Low Inflation, Flatter COLA: Social Security Benefits to Get 1.7% Bump

Tens of millions of elderly and disabled Americans will see a small bump in their government payments next year, another reflection of a sluggish economic recovery that has kept inflation low.

The Social Security Administration on Wednesday announced a 1.7% annual cost-of-living adjustment, or COLA, for the nearly 64 million Americans who receive federal retirement or disability benefits. The increase would result in about a $22-a-month increase for the average retiree. Increases have been between 1.5% and 1.7% for three straight years.

The benefit increase in 2015 matches the 1.7% gain in consumer prices in September, compared to a year earlier, according to Labor Department data also released Wednesday.

Some beneficiaries say the small bump provides little relief for already stretched budgets. Gertrude Hodge, a 95-year-old retiree from Topsham, Vt., relies on her Social Security benefits and a small state pension to get by. "At the end of the month, sometimes I don't even break even," said Ms. Hodge, a widow who lives on a small farm.

Ms. Hodge said the annual adjustments are crucial to cover her living costs. She said her biggest expenses are heating her home, real-estate taxes and gasoline.

The increases aren't intended to provide an economic stimulus, but the small bump nonetheless limits the ability of beneficiaries--about one-fifth of the U.S. population--to step up spending. A majority of people age 65 and older rely on Social Security benefits for at least half of their retirement income, according to AARP, the lobbying group for older Americans.

The modest increase "helps beneficiaries of all ages maintain their standard of living, keeping many from falling into poverty," said Jo Ann Jenkins, AARP's chief executive.

The latest announcement comes amid a debate around how the government calculates the cost of living.

The benefit increase is determined by the change in prices for urban wage earners and clerical workers, known as the CPI-W. That measure might not represent beneficiaries' costs because most recipients don't work, said Polina Vlasenko, senior research fellow at the American Institute for Economic Research, a Massachusetts think tank.

For example, changes in gasoline prices tend to be a greater concern for commuters than for elderly people who drive less.

Older Americans do spend a larger share of their budgets on health care. But after decades of outpacing inflation by a wide margin, health-care price increases have slowed. The cost of medical services was up 1.7% from a year earlier and commodities, including drugs, advanced 2.9%.

If the government used a separate index that measures costs faced by those 62 and older, beneficiaries would have received a slightly smaller bump in benefits over the past decade, Ms. Vlasenko said.

Some lawmakers have called for using the chained consumer-price index. That price measure considers substitutions consumers make when the price of one product rises. President Barack Obama had backed such as change, but dropped the recommendation from his annual budget this year. Chained CPI also would have resulted in smaller benefit increases since 2004.

Limiting gains in benefits would help the federal budget deficit, especially as more baby boomers become eligible for Social Security.

Regardless of the measure used, overall U.S. inflation is expected to remain tame in the coming months due to relatively slow growth in the U.S. and a softening global economy. China's economy grew at its slowest pace in five years in the third quarter. Growth in Europe essentially stalled in the second quarter.

The most closely watched of the Labor Department's price measures in Wednesday's report rose a seasonally adjusted 0.1% in September from a month earlier. Excluding volatile food and energy categories, prices also rose 0.1%. Prices fell 0.2% in August.

"There's no denying that the inflation outlook has softened," said Paul Dales, economist at Capital Economics, adding the overall price gains are likely to ease for the remainder of the year due to falling gasoline and energy costs. The softer inflation outlook "gives more ammunition" to Federal Reserve officials who would prefer to wait longer before raising interest rates.

The latest report showed energy prices fell 0.7% in September, the third straight decline. Food prices rose 0.3% in September, led by higher costs for meat and dairy products.

Shelter costs, which rose 0.3% for the month, are up 3% from a year earlier. Housing costs account for almost a third of consumer expenditures.