If you aren’t yet claiming Social Security, it may seem unlikely that you are affected by the announcement on Wednesday about the 2022 Social Security cost of living adjustment. And while that may not have a big impact on you directly, the driving force of inflation behind this COLA could actually be impacting you quite a bit.

So how does this affect you?

First, it is evidence that we are in a high inflation environment. If you look at the 1975-present Social Security COLA’s [1, 2], you can see this is the largest inflation adjustment since 1982. Only 1990’s adjustment for 1991, and 2008’s adjustment for 2009, came close. Think about what the world felt like in those years. Was the economic feel of the times comforting? Not in my experience.

Second: Companies are not increasing their wages, and so-far announced bonuses are smaller than they’ve been recently. We’ll see if they change their stances later this year when they announce their 2022 salary and hourly rate increases, and year-end bonuses, but given the recent treatment of employees by many companies, I’m not optimistic. This means that the amount of effective funds that people have available to spend, on necessities and on extras, is effectively shrinking, while we watch prices of food and goods and services rise.

And third, if you are leaving a employer with a pension through any form of separation of service (quitting, being laid off, being fired, or retiring), you could elect a lump sum of that pension. The lump sum value that is actuarially equivalent to the stream of payments you could receive at age 65 is impacted by inflation. Specifically, summer and early fall measures of inflation (eg the same timeframes that triggered this very high inflation adjustment for Social Security) cause a re-set of lump sum calculation as of the end of November. For people claiming that lump sum in December 2021-November 2022, this inflation factor will be very important. As inflation goes up, the lump sum value goes down. You may find that an entire year or more worth of value has been chopped off of your lump sum pension value, as of December 2021. You may notice large swaths of retirees from pension-providing companies in November of each year, as employees evaluate the current interest environment vs the value of continuing to work another month or two.

Finally, for those who are in catch-up age groups for their 403b, their 401k, their 457b, their IRA, and their HSA, those catch up contribution limits are not inflation adjusted. The dollars you will be able to contribute will remain capped at $6500 or at $1000, depending on the account type. This means you are effectively contributing less than those amounts were worth in previous years.

Which one of these inflation impacts is hurting you and your family the worst?