How Well Are Social Security Recipients Protected from Inflation?

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

NBER Working Paper No. 16212
Issued in July 2010, Revised in December 2011
NBER Program(s):Program on the Economics of Aging, Public Economics Program

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 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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Document Object Identifier (DOI): 10.3386/w16212


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