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September 1984, Vol. 107, No.
9
Postretirement increases
under private pension plans
Rapid inflation over a short time span can substantially reduce the purchasing power of fixed retirement incomes. For example, over the 1978-81 period, when consumer prices rose 51 percent,1 retirees with fixed private pensions experienced a one-third decline in the buying power of these annuities.
A lower rate of inflation—but continuing over a longer period—may have still greater effects on today's retirees, who often will receive pension benefits for 15 years or more.2 An inflation rate of 5 percent a year would, after 15 years, cut in half the purchasing power of the original pension benefit, and a 7.5-percent annual rate of price increases would result in a two-thirds reduction. Thus, even without "double-digit" inflation, the value of a fixed pension can be seriously eroded during retirement. To offset part of this loss, many employers grant pension increases to retirees or their beneficiaries.3
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1 The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) rose from 186.1 in December 1977 to 281.1 four years later (1967=100).
2 The average 65-year-old man can now expect to live until age 80, and the average 65-year-old woman's life expectancy extends beyond age 83. Vital Statistics of the United States: 1980 (National Center for Health Statistics, U.S. Department of Health and Human Services, 1984).
3 Such postretirement increases also reduces the growing spread between fixed pensions and rising earnings of current workers.
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