In December, the Social Security Administration announced that for 2018, COLA would increase by 2% in Social Security and Supplemental Security Income benefits. Two percent may not seem like a huge jump, but this increase has taken place, and it is affecting the lives of recipients of SSD and SSI benefits around the country. But what exactly is COLA and why should you care? Read below to learn about why COLA is important and how it got to be what it is today.

COLA stands for Cost of Living Adjustments and is represented as a percentage increase to the benefits that SSD and SSI recipients get. The purpose of cost of living adjustments is to ensure that inflation does not degrade the purchasing power of those who are receiving benefits. The percentage increase is based upon the Consumer Price Index for Urban Wage Earners and Clerical Workers, or the CPI-W.

As part of the 1972 Social Security Amendments, Congress enacted COLA provisions to help mitigate purchasing power eroding because of inflation. In 1975, COLAs became automatic annually based on the increase of the CPI-W. Before that, only special legislation from Congress could increase SSD or SSI benefits.

So why should you care about understanding the cost of living adjustments to your benefits? Knowing why your SSD or SSI benefits increase is important because it should help you budget your money for the future. 8 million SSI beneficiaries have already seen an increase in their benefits.

Other adjustments based on the average increase in wages will affect Social Security. The changes made to SSD and SSI 2018 mean that the maximum amount of earnings subject to the Social Security Tax has increased from $127,200 to $128,400. Among the nearly 175 million American workers who will pay Social Security Taxes in 2018, nearly 12 million will pay more due to this increase.