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Inflation and Economic Security of the Older Population

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Abstract

Because the older population are net lenders, they tend to be economically vulnerable to high and increasing inflation. This research used data from the Health and Retirement Study and its supplement, the Consumption and Activities Mail Survey, to assess the effects of inflation on the older population. The research employed two models. The first is an asset valuation model, which addresses how, given portfolio composition, household wealth changes in response to a permanent and unanticipated increase in inflation. The second is a simulation model to estimate how the economic position of a representative sample of the older population will evolve over the rest of their lifetime after an unanticipated increase in inflation. The model assumes an annual inflation rate of 2%, which increases permanently to 6% in 2020. The analyses provide insight on the effects of the inflation spike that occurred over the course of the COVID-19 pandemic. We show how results vary by education and marital status. We find overall that the typical person was likely affected only modestly by the inflation increase. The largest effects are concentrated among households with greater economic resources because a greater share of their portfolio tends to not be indexed to inflation. Conversely, those with fewer economic resources are relatively better protected from increases in inflation because Social Security benefits, which are adjusted for changes in the cost-of-living, constitute the most important retirement asset for them.

Key Findings

From our analysis of household asset portfolios, we found:

  • The typical household would experience only a small reduction in the real value of their assets from an unexpected increase in the inflation rate.
  • College graduates would be more affected because a greater share of their economic resources is not indexed and hence vulnerable to inflation increases.
  • Households with mortgages could gain because inflation reduces the real cost of fixed-term mortgages.

Simulations from ages 66 to 69 to the end of life of income, consumption and wealth found:

  • A reduction in rest-of-life real income by about $7,000 for single persons and $27,000 for those who were married at baseline (age 66-69);
    • These are small percentages of their total economic resources.
  • The unexpected increase in inflation would require a de minimis reduction in remaining lifetime consumption to avoid running out of wealth:
    • about $500 on a base of $318,000 for single persons,
    • about $1,600 on a base of $668,000 for married households.
  • The effects would be greater for the better educated because of their greater economic resources.
    • But their loss of economic resources would be made up by a decrease in bequests rather than by a reduction in consumption.
  • Those with fewer economic resources are relatively well protected from inflation because Social Security benefits, which are adjusted for cost-of-living increases, constitute a much larger share of their portfolio.

Citation

Hurd, Michael, and Susann Rohwedder. 2024. “Inflation and Economic Security of the Older Population.” Ann Arbor, MI. University of Michigan Retirement and Disability Research Center (MRDRC) Working Paper; MRDRC WP 2024-480. https://mrdrc.isr.umich.edu/publications/papers/pdf/wp480.pdf

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Project

Paper ID

MRDRC WP 2024-480

Publication Type

Working Paper

Publication Year

2024