Social Security measures to balance inflation fail – retirees end up with higher medical expenses as healthcare costs grow inflationary
Gopi Shah Goda, John B. Shoven, and Sita Nataraj Slavov 10, (Gopi Shah is an economist at Stanford University, John B. Shoven is the former Trione Director of the Stanford Institute for Economic Policy Research, the Charles R. Schwab Professor of Economics at Stanford University, the Buzz and Barbara McCoy Senior Fellow at the Hoover Institution and a research associate of the National Bureau of Economic Research, and Sita Nataraj Slavov is a professor of public policy in the Schar School of Policy and Government at George Mason University), “HOW WELL ARE SOCIAL SECURITY RECIPIENTS PROTECTED FROM INFLATION?”, July 2010, https://www.nber.org/system/files/working_papers/w16212/w16212.pdf // EE
Social Security is widely believed to protect its recipients from a number of risks, including uncertainty regarding length of life and inflation, due to the inflation-indexed life annuity form of the benefit. The inflation protection comes from the fact that Social Security benefits are indexed to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W is based on the spending patterns of a broad group of workers, representing approximately 32 percent of the U.S. population. 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, individual retirees would still, on average, need to devote a larger share of income to medical spending as they age. This means that individual retirees would still see a decline in the real income they have available for non-medical spending. In this paper, we explore both of these factors, quantify the extent to which they undermine the inflation protection provided by the indexation of Social Security benefits, and explore the implications of alternative methods of indexing benefits.
Our analysis is related to the literature on cost-of-living indices for the elderly. Most recently, Burdick and Fisher (2007) and Stewart (2008) compare the CPI-W to the CPI-E, an experimental consumer price index based on the spending patterns of the elderly, produced but not published by the Bureau of Labor Statistics (BLS). Since the CPI-E is intended to reflect the experience of Americans aged 62 and older, the main difference between the CPI-E and the CPIW is in the weights for the various expenditure categories. The CPI-E has increased faster than the CPI-W over the past twenty years, due primarily to the relative rise in health care costs, and the fact that the elderly spend more on health care than the nonelderly, even after taking into account the availability of Medicare. Hobijn and Lagakos (2003) suggest that if Social Security benefits were indexed to the CPI-E instead of the CPI-W, the Trust Fund depletion date would be moved forward by about five years. This result demonstrates that there are important differences between the two indices, and that the choice between them is consequential. Other relevant research includes Boskin and Hurd (1982), who compute separate price indices for elderly and nonelderly households even before the CPI-E was constructed, and List (2005), who reviews the issues regarding cost-of-living indices for the elderly, but without as much of a focus on health care spending.