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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.

Suggested Citation

  • Goda, Gopi Shah & Shoven, John B. & Slavov, Sita Nataraj, 2011. "How Well Are Social Security Recipients Protected From Inflation?," National Tax Journal, National Tax Association, vol. 64(2), pages 429-449, June.
  • Handle: RePEc:ntj:journl:v:64:y:2011:i:2:p:429-49
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    References listed on IDEAS

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    1. Julian P. Cristia, 2007. "The Empirical Relationship Between Lifetime Earnings and Mortality: Working Paper 2007-11," Working Papers 19096, Congressional Budget Office.
    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, February.
    3. Michael J. Boskin & Michael D. Hurd, 1982. "Are Inflation Rates Different for the Elderly?," NBER Working Papers 0943, National Bureau of Economic Research, Inc.
    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. Ambrose, Brent W. & Coulson, N. Edward & Yoshida, Jiro, 2017. "Inflation Rates Are Very Different When Housing Rents Are Accurately Measured," HIT-REFINED Working Paper Series 71, Institute of Economic Research, Hitotsubashi University.
    2. Joshua Blonz & Dallas Burtraw & Margaret Walls, 2012. "Social safety nets and US climate policy costs," Climate Policy, Taylor & Francis Journals, vol. 12(4), pages 474-490, July.
    3. Aaron, Henry J., 2011. "Social Security Reconsidered," National Tax Journal, National Tax Association, vol. 64(2), pages 385-414, June.

    More about this item

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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