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.

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.

In fact, the elderly consume more healthcare compared 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?

-please type

Answer 1

Social security benefits for the older population are adjusted for inflation to make cost of living at par over years.As mentioned in the question CPI sometimes are overstated and SS benefits in terms of cost of living adjustments are increased with every percentage increase in CPI.Hence it is quite likely that elderly will be better off because their purchasing power will increase with the cost of living adjustment.

For the second case elderly people will be worse off because in their goods basket they demand more of healthcare products than younger population.Since healthcare costs are higher than average inflation rate a goods basket containing higher healthcare products will cost more than a basket containing more general products and less healthcare products.