Do We Need a Price Index for the Elderly?

Alicia Munnell and Anqi Chen

Issues in Brief from Center for Retirement Research

Abstract: As announced recently, Social Security will not pro­vide a cost-of-living adjustment (COLA) in 2016. This news will prompt some to argue that using a more ap­propriate index of inflation for the elderly would have shown an increase in prices. These critics contend that the Consumer Price Index (CPI-W) currently used for the Social Security COLA does not reflect the spending patterns of older Americans and therefore understates inflation. They urge the adoption of a special price index designed to reflect the spending patterns of Social Security beneficiaries – a CPI-E. This brief explores the relationship between the CPI-W and the experimental CPI-E. While historical­ly the CPI-E has risen faster than the CPI-W, despite a big gap in 2015, the average for the two indexes over 2002-2015 has been virtually identical. The questions are: What was driving the historical relationship? And why has the pattern changed? The discussion proceeds as follows. The first section describes the calculation of the Social Security COLA. The second section introduces the CPI-E as a potential alternative index for determining the COLA. The third section reports the relationship between the CPI-W and the CPI-E since 1983 and shows how that relationship has changed in recent years. The fourth section finds that the two indexes, on average, have been virtually identical since 2002 primarily because of slower growth in medical care costs, on which the elderly spend relatively more. The final section concludes that, if medical cost inflation continues to be held in check, the two indexes may remain quite similar. But if medical costs start surging again, it may be time to use an index designed specifically for older Americans.

Pages: 9 pages
Date: 2015-10
New Economics Papers: this item is included in nep-age
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