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How Well Are Social Security Recipients Protected from Inflation?

In: Investigations in the Economics of Aging

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

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 other goods, as retirees age, 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 real income left over for non-medical spending. In the 1918 birth cohort, We show that Social Security benefits net of average out-of-pocket medical expenses have declined relative to a price index for non-medical goods by almost 20 percent for men, and almost 27 percent for women. We also explore the extent to which indexing Social Security benefits to the CPI-E, an experimental measure of inflation for the elderly, would change these results.

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This chapter was published in:

  • David A. Wise, 2012. "Investigations in the Economics of Aging," NBER Books, National Bureau of Economic Research, Inc, number wise11-2, July.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 12433.

    Handle: RePEc:nbr:nberch:12433

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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. Mariacristina De Nardi & Eric French & John B. Jones, 2010. "Why Do the Elderly Save? The Role of Medical Expenses," Journal of Political Economy, University of Chicago Press, vol. 118(1), pages 39-75, 02.
    3. Julian P. Cristia, 2007. "The Empirical Relationship Between Lifetime Earnings and Mortality: Working Paper 2007-11," Working Papers 19096, Congressional Budget Office.
    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, vol. 9(May).
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    Cited by:
    1. Aaron, Henry J., 2011. "Social Security Reconsidered," National Tax Journal, National Tax Association, vol. 64(2), pages 385-414, June.

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