Inflation and the Elderly

Thesis advisor: Alicia MunnellSince 1975, Social Security retirement benefits have been tied to the Consumer Price Index to adjust for inflation. The CPI measures price changes for a market basket of goods and services designed to replicate the average consumer's expenditures. The elderly, however, consume a market basket different from that of the typical person. In particular, the elderly tend to purchase more medical services than other consumers. Because the price of medical care increases more rapidly than other prices, the inflation rate experienced by the elderly is greater than the inflation rate for the general population, even when controlling for the upward quality bias in the medical care component of pricing data. However, given that this difference in inflation rates is less than the size of the total measurement error in the CPI, recipients of Social Security retirement benefits are actually overcompensated for increases in inflation. Over the course of a beneficiary's retirement, this overcompensation results in a total benefit that is 5.4 – 6.6% greater than what the total benefit would have been under an ideal inflation indexing scheme.Thesis (BA) — Boston College, 2005.Submitted to: Boston College. College of Arts and Sciences.Discipline: Economics Honors Program