Social Security benefits to rise 3.6 percent

Demonstrators with the California Alliance for Retired Americans hold a rally outside the office of U.S. Senator Dianne Feinstein (D-CA) in San Francisco, California August 17, 2011.

WASHINGTON (Reuters) - Social Security retirement benefits for about 55 million people will go up by 3.6 percent next year, the first cost-of-living increase since 2009, the U.S. Social Security Administration said on Wednesday.

The increase means the average Social Security benefit will rise by $516 a year to $14,748, according to a congressional analysis.

"This is welcome news for seniors facing high prices for everyday items like gas, food and medicine," said Senate Finance Committee Chairman Max Baucus, a Democrat.

Some or all of the Social Security retirement benefit increase could be eaten up by a rise in premiums for the Medicare federal health insurance program for the elderly. Medicare premium adjustments are expected to be announced later this month.

The Social Security benefit increase is due to start in January 2012. An additional 8 million poor and disabled people receiving supplemental benefits will see a 3.6 percent increase starting this December 30, the Social Security Administration said.

Benefits are recalculated annually based on the rate of consumer inflation. Next year's increase will be the first since 2009 because consumer prices have remained relatively stable since then.

The cost-of-living adjustment increase also means that the maximum amount of annual wages subject to Social Security taxes will rise to $110,100 in 2012 from $106,800. That means the annual tax bill will go up for about 10 million wage earners, the Social Security Administration said.

The annual benefit adjustment is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers. Some deficit hawks are pushing to switch the benefit adjustment calculation to an index, called "chained CPI," that reflects a lower rate of inflation based on the assumption that consumers shift to lower-priced items when faced with price increases.

It is unclear if a U.S. congressional "super committee" charged with finding at least $1.2 trillion in budget savings over 10 years will agree to changing the Social Security benefit calculation in the face of stiff opposition from the AARP and other advocacy groups for elderly Americans.

"This so-called 'chained CPI,' through compounding, would cut seniors' benefits by thousands of dollars over their lifetimes -- and the older one gets, the larger the cut," said AARP Executive Vice President Nancy LeaMond.

(Reporting by Donna Smith; Editing Deborah Charles and Will Dunham)