beneficiary will see their benefits rise by less than the increased cost of Medicare premiums.
The government previously announced that the Medicare Part B premium will increase in 2005 by $11.60 a month to $78.20. So roughly half the average increase in benefits will go to the higher premiums. Some economists say the increased benefit will leave many retirees on a tighter budget in 2005.
The Association for American Retired Persons (AARP) welcomed the increase. But group CEO William Novelli warned "Far too many Social Security beneficiaries will see the 2.7 percent Social Security COLA partially or completely eroded by the Medicare Part B Premium increase this year."
According to AARP, eight out of 10 retirees use Social Security as their primary source of income.
"Imagine if there were no Social Security COLA and today's 47 million Social Security beneficiaries had to keep up with current health care and energy inflation on their own," Novelli noted.
Payments begin in January
The increased benefits will go to more than 47 million Social Security beneficiaries starting in January 2005. Increased payments to 7 million Supplemental Security Income beneficiaries will begin Dec. 30.
"Given the recent surge in energy prices and higher medical costs, many will not be made whole by the increase," said Mark Zandi of Economy.com. "The increase is backwards looking; it represents inflation over the last year. In the near term, inflation will be greater."
Zandi said many retirees will also be hurt because health care costs are rising faster than prices as a whole; medical costs are up 4.4 percent over a year ago in the latest CPI report, compared to a 2.5 percent increase in prices overall.
And senior citizens are greater consumers of health care than the population as a whole, he said.
"The overall CPI does not reflect the inflation most seniors face," Zandi said.
The government also raised the amount of wages of working Americans subject to Social Security taxes, meaning that about 9.9 million active workers will pay more in Social Security taxes in 2005, even without an increase in the tax rate. The first $90,000 of income will now be subject to the Social Security tax, up from $87,900 subject to the tax this year.
--CNN contributed to this report
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