A Separate Consumer Price Index for the
Elderly?
Brian W. Cashell
Specialist in Macroeconomic Policy
January 20, 2010
Congressional Research Service
7-5700
www.crs.gov
RS20060
CRS Report for Congress
P
repared for Members and Committees of Congress
A Separate Consumer Price Index for the Elderly?
Summary
The federal government, in an effort to protect the purchasing power of social security benefits,
indexes those benefits to increases in the consumer price index for urban wage earners and
clerical workers (CPI-W). There is concern, however, that the CPI-W may not accurately reflect
the inflation experience of the elderly population. On average, the elderly spend relatively more
on health care, whose price has tended to rise faster than overall prices. Other things being equal,
that would suggest that the CPI-W tends to understate the inflation experience of the average
elderly household. The Bureau of Labor Statistics (BLS) has developed an experimental price
index to track inflation for the population aged 62 and older. The average annual rate of change
between December 1982 and December 2009 for the experimental index was 3.2%; over the
same period, the CPI-W rose at a 2.9% rate. No inflation measure for a large population group
will exactly account for the experience of each member of that group. Differences in spending
patterns, in combination with different rates of price change for all of the various goods and
services included in the CPI, mean that individual inflation rate experiences may range
significantly above or below the measured average.
Introduction
The federal government, in an effort to protect the purchasing power of social security benefits,
indexes those benefits to increases in the consumer price index for urban wage earners and
clerical workers (CPI-W).1 There is concern, however, that the CPI-W may not accurately reflect
the inflation experience of the elderly population. It has been asserted that the elderly face a
higher inflation rate because they tend to spend a larger share of their household budget on goods
and services whose prices have been rising faster than average. More to the point, it is argued that
increases in social security benefits have not kept pace with increases in the prices of those goods
and services purchased by the elderly, and that some other index might be more appropriate. As
Congress takes up the issue of social security reform, one item of consideration may be the way
in which benefits are indexed. Some may call for a change in the index, which is used to
determine cost-of-living adjustments (COLAs) for benefits.
The CPI-W is published monthly by the Bureau of Labor Statistics of the Department of Labor
(BLS). It is designed to measure changes in the prices of goods and services purchased by those
who earn more than half of their income from clerical or wage occupations and have been
employed at least 37 weeks in the previous year.2 This group accounts for about 32% of the total
U.S. population. But the CPI-W only tracks the buying habits of the employed. To the extent that
retirees’ purchasing patterns differ from those of the rest of the population, the effect of inflation
on their standard of living may be different from what is indicated by the CPI-W.
1 Social Security is not the only program with an automatic cost-of-living adjustment. See CRS Report RL34168,
Automatic Cost of Living Adjustments: Some Economic and Practical Considerations, by Brian W. Cashell.
2 Specifically, clerical workers, craft workers, operatives, service workers, or laborers.
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A Separate Consumer Price Index for the Elderly?
Expenditure Patterns of the Elderly
To establish the composition of the market basket of goods and services whose prices are
gathered in calculating the CPI, BLS collects data regularly concerning how households spend
their money via the Consumer Expenditure Survey. Table 1 presents some of these data on total
dollar expenditures and how those expenditures were allocated across different categories of
goods and services. In the survey, a consumer unit refers primarily to households. It may be a
family, an individual, or a group that pools its income for consumption purposes. The figures
show the distribution of expenditures in 2008 for the population as a whole as well as for the
elderly population.
The largest differences in spending patterns between the elderly and the general population are
found in the shares of expenditures accounted for by health care.3 Those aged 65 and older spent
more than twice as large a share of their total outlays on health care as did the overall population.
With respect to the population aged 75 and older, the share of their spending allocated to health
care was close to three times as large as that of the total population. Two other expenditure
categories differed by more than 2 percentage points for the over-65 population: insurance and
pensions, which includes life insurance premiums and contributions to social security and other
pension plans; and cash contributions, which are payments to persons outside the household and
include alimony, child support, and care of students outside the home.
Table 1. Expenditures by Age, 2008
All Consumer
Units
65 and Older
65 to 74
75 and Older
Average annual
expenditures
$50,486 $36,844 $41,433 $31,692
Percentage of Average Expenditures
Food
12.8 12.7 12.9 12.4
Alcoholic
0.9 0.7 0.8 0.5
beverages
Shelter 20.2 18.8 17.6 20.7
Utilities 7.2 9.0 8.5 9.7
Household
2.0 2.4 1.8 3.3
operations
Housekeeping
1.3 1.7 1.8 1.5
supplies
Household
3.2 3.4 3.7 2.8
furnishings
Apparel and
3.6 3.0 3.3 2.4
services
3 In the CPI, expenditure shares for health care are based on health insurance premiums and out-of-pocket outlays. The
CPI does not include health benefits paid by employers or federal government programs. Health care expenditure
shares in the CPI marketbasket are consequently smaller than is the case in the national income and product accounts.
See U.S. Department of Labor, Bureau of Labor Statistics, Measuring Price Change for Medical Care in the CPI,
Summary 97-9, June 1998 (Revised), available at http://www.bls.gov/cpi/cpifact4.pdf.
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A Separate Consumer Price Index for the Elderly?
All Consumer
Units
65 and Older
65 to 74
75 and Older
Transportation
17.0 15.3 16.3 13.9
Health
care 5.9 12.5 11.5 13.9
Entertainment
5.6 5.2 5.8 4.3
Personal
care
1.2 1.4 1.3 1.4
Reading 0.2 0.4 0.4 0.4
Education 2.1 0.7 0.8 0.6
Tobacco 0.6 0.4 0.5 0.3
Miscel aneous
1.7 1.6 1.6 1.6
Cash
contributions
3.4 5.9 4.9 7.2
Insurance and
11.1 5.0 6.3 3.2
pensions
Source: Department of Labor, Bureau of Labor Statistics.
Health care costs have consistently risen more rapidly than the average price level. Between
December 1982 and December 2009, the CPI-W increased at an annual rate of 2.9% compared
with a 5.2% rate of increase for the medical care component of the CPI-W. Because the elderly
consume a greater than average share of a good whose price has tended to rise faster than overall
prices, the CPI-W may tend to understate the inflation experience of the average elderly
household.
Averages and Individuals
As noted above, the argument is often made that the CPI does not represent the average inflation
experience of the elderly population. But, just as the inflation experience of the elderly population
may differ from that of the population at large, so too are there differences within the elderly
population itself.
No summary inflation measure for a large population group will exactly account for the
experience of each member of that group. Differences in spending patterns, in combination with
different rates of price change for all of the various goods and services included in the CPI, mean
that individual inflation rate experiences may range significantly above or below the measured
average. If there is a great deal of variation in both the general population and within subgroups
such as the elderly, a small difference in average inflation rates between groups may not be
significant.4
Suppose the average inflation rate of the elderly population is slightly higher than the rate for the
overall population, but that the distribution of individual inflation rates among the elderly is
widely dispersed. In this case all of the elderly would be better off if their benefits were indexed
to an inflation measure based on the average elderly household.
4 See Department of Labor, Bureau of Labor Statistics, The Consumer Price Index—Why the Published Averages Don’t
Always Match An Individual’s Inflation Experience, fact sheet, available at http://www.bls.gov/cpi/cpifact5.htm.
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A Separate Consumer Price Index for the Elderly?
Within the elderly population, however, there would be several different consequences. First,
there would be some elderly whose inflation rates would be understated by the overall rate, but
exaggerated by the elderly inflation measure. Second, there would be those elderly whose
inflation rates were higher than either the overall measure or one based on elderly consumption
patterns. Finally, there would be a number of elderly whose actual inflation rates would be lower
than either the overall measure or one based on the elderly.
One study of the distribution of inflation rates across the population found, with regard to
inflation rates, that differences among demographic groups were small in comparison with the
variation within those groups. Further, it was found that differences between groups tended not to
be stable over time. This study argued that no one group suffered disproportionately from
inflation.5 If the variation in consumption patterns is great among the elderly and if the average
inflation rate of the elderly is not dramatically different from the average rate of the overall
population, then arguments for a separate index for the elderly population might be less
compelling.
BLS’ Experimental CPI for the Elderly
In 1987, Congress amended the Older Americans Act of 1965 to direct BLS to develop an
experimental price index to track inflation in the population aged 62 and older. BLS has
calculated estimates of such an index that go back to December 1982.6
Table 2 presents those estimates alongside actual data for the CPI-W and the consumer price
index for all urban consumers (CPI-U). The CPI-U measure is based on a larger population than
the CPI-W and, unlike the CPI-W, takes the elderly population into account. The CPI-U is the
measure of inflation most often cited in press reports.
The figures show that there have been only three years (1983, 2007, and 2009) in which either of
the two official indexes rose more rapidly than the experimental one. The average annual rate of
change between December 1982 and December 2009 for the experimental index was 3.2%. Over
the same period, the CPI-W rose at a 2.9% rate and the CPI-U rose at a 3.0% rate. That the CPI-U
was closer to the experimental index than the CPI-W was due, at least in part, to a larger weight
given to health care outlays because its market basket is more influenced by the spending patterns
of the elderly.
Although the differences in the three indexes are usually in the direction that might be expected,
there are a number of considerations to keep in mind. Because this is an experimental index,
fewer resources were used in its development. For example, the survey on which its market
basket is based was considerably smaller than the surveys used for the CPI-W and CPI-U and so
is subject to greater sampling error. Further, no additional survey was conducted to determine if
the elderly shop in different outlets than the population as a whole. If BLS were to initiate an
5 Robert T. Michael, “Variation Across Households in the Rate of Inflation,” Journal of Money, Credit and Banking,
vol. 11, issue 1 (February 1979), pp. 32-46.
6 Nathan Amble and Ken Stewart, “Experimental price index for elderly consumers,” Monthly Labor Review, May
1994, pp. 11-16.
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A Separate Consumer Price Index for the Elderly?
official CPI for the elderly program, it would involve more resources and might yield different
results from those presented here.7
The experimental index shown here is based on different weights assigned to different categories
of goods and services. However, there may also be substantial differences in consumption
patterns within those categories that could also change the figures shown in Table 2. A study by
BLS looked, in particular, at spending by the elderly on prescription drugs.8 Among other things,
this study found that there was considerable variation in the types of drugs purchased, by age.
However, the study found no strong evidence that there were significant age-related differences in
prescription drug inflation.
7 Kenneth J. Stewart, “The experimental consumer price index for elderly Americans (CPI-E): 1982-2007,” Monthly
Labor Review, April 2008, available at http://www.bls.gov/opub/mlr/2008/04/art2full.pdf.
8 Ernst R. Berndt et al., “Prescription drug prices for the elderly,” Monthly Labor Review, September 1998, pp. 23-34.
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A Separate Consumer Price Index for the Elderly?
Table 2. Consumer Prices and the Elderly
(percentage change from December to December)
Experimental CPI
for the Elderly
CPI-W CPI-U
1983 3.7 3.3 3.8
1984 4.1 3.6 3.9
1985 4.1 3.6 3.8
1986 1.8 0.6 1.1
1987 4.5 4.5 4.4
1988 4.5 4.4 4.4
1989 5.2 4.5 4.6
1990 6.6 6.1 6.1
1991 3.4 2.8 3.1
1992 3.0 2.9 2.9
1993 3.1 2.5 2.7
1994 2.7 2.7 2.7
1995 2.8 2.5 2.5
1996 3.4 3.3 3.3
1997 1.8 1.5 1.7
1998 1.9 1.6 1.6
1999 2.8 2.7 2.7
2000 3.6 3.4 3.4
2001 1.9 1.3 1.6
2002 2.6 2.4 2.4
2003 2.1 1.6 1.9
2004 3.4 3.4 3.3
2005 3.6 3.5 3.4
2006 2.7 2.4 2.5
2007 4.0 4.3 4.1
2008 0.5 -0.5 0.1
2009 2.2 3.4 2.7
Source: Department of Labor, Bureau of Labor Statistics.
Policy Considerations
Aside from the practical considerations, such as how much of a difference having a separate price
index for the elderly would make, there are a number of other things to consider. For example, if
the primary purpose of developing a separate index is for social security COLAs, it should be
kept in mind that not all social security recipients are elderly. Thus, some would argue that the
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A Separate Consumer Price Index for the Elderly?
market basket of the elderly population might not be the appropriate one on which to base
adjustments to social security benefits.
Having a separate price index may introduce a number of complications in other areas. If it is
appropriate to base social security benefit COLAs on a new price index for the elderly, should
that new index be used to adjust income tax brackets of elderly taxpayers, which are currently
indexed to the CPI-U? Finally, because there is substantial variation in inflation rates among
individuals and between different groups of individuals, any single measure of inflation is going
to over-or understate the inflation actually experienced by many.
Author Contact Information
Brian W. Cashell
Specialist in Macroeconomic Policy
bcashell@crs.loc.gov, 7-7816
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