Answer to Question #87012 in Macroeconomics for RICHARD ACQUAH

Question

Given the budget deficit in recent, some economists have argued that by adjusting social security payment for inflation using the CPI, social security is overpaying recipients.is this statement true?

Answer 1

The Statement is true.

Due to the substitution and quality goods bias, the consumer price index puts the inflation rate higher than the real market rate. Adjusting social security payments takes into consideration the inflation rate, and thus maintains the purchasing power of the payments. Therefore, due to the CPI overstating the inflation rate, using it to adjust social security payments will result in overpayment of the recipients.