The amount of wages subject to Social Security taxes is also going up. Social Security is funded by a 12.4 percent tax on the first $113,700 in wages earned by a worker, with half paid by employers and the other half withheld from workers' pay.
The wage threshold will increase to $117,000 next year, the Social Security Administration said. Wages above the threshold are not subject to Social Security taxes.
About 165 million workers pay Social Security taxes. About 10 million earn wages above the threshold, the agency said.
By law, the cost-of-living adjustment is based on the consumer price index for urban wage earners and clerical workers, a broad measure of consumer prices generated by the Bureau of Labor Statistics. It measures price changes for food, housing, clothing, transportation, energy, medical care, recreation and education.
The COLA is calculated by comparing consumer prices in July, August and September each year with prices in the same three months from the previous year. If prices go up over the course of the year, benefits go up, starting with payments delivered in January.
Since 1975, annual Social Security raises have averaged just over 4 percent. Next year will mark only the seventh time the COLA has been less than 2 percent. This year's increase was 1.7 percent. There was no COLA in 2010 or 2011 because inflation was too low.
"By providing protection against inflation, the COLA helps beneficiaries of all ages maintain their standard of living, keeping many from falling into poverty," said AARP executive vice president Nancy LeaMond. "The COLA announced today is vital to millions, but at an average of just $19 per month, it will quickly be consumed by the rising costs of basic needs like food, utilities and health care."
Lower prices for gasoline are helping keep inflation low. The average price of a gallon of regular gasoline has dropped over the past year from $3.53 to about $3.28, according to the automotive club AAA.