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The Social Security Administration announced that it will institute a cost-of-living adjustment (COLA) of 3.6 percent next year, the first “raise” for Social Security beneficiaries in two years. That’s welcome news for seniors, and a better raise than most private sector employees are expecting in 2012.

After a big COLA spike in 2009 — seniors got a 5.8 percent bump in benefits –  there were no increases in 2010 or 2011. Seniors were angry, and in 2010, the president and Congress sent $250 bonus checks to Social Security recipients as part of the economic stimulus plan passed in 2009. Many people mistakenly think it was Congress that decided to nix the COLA, but in fact it’s determined by a formula based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W index). The CPI-W index takes into account average amounts consumers pay for goods and services, and the 2008 spike was based largely on skyrocketing gas prices. Even though other prices have climbed since ‘08, lower gas prices kept the index below its 2008 level until recently.

There’s some bad news buried in the good news, however. Many retirees won’t see much of a net increase in their payout because of an increase in Medicare Part B premiums, which are deducted from most recipients’ Social Security checks. For the past two years, many retirees have seen decreases in their checks, as Medicare premiums ticked higher and the lack of a COLA increase kept their Social Security payout steady.

Next year’s COLA might be the last to be determined based on the CPI-W index. Congress and the debt super committee are analyzing whether the COLA should be based on an index known as the chained-CPI, which reflects how consumers change their spending habits when prices rise. Use of the chained-CPI would most likely reduce future COLAs as a cost-savings measure.

Meanwhile, the inflation-adjusted increase means a small tax hike for some well-compensated employees. The 2012 Social Security wage base — the maximum amount of wages subject to FICA taxes — will also increase for the first time since 2009, to $110,000. Workers making less than $106,000 won’t see any difference; workers above that level will find that a little more of their income is subject to the “FICA” tax. More significant increases in the wage base are also under consideration as a means to raise more revenue to help Social Security’s long-term financial position.

These automated increases are evidence that the Social Security system is operating as designed; no special actions have been taken to trigger the inflation adjustment. That’s not to say that the system is actually healthy: Read my previous posts on the Social Security system (see the links below) and my suggestions for revamping it to make it serve our citizens and our government better.

Steve Vernon, FSA, uses his substantial actuarial experience to help working people make their money last for life. He has developed unbiased, trusted information and strategies for his recent book “Recession-Proof Your Retirement Years: Simple Retirement Planning Strategies That Work Through Thick or Thin” and his DVD/workbook “The Quest: For Long Life, Health and Prosperity.” Steve is President of Rest-of-Life Communications and a research fellow and executive faculty member at the California Institute for Finance at California Lutheran University. For 35 years, he has helped large employers design and operate their retirement programs. He currently consults to Mercer’s U.S. Retirement, Risk and Finance Business.