The increase, which starts in January, is tied to a measure of inflation released Tuesday. It shows that inflation has been relatively low over the past year, resulting in one of the smallest increases in Social Security payments since automatic adjustments were adopted in 1975.
This year, Social Security recipients received a 3.6 percent increase in benefits after getting none the previous two years.
About 8 million people who receive Supplemental Security Income will also receive the cost-of-living adjustment, or COLA, meaning the announcement will affect about 1 in 5 U.S. residents.
Social Security payments for retired workers average $1,237 a month, or about $14,800 a year. A 1.7 percent increase will amount to about $21 a month, or $252 a year, on average.
Social Security also provides benefits to millions of disabled workers, spouses, widows, widowers and children.
The amount of wages subjected to Social Security taxes is going up, too. Social Security is supported by a 12.4 percent tax on wages up to $110,100. That threshold will increase to $113,700 next year, resulting in higher taxes for nearly 10 million workers and their employers, according to the Social Security Administration.
Half the tax is paid by workers and the other half is paid by employers. Congress and President Barack Obama reduced the share paid by workers from 6.2 percent to 4.2 percent for 2011 and 2012. The temporary cut, however, is due to expire at the end of the year.
Some of next year's COLA could be wiped out by higher Medicare premiums, which are deducted from Social Security payments. The Medicare Part B premium, which covers doctor visits, is expected to rise by about $7 per month for 2013, according to government projections.
The premium is currently $99.90 a month for most seniors. Medicare is expected to announce the premium for 2013 in the coming weeks.
"If seniors are getting a low COLA, much of their increase will go to pay off their Medicare Part B premium," said Mary Johnson, a policy analyst at The Senior Citizens League.
By law, the increase in benefits is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, 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 Social Security Administration compares the price index in the third quarter of each year -- the months of July, August and September -- with the same three months in the previous year.
If consumer prices increase from year to year, Social Security recipients automatically get higher payments, starting the following January. If prices drop, the payments stay the same, as they did in 2010 and 2011.
Since 1975, the annual COLA has averaged 4.2 percent. Only five times has it been below 2 percent, including the two times it was zero. Before 1975, it took an act of Congress to increase Social Security payments.
The COLA has played an important role in keeping older Americans out of poverty, said David Certner, AARP's legislative policy director. Most older Americans rely on Social Security for a majority of their incomes, according to the Social Security Administration.
Over the past decade, the COLA has helped increase incomes for seniors, even as incomes have dropped for younger workers.
From 2001 to 2011, the median income for all U.S. households fell by 6.6 percent, when inflation was taken into account, according to census data. But the median income for households headed by someone 65 or older rose by 13 percent.