Consumer price indexes for the elderly: British experience.

Legislation enacted in 1972 introduced an automatic benefit increase provision into the Old-Age, Survivors, and Disability Insurance (OASDI) program of the United States.’ Present law calls for the adjustment of benefits for those already on the rolls to keep pace with inflation whenever the Consumer Price Index (CPI) rises by 3 percent or more from the first quarter of one year to the first quarter of the next year. For some time, the question of whether the CPI is the appropriate measure for computing cost-of-living adjustments to benefits has stirred lively debate in the United States. On one hand, it is argued that the present CPI-developed to track movements in the economy as a whole-understates the rise in the cost of living for the elderly because of the differences in consumption habits of the elderly and the younger population. The former allocate a greater proportion of their budget to food, medical care, and utilities than do the latter. The rapid rise in prices of these types of goods and services presumably has led to an erosion of the elderly’s benefitpurchasing power in the 1970’s. On the other hand, the CPI is believed to overstate the effects of inflation on the elderly because of its sensitivity to home purchase costs and to mortgage interest rates. Since the elderly do not purchase homes as often as the average consumer, some believe that benefit increases might have been higher than actually required to keep up with the true cost of living for Social Security beneficiaries. The National Commission on Social Security, in its final report (1981), recommended continuing research to determine how a special index to measure price changes for the elderly might be constructed and subsequently used in indexing all Social Security benefits? The creation of a special index would address the above