The Consumer Price Index

and Social Security Benefits

June 1998

The Consumer Price Index and Older Consumers

The Consumer Price Index (CPI) measures the average change in prices over time for a fixed market basket of goods and services. Two things are necessary in order for a CPI to accurately reflect your own price experience.

(1) The index must be calculated using the best statistical procedures. In December 1996 an Advisory Commission to Study the Consumer Price Index identified several problems with the way the index was calculated. These problems cause the CPI to overestimate price increases. The press quickly reported both the results of the Advisory Commission and the call by some politicians to reduce the social security benefit adjustment (which is based on the CPI). Currently, these technical problems in the CPI are being corrected and will be reflected in future calculations of all CPI=s. Therefore, the CPI will no longer overestimate inflation.

(2) The CPI must reflect your expenditure patterns. For example, if you spend more than the average person on medical expenses and prices rise sharply for medical expenses, then your CPI would be greater than that of the average consumer. Because the expenditure patterns of elderly consumers are different from those of the average consumer, the Older Americans Act of 1987 directed the Bureau of Labor Statistics to develop an experimental CPI for Americans 62 years of age and older. This is called the CPI-E and below is a table that shows the differences in the weights given to the different categories of goods and services.

The first column, CPI-U, shows the percentage of the market basket of the average urban consumer allocated to each category of items. The second column, CPI-W, provides the same information but for the average urban wage and clerical worker. (It is the CPI-W that is used as the basis for the social security adjustment.) Finally, the third column, CPI-E, shows the allocation of the market basket for those 62 years of age and older. For example, 1.09% of total market basket of a person 62 and older will be allocated to health insurance, compared to .25% for the average urban wage earner.

Comparative analysis of CPI relative importance data of selected expenditure groups, December 1995.

Expenditure Group	CPI-U	CPI-W	CPI-E
All items	100.00	100.00	100.00
Food and beverages	17.33	19.26	15.00
Food at home	9.88	11.21	9.66
Food away from home	5.89	6.37	4.23
Alcoholic beverages	1.57	1.68	1.10
Housing	41.35	38.89	46.89
Shelter	28.29	25.98	33.88
Apparel and upkeep	5.52	5.53	3.93
Transportation	16.95	19.02	13.82
Medical care	7.36	6.26	12.14
Medical care commodities	1.28	1.06	2.57
Medical care services	6.08	5.21	9.57
Health Insurance	.36	.25	1.09
Entertainment	4.37	4.03	3.35
Other goods and services	7.12	7.01	4.87
College tuition	1.61	1.19	0.59

Therefore, when the cost of health insurance rises, the CPI for those over 62 will rise more than the CPI for the average urban wage earner. Similarly, if the cost of apparel rises, the CPI for those over 62 will rise less than the CPI of the average urban wage earner. In fact, between December 1990 and December 1995, the CPI-E rose 15.9%, the CPI-U rose 14.7%, and the CPI-W rose 14.1%.

The CPI-E and its relationship to Social Security Benefits

The consumer price index is of concern to those receiving social security benefits because adjustments to social security benefits are based on changes in the CPI. Currently these adjustments to your social security benefits are based on changes in the CPI-W. The CPI-W reflects the expenditure patterns of urban wage earners and clerical workers. It may seem better to link the adjustment to your social security benefits, instead, to the CPI-E, which reflects the expenditure patterns of those 62 and older. But this only makes sense if the CPI-E reflects the expenditure patterns of those people who are receiving social security - which it does not because it does not cover social security beneficiaries who are younger than 62 and it does cover those over 62 who are not receiving social security benefits.

A consumer price index could be designed specifically to measure price changes for social security beneficiaries that excludes older people not receiving benefits but includes younger people receiving survival and disability benefits. Adjustment to social security benefits could then be linked to this consumer price index.