More than 47 million Americans will get a 2.7 percent increase in their Social Security checks starting in January, meaning an additional $25 per month for the typical retiree. But almost half of that gain will be gobbled up by a record increase in Medicare premiums.

The cost of living adjustment, or COLA, announced Tuesday by the Social Security Administration (search) will be the largest percentage gain since a 3.5 percent increase in 2001. The increase last January was 2.1 percent.

The inflation adjustment is based on the amount prices — as measured by the consumer price index (search) — have risen in the July-September quarter compared with the same period a year ago. Rising energy costs have driven inflation higher this year.

The average Social Security retiree will see his benefit check increase from $930 this year to $955 next year.

However, the average retiree will also realize just over half of that increase because the government announced in September that monthly Medicare premiums for doctor visits will rise by $11.60 a month next year, a record in dollar terms.

Democratic presidential nominee John Kerry, who is trying to make President Bush's handling of Social Security and health care major issues in the campaign, told a rally in Pennsylvania the 2.7 percent benefit increase represented "more bad news" because of the large increase in the Medicare premium.

Kerry said the situation will be even worse for 2 million retirees receiving the lowest benefit payments, whose entire cost of living adjustment will be wiped out by the Medicare hike.

Under law, the monthly increase in Medicare premiums cannot be higher than an individual's cost of living adjustment. Retirees whose cost of living increase will be less than $11.60 next year will not be forced to pay the entire Medicare increase.

Democrats in the House and Senate are pushing legislation that would go further and cap the Medicare premium increase to no more than 25 percent of a retiree's cost of living increase.

"The COLA was created to help seniors keep up with increased costs of food, housing and other necessities," said Senate Minority Leader Tom Daschle (search). "Seniors should not lose their COLAs to pay for their medical bills."

Kerry repeated a charge he made Sunday that Bush is planning a surprise second-term effort to privatize Social Security.

"I will not privatize Social Security, I will not cut benefits. I will not raise the retirement age," Kerry said.

Bush rapped Kerry for trying "to scare our seniors."

"In 2000, they tried the same thing; if George W. gets elected, seniors won't get their checks. The seniors got their checks," Bush said Monday in an Associated Press interview. "The seniors will continue to get their checks. But it is wrong to try to scare people going into the polls."

Social Security will face a funding shortfall in coming years as more baby boomers retire and the government's biggest benefit program begins paying out more than it takes in in payroll taxes.

Federal Reserve Chairman Alan Greenspan has called for baby boomers' benefits to be trimmed, possibly by reducing the annual COLA increase or raising the retirement age, because he says the government has promised more in retirement benefits than it can afford.

Bush campaigned in 2000 on a program to partially privatize Social Security by giving younger workers the option of diverting some of their payroll taxes into private investment accounts. But the proposal has languished in large part because of sizable transition costs that some estimate would top $1 trillion.

The 2.7 percent benefit increase will mean the average retired couple will see their Social Security benefits rise from $1,532 a month currently to $1,574 next year, a gain of $42 per month.

William D. Novelli, head of AARP, formerly the American Association of Retired Persons, urged the government to do more "to prevent erosion of the Social Security COLA from sharply higher health costs."

The American Medical Association said the increase in premiums for Medicare reflected in part enhancements to the program that Congress made last year when it approved a new prescription drug benefit and blocked a planned 4.5 percent cut in Medicare payments to physicians.

"Without Congress' intervention to stop scheduled cuts in Medicare physician payments, senior patients' access to physician services would have been in jeopardy," said AMA President John C. Nelson.

The cost of living adjustments announced Tuesday will go to more than 52 million people. That includes 47 million people receiving Social Security benefits; the rest receive Supplemental Security Income payments that go to the poor.

The standard SSI payment will go from $564 per month to $579 per month for an individual and from $846 to $869 for a couple.

The average monthly Social Security payment for disabled workers will increase from $871 currently to $895 next year.

Monthly Social Security benefit checks have been adjusted automatically since 1975 to protect retirees' income from erosion caused by rising inflation.

The Social Security Administration also announced Tuesday that 9.9 million workers will face higher taxes next year because the maximum amount of Social Security earnings subject to the payroll tax will rise from $87,900 to $90,000. In all, an estimated 159 million workers will pay Social Security taxes next year.