The 1.5% benefit hike affects more than 57 million retired and disabled workers as well as their spouses, dependents and survivors. The increase will also apply to supplemental security income benefits received by more than 8 million poor and disabled individuals, starting Dec. 31.
The increase will be slightly below last year's COLA of 1.7% and below the average of 2.7% since 1990.
Benefits won't be the only thing that increases next year. Although the payroll tax rate will remain the same, the amount of wages subject to those taxes will increase to $117,000 per year in 2014, up from this year's $113,700.
The tax hike will affect only those workers earning more than this year's taxable wage base. Of the estimated 165 million workers who will pay Social Security taxes in 2014, the SSA estimates that about 10 million will pay higher taxes as a result of the increase in the taxable maximum.
Payroll taxes are shared by employers and employees. Each pays 7.65% on all earnings.
Self-employed individuals pay both portions of the tax for a combined rate of 15.3%. The 6.2% portion that funds Social Security is applied only up to the taxable wage-based maximum.
But the 1.4% Medicare tax portion applies to all earnings, even those above the taxable maximum. And beginning this year, high earners, defined as individuals who have earned income of more than $200,000 or married couples filing jointly with income of $250,000 or more, pay an additional 0.9% in Medicare taxes to help fund expanded health care coverage under the Affordable Care Act.
The average Social Security retirement benefit will increase to $1,294 per month next year as a result of the 1.5% COLA, up from this year's average of $1,275 per month, the SSA said.
For retired couples, the average benefit will increase to $2,111 per month next year, from $2,080 per month this year.
The earned-income limit also will increase next year. Retirees who collect Social Security benefits before their full retirement age and who continue to work must temporarily forfeit benefits if they earn more than a prescribed amount.
Next year, retirees will lose $1 of benefits for every $2 they earn over $15,480 per year. That is $360 more than the 2013 earnings cap of $15,120.
A more generous earnings cap applies in the year a person reaches full retirement age. During the months leading up to his or her 66th birthday, a Social Security recipient can earn up to $41,400 per year in 2014, a $1,320 increase from this year's earning cap of $40,080.
Once a person reaches full retirement age, the earnings cap restrictions disappear and SSA will recalculate future benefits to take into account the benefits that were lost to the earnings cap in prior years.
Retirees 65 and older will be relieved to know that while their Social Security benefits will increase slightly next year, their monthly Medicare premium won't.
Most people will continue to pay $104.90 per month for Part B coverage, which covers doctors' bills and out-patient services, the same as this year. Medicare Part A, which covers hospital bills, is free.