Your textbook explains that Social Security benefits are inc

Your textbook 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. With this in mind, 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? Now, in reality, 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?

Solution

One way would be to compute a new basket of goods that captures the higher consumption of health care by elderly people, and see how changes in the price of this basket compares to the increase in their Social Security benefits. If the cost of this basket increases by more than the increase in Social Security benefits, then they are not better of from year to year. If it increases by less than the increase in Social Security benefits, then they are.