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How Well Are Social Security Recipients Protected From Inflation?

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  • Goda, Gopi Shah
  • Shoven, John B.
  • Slavov, Sita Nataraj

Abstract

Social Security is widely believed to protect its recipients from inflation because benefits are indexed to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). However, the CPI-W may not accurately reflect the experience of retirees for two reasons. First, retirees generally have higher medical expenses than workers, and medical costs, in recent years, have tended to rise faster than the prices of other goods. Second, even if medical costs did not rise faster than the prices of other goods, as retirees aged, their medical spending would still tend to increase as a share of income; that is, each cohort of retirees would still see a decline in the real income available for non-medical spending. We show that, for in the 1918 birth cohort, Social Security benefits net of average out-of-pocket medical expenses have declined relative to a price index for non-medical goods by around 20 percent for men, and by around 27 percent for women. We explore alternative options for indexing Social Security benefits and discuss the impact of these alternatives on Social Security’s long-term finances.

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Bibliographic Info

Article provided by National Tax Association in its journal National Tax Journal.

Volume (Year): 64 (2011)
Issue (Month): 2 (June)
Pages: 429-49

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Handle: RePEc:ntj:journl:v:64:y:2011:i:2:p:429-49

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  1. Michael J. Boskin & Michael D. Hurd, 1982. "Are Inflation Rates Different for the Elderly?," NBER Working Papers 0943, National Bureau of Economic Research, Inc.
  2. Julian P. Cristia, 2007. "The Empirical Relationship Between Lifetime Earnings and Mortality: Working Paper 2007-11," Working Papers, Congressional Budget Office 19096, Congressional Budget Office.
  3. Mariacristina De Nardi & Eric French & John Bailey Jones, 2009. "Why do the elderly save? the role of medical expenses," Working Paper Series, Federal Reserve Bank of Chicago WP-09-02, Federal Reserve Bank of Chicago.
  4. Bart Hobijn & David Lagakos, 2003. "Social security and the consumer price index for the elderly," Current Issues in Economics and Finance, Federal Reserve Bank of New York, Federal Reserve Bank of New York, vol. 9(May).
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Cited by:
  1. Aaron, Henry J., 2011. "Social Security Reconsidered," National Tax Journal, National Tax Association, National Tax Association, vol. 64(2), pages 385-414, June.

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