Alert
Close

Last chance – give now. Before 2014 ends, help struggling seniors. Donate

Highlights

Open

You and Your Town Contest-You could win an AARP RealPad

Contests and
Sweeps

$10,000 Winter Escapes Sweepstakes

Beat the cold and cozy up to a chance of winning $10,000! See official rules.

Driver Safety

Piggy bank on the road - AARP Driver Safety

Take the new AARP Smart Driver Course!

AARP Books

Visit the Money Section

Enjoy titles on retirement, Social Security, and becoming debt-free.

Jobs You Might Like

most popular
articles

Viewed

A Note On Using An Experimental CPI-E For Older Americans

Table of Contents:What is the CPI-E? |Limitations of the CPI-E |CPI and Social Security Benefits

The Consumer Price Index (CPI) reported monthly by the Bureau of Labor Statistics (BLS) measures the average change in prices over time for a fixed basket of goods and services. The BLS calculates the CPI for two population groups: "All Urban" consumers, (CPI-U), and "Urban Wage Earners and Clerical Workers," (CPI-W). The latter is a subset of the former and represents 32 percent of the total U.S. population. The CPI-W is used primarily for calculating cost-of-living adjustments (COLA) for unionized workers and recipients of federal entitlements such as Social Security. Because the CPI-U is more comprehensive, it is used to adjust many entitlements and the tax code, besides being a measure of inflation.

In addition to these two CPIs, the 1987 amendments to the older Americans Act (1965) directed the BLS to develop an experimental index (CPI-E) for Americans 62 years of age and older. This index initially measured price changes during 1987 to 1993, and has been extended through 2000. Figure 1 shows the three index numbers since the inception of the CPI-E in 1982.

Figure 1 CPI (1982 - 84 = 100)

The rate of price increase in the CPI-E has always been greater than the other two index numbers. In April 2000, it was about 14.4 percentage points higher than the CPI-W (182.5 vs. 168.1). Over a five-year period from December 1995 to April 2000, the CPI-E has risen 19.9 percent as compared to 17.7 percent and 17.0 percent for the CPI-U and CPI-W, respectively. However, the indexes are not directly comparable because the CPI-E uses a market basket that may not reflect the actual purchases made by persons 62 and over. 1

What is the CPI-E?

For both the CPI-U and CPI-W, items in the basket are weighted according to their importance-known as expenditure weights- in the consumer spending for their specific populations. Whereas the CPI-U and CPI-W cover all age groups, the CPI-E refers to those urban consumer units in which (a) unattached individuals (not in the family) are at least 62 years of age; or (b) the reference person of the family or the spouse is at least 62 years of age; or (c) the reference person of the groups of unrelated individuals living together, who pooled their resources for living expenses, is at least 62 years of age.

In the 1984 Consumer Expenditure Survey, which is used in constructing CPIs, 3,135 (or 19 percent) of the total sample of 16,500 urban consumers satisfied the definition of the CPI-E population mentioned above. In 1995, the expenditure weights for the three CPIs varied as follows:

Table 1 Consumer Expenditure Weights in 1995

The expenditure weight of any item in the CPI is measured by the actual expenditure on that item in the base period. It represents the relative importance of that item in total expenditure. As commodity prices change from time to time, the relative importance is updated accordingly as percent change in expenditures. Since the sample of consumers aged 62 and older was much smaller than the total sample, the sampling error for the CPI-E, particularly in expenditure weights, is higher than for the other two index numbers.

Table below shows that the CPI-E rose 19.9 percent from 1995 to 2000, as compared to 17.7 percent for the CPI-U, and 17.0 percent for the CPI-W. Higher rate of increase in the CPI-E shows that consumers aged 62 and above allocate a larger portion of their total expenditure on those items that have grown more rapidly. For example, the elderly population needs to allot a larger proportion of their expenses for medical insurance (see expenditure weights) than the two population groups represented in the CPI-U and CPI-W, whose insurance is usually provided by employers. The price increase on medical services for elderly consumers was 37 percent as compared with 35 percent for the other two populations. Of all three CPIs, the CPI-E had the highest rate of price increase for all major categories except apparel and education. Medical care accounts for most of the difference between the CPI-E and other two index numbers.

Table 2 Percentage Change Dec 1995 - April 00

 

Limitations of the CPI-E

The relative importance of items differed in the three index numbers, especially for medical care, shelter, and transportation. An important limitation of the CPI-E, however, is that prices of items within each goods and service category are based on the purchases of the entire CPI-U sample. For example, prices of medical services within the medical care category are selected from the purchases of the CPI-U population and may not be representative of specific services, such as nursing care, purchased by the CPI-E population.

Another limitation of using CPI-U prices is that they do not account for discount prices available to older Americans, such as senior-citizen discounts. Also, areas and outlets used in collecting prices are the same for all three CPIs, but these outlets may not necessarily represent places where older Americans buy their merchandise. This causes price-selection bias in the CPI-E which is already based on a much smaller sample. Because of these limitations, the CPI-E is classified as an experimental index, and any conclusions drawn from this index are only tentative in nature.

CPI and Social Security Benefits

Besides the selection of items and price quotations, there are some other inconsistencies in using the CPI-E for indexing purposes. The Social Security inflation adjustments are currently based on the CPI-W averaged from the third quarter of one year to the third quarter of the next year and applied to benefits of the following year. If Social Security benefits were to be indexed by the CPI-E instead of the CPI-W, the COLA adjustments would be higher. But the CPI-E does not represent all Social Security recipients. Many Social Security recipients are younger than age 62--those who are surviving spouses and/or minor children, or disabled workers. Secondly, many workers do not start receiving Social Security benefits until they retire at age 65, while the CPI-E covers the entire population aged 62 and above. Using the CPI-E for Social Security adjustments would mean excluding some who are already receiving benefits, but including some (age 62 to 65) who are not into the program yet. These two population groups may not be sufficiently comparable in number to cancel out each other, nor can they be assumed to have identical spending habits.

 


Footnote

1 Kenneth J. Stewart and Joseph Pavalone, "Attachment F: Experimental CPI for Americans 62 Years of Age and Older," BLS New Release, December 1996.


Written by Satyendra Verma, Ph.D.
December 2000
©2000 AARP
May be copied only for noncommercial purposes and with attribution; permission required for all other purposes.
Public Policy Institute, Public Affairs, AARP, 601 E Street, NW, Washington, DC 20049

Topic Alerts

You can get weekly email alerts on the topics below. Just click “Follow.”

Manage Alerts

Processing

Please wait...

progress bar, please wait

Tell Us WhatYou Think

Please leave your comment below.

The Cheap Life

Jeff Yeager Cheap Life Ultimate Cheapskate AARP YouTube web series save money

Catch the latest episode of The Cheap Life starring Jeff Yeager, AARP's Ultimate Cheapskate. Watch

Discounts & Benefits

From companies that meet the high standards of service and quality set by AARP.

Life insurance: you are covered rain or shine

Exclusive annuities for members from AARP Lifetime Income Program from New York Life.

AARP Credit card from Chase

Members can get cash back rewards on purchases with the AARP® Credit Card from Chase.

Homeowners Insurance
Member Benefits

Join or renew today! AARP members receive exclusive member benefits & affect social change.

Rewards for Good

Your Points Balance:

Learn More

Earn points for completing free online activities designed to enrich your life.

Find more ways to earn points

Redeem your points to save on merchandise, travel, and more.

Find more ways to redeem points

Advance your skills. Transform your career.

Explore your learning possibilities.