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Anyone who remembers the soaring prices of the 1970s would have a hard time equating today's inflation rate with disaster.
Prices more than doubled between 1973 and 1982, with the inflation rate peaking at 13.58% in 1980. By contrast, the Consumer Price Index this year is up just 3.7%.
| Inflation decade | ||||
|---|---|---|---|---|
Year | Inflation | S&P 500 | Long bonds* | Real estate |
1973 | 6.16% | -14.66% | -1.11% | 8.24% |
1974 | 11.03% | -26.47% | 4.35% | 10.73% |
1975 | 9.20% | 3.72% | 9.20% | 10.31% |
1976 | 5.75% | 23.84% | 16.75% | 7.93% |
1977 | 6.50% | -7.18% | -0.69% | 12.60% |
1978 | 7.62% | 6.56% | -1.18% | 13.52% |
1979 | 11.22% | 18.44% | -1.23% | 14.37% |
1980 | 13.58% | 32.42% | -3.95% | 11.67% |
1981 | 10.35% | -4.91% | 1.86% | 6.75% |
1982 | 6.16% | 21.41% | 40.36% | 2.11% |
*Long-term U.S. government-issued bonds.
Sources: Bureau of Labor Statistics, Ibbotson Associates, National Association of Realtors.
But even relatively mild inflation can be devastating to those on fixed incomes. If inflation rates should continue to rise, people in or near retirement today may be even more vulnerable than their counterparts 30 years ago.
Here are some of the reasons why:
Today's retirees are much less likely to have traditional pensions. In 1975, 39% of the private work force had defined-benefit pensions which promised them a paycheck in retirement that they wouldn't outlive, according to the Employee Benefit Research Institute. Today the percentage of private workers covered by defined-benefit plans is less than 20%.
Furthermore, many of these pensions had built-in cost-of-living increases that helped retirees keep up with inflation.
"(Retirees') personal savings was less important," said financial planner Ross Levin of Accredited Investors in Edina, Minn. "Today, retirees pretty much have to fend for themselves."
Now, it's not as if every retiree in 1975 was rolling in pension money. The majority of workers have never had such coverage, said EBRI CEO Dallas Salisbury, and many of those that did couldn't take full advantage because they didn't spend their entire careers at one company. (Defined-benefit checks tend to be biggest for those who spend 20 years or more -- including their last, biggest-earning years -- at the same employer.)
But every little bit helps, and even a small pension check can help retirees cope with inflation. That's an option that few will have going forward.
Today's retirees have less generous cost-of-living adjustments. In 1973, Congress implemented automatic increases in Social Security checks that were tied to the Consumer Price Index, which measures inflation. Benefits rose as prices did (with a few months' lag, since the increase every December is based on the rise between the third quarter of that year and the third quarter the year before). But the way the CPI is calculated changed significantly in 1999. Instead of assuming that a consumer would continue to buy the same goods and services as prices rise, the new formulation attempts to factor in the possibility that consumers might substitute cheaper options. Those in favor of the overhaul argued the new CPI would more accurately reflect real behavior -- and, by the way, save the government billions over the years in benefit adjustments.
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