How Well are Social Security Recipients Protected from Inflation?

30 Pages Posted: 26 Jul 2010 Last revised: 20 Apr 2025

See all articles by Gopi Shah Goda

Gopi Shah Goda

Stanford University

John B. Shoven

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Sita N. Slavov

American Enterprise Institute; Occidental College - Department of Economics

Date Written: July 2010

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.

Suggested Citation

Goda, Gopi Shah and Shoven, John B. and Slavov, Sita N., How Well are Social Security Recipients Protected from Inflation? (July 2010). NBER Working Paper No. w16212, Available at SSRN: https://ssrn.com/abstract=1648012

Gopi Shah Goda (Contact Author)

Stanford University ( email )

SIEPR
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John B. Shoven

Stanford University - Department of Economics ( email )

Landau Economics Building
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National Bureau of Economic Research (NBER)

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Sita N. Slavov

American Enterprise Institute ( email )

1150 17th Street, N.W.
Washington, DC 20036
United States

HOME PAGE: http://www.aei.org/scholar/sita-nataraj-slavov/

Occidental College - Department of Economics ( email )

Los Angeles, CA 90041
United States

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