The Last Time Inflation Was This High, Social Security Was in Crisis

By Mary Johnson, editor

Higher consumer prices for just about everything continues to work through the pipeline and are reaching levels that haven’t been seen since 1981.  As of consumer price data through April, the COLA for 2023 could be about 8.6% making it the highest since 1981.  While COLAs are intended to preserve the buying power of benefits, an increase of that size, right after the 5.9% increase this year is likely to raise the question of what happened to Social Security the last time inflation was this high two years in a row?

In 1981, I was only 30 years old and not paying attention to Social Security at the time.  But what I do remember were tough times.  I was lucky enough to live across the street from Buck and Florence, a retired couple who became my life - line.  They taught me a lot about how to eat well even when it was next to impossible to afford much at the supermarket.  They would drop by with bags of excess beans, tomatoes, corn, and other vegetables they grew themselves.  I started growing my first tomatoes in those years.

In 1981, the Social Security COLA was a formidable 11.2% following an astonishing 14.3% COLA just the year before — and Social Security was in financial crisis.  Its finances were deteriorating and, only four years earlier in 1977, Congress had passed legislation that deeply cut Social Security benefits, by changing the Social Security benefit formula.  Two years later in 1983, as Social Security was just weeks away from being unable able to pay full benefits, Congress passed major Social Security reform legislation raising payroll taxes and making even more benefit cuts.

The situation faced by lawmakers in Congress during that period is somewhat different from the one facing Congress today.  At the start of 1983, the Social Security Trust Fund was just weeks from insolvency.  At the start of 2022, the Social Security Trust Fund is about 11 years from its expected date of exhaustion.  But some factors are still similar, such as the imbalance in the number of people receiving benefits to the number of people currently working and paying into the system.  Social Security is a pay-as-you-go system.  Taxes for today’s workers are used to pay the benefits of current beneficiaries.  What makes the challenge so much bigger today is the magnitude of the system’s funding shortfall today, which is much greater than that of the period leading up to the 1983 amendments.

There’s also a difference in payroll taxes.  The really big difference today is that wages are rising, and higher wages mean more payroll taxes for Social Security.  In 1983, high inflation occurred while at the same time wages were lower than expected.  Lower wages meant fewer payroll taxes flowing into the system.  Even today, payroll taxes account for about 90% of the funding for benefits.   In addition to higher wages, other factors continue to drive up prices, such as:

  • Shortages caused by supply chain disruptions and shipping backlogs.
  • Rising housing costs.  Mortgage rates are climbing due to higher interest rates, and rents are higher after the expiration of rent increase moratoriums enacted in 2020 COVID relief legislation.
  • Higher energy prices.  Gasoline prices that were already high were made even worse by the war in Ukraine, which is also expected to affect the price of wheat and corn products.

While we have a little more time than Congress did in 1983, Congress can avoid deep benefit cuts and steep tax increases when it enacts small changes phased in over the longest possible time.  But eleven years is not that much time for people close to retirement to adapt.

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