Working Paper: NBER ID: w16212
Authors: 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 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.
Keywords: Social Security; Inflation; Retirees; CPIW; CPIE
JEL Codes: H55; J14; J26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Social Security Benefits (net of medical expenses) (H55) | Decline in real income available for nonmedical spending (D12) |
| Rising medical costs (I13) | Social Security Benefits (net of medical expenses) (H55) |
| CPIW (C43) | Inadequate reflection of retirees' inflation experience (J26) |
| Indexing to CPIE instead of CPIW (C43) | Shortfall in retirement income less severe (J26) |
| Indexing decisions (G11) | Impact on social security's financial sustainability (H55) |