The increase is expected to help ease the cost of current living pressures.
Age Pension, Disability Support Pension and Carer Payments will all increase, rising by $38.90 a fortnight for singles and $58.80 a fortnight for couples.
For singles, the maximum rate of pension will increase to $1,026.50 a fortnight and $773.80 for each member of a pensioner couple, or $1,547.60 per couple, including the Pension Supplement and Energy Supplement.
The bi-annual increase for a single pensioner represents a 6.1% increase from the September 2021 payment - in-line with the latest headline inflation figure of 6.1%.
Annual headline inflation in food and non-alcoholic beverages rose 5.9%, and 9.0% for transport.
Minister for Social Services Amanda Rishworth said it was the largest indexation increase to payments in more than 30 years for allowances and 12 years for pensions.
"We want to ensure Australia has a strong social security safety net to protect our most disadvantaged," Minister Rishworth said.
"Our guiding principles as a Government are ensuring no one is left behind and no one is held back and this indexation increase will help those on Government payments keep up with the cost of living."
The JobSeeker Payment, Parenting Payment, ABSTUDY and Rent Assistance will also see an increase.
For singles without children, the JobSeeker payment will increase by $25.70 a fortnight to $677.20 including Energy Supplement.
Parenting Payment Single will increase by $35.20 per fortnight to $927.40 including Pension Supplement and Energy Supplement.
Recipients of the Partnered JobSeeker Payments and Parenting Payment will see a $23.40 increase a fortnight to $616.60 including Energy Supplement.
Edwina MacDonald, acting CEO of the Australian Council of Social Service (ACOSS), said despite the increase, welfare payments still fall short of covering essentials.
"Young people will somehow have to cope with skyrocketing cost of living on a payment that doesn’t cover average rents let alone everything else," Ms MacDonald said.
"It does not deliver a real increase above inflation, and that is what people on JobSeeker and other payments need to keep a roof over their head and put food on the table.
"The Federal Government must urgently increase Jobseeker, Youth Allowance and related payments in the October budget to address the acute crisis facing people on the lowest incomes."
Increases in the Consumer Price Index were the driving force behind the pension raise, which exceeded the increase in the Pensioner and Beneficiary Living Cost Index.
To ensure people are not disadvantaged, some income and asset limits will also change as a result of the payment rate indexation - these increases will come into effect from 20 September.
Asset limits have been increased by between $13,000 and $24,500 depending on demographic.
This comes as a new government policy of providing a $4,000 one-off income credit for age pensioners was tabled at the Jobs and Skills Summit.
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