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Sunday, January 31, 2010

A Separate Consumer Price Index for the Elderly?

Brian W. Cashell
Specialist in Macroeconomic Policy

The federal government, in an effort to protect the purchasing power of social security benefits, indexes those benefits to increases in the consumer price index for urban wage earners and clerical workers (CPI-W). There is concern, however, that the CPI-W may not accurately reflect the inflation experience of the elderly population. On average, the elderly spend relatively more on health care, whose price has tended to rise faster than overall prices. Other things being equal, that would suggest that the CPI-W tends to understate the inflation experience of the average elderly household. The Bureau of Labor Statistics (BLS) has developed an experimental price index to track inflation for the population aged 62 and older. The average annual rate of change between December 1982 and December 2009 for the experimental index was 3.2%; over the same period, the CPI-W rose at a 2.9% rate. No inflation measure for a large population group will exactly account for the experience of each member of that group. Differences in spending patterns, in combination with different rates of price change for all of the various goods and services included in the CPI, mean that individual inflation rate experiences may range significantly above or below the measured average.

The federal government, in an effort to protect the purchasing power of social security benefits, indexes those benefits to increases in the consumer price index for urban wage earners and clerical workers (CPI-W).1 There is concern, however, that the CPI-W may not accurately reflect the inflation experience of the elderly population. It has been asserted that the elderly face a higher inflation rate because they tend to spend a larger share of their household budget on goods and services whose prices have been rising faster than average. More to the point, it is argued that increases in social security benefits have not kept pace with increases in the prices of those goods and services purchased by the elderly, and that some other index might be more appropriate. As Congress takes up the issue of social security reform, one item of consideration may be the way in which benefits are indexed. Some may call for a change in the index, which is used to determine cost-of-living adjustments (COLAs) for benefits. 

The CPI-W is published monthly by the Bureau of Labor Statistics of the Department of Labor (BLS). It is designed to measure changes in the prices of goods and services purchased by those who earn more than half of their income from clerical or wage occupations and have been employed at least 37 weeks in the previous year.2 This group accounts for about 32% of the total U.S. population. But the CPI-W only tracks the buying habits of the employed. To the extent that retirees' purchasing patterns differ from those of the rest of the population, the effect of inflation on their standard of living may be different from what is indicated by the CPI-W.


Date of Report: January 20, 2010
Number of Pages: 8
Order Number: RS20060
Price: $29.95

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