Answer to Question #289684 in Macroeconomics for Vinay

Question

The chapter explains that Social Security benefits are

increased each year in proportion to the increase in

the CPI, even though most economists believe that the

CPI overstates actual inflation.

a. If the elderly consume the same market basket

as other people, does Social Security provide the

elderly with an improvement in their standard of

living each year? Explain.

b. In fact, the elderly consume more healthcare com-

pared to younger people, and healthcare costs

have risen faster than overall inflation. What

would you do to determine whether the elderly

are actually better off from year to year?

Answer 1

Social security benefits

Yes, social security better the living standards of the elderly. This is mainly because consumer price index exaggerates increase in the cost of living.  CPI involves the measure of average changes in prices of goods and services in a basket as purchased by urban workers. The consumer resorts to good and services that are equally cheaper when the price of a basket increases. This therefore results in substitution bias where the rise in the cost of living as per the CPI is more than the actual rise. Social security benefits depends on the consumer price index hence when the CPI rises social security benefits also increases. For instance, if the CPI increases by 16% from the previous year, the social security benefits subsequently increases by 16%. However, due to substitution bias the actual increase in the cost of living is less than 16%. This results in the elderly receiving greater increase in social benefits than the actual cost. Since this is a recurring state, the standard of living for the elderly increases annually.  

The elderly utilizes more healthcare services than the younger population. Majority of the older people battle with chronic lifestyle diseases that require constant medical care. Inflation has a direct impact on social security. Hence, social security benefits is annually adjusted in accordance to the cost of living. This cost of living adjustment (COLA) safeguards beneficiaries from inflation. In order to ensure that this is the case, there is a need to advocate for changes in the insurance systems. The systems should develop social security benefits that is reliable, sufficient, flexible and provides long-term care. In addition more weight should be emphasized on healthcare when estimating the cost of living among the elderly.There is also a need to promote healthy aging in order to reduce medical dependency among the elderly.