ERRORS IN THE MEASUREMENT OF HOUSING COSTS IN THE CPI-W
The discussion above pointed out the important role of the CPI-W in Social Security benefit
determination. Any error in measurement in the CPI-W could be translated into a significant
error in benefit payments. An upward bias, for example, would imply that benefits would be
raised more than intended, that is, more than what is necessary in order to maintain the
purchasing power of benefits. As discussed earlier, prior to 1985 the CPI-W suffered the defect
of an inappropriate treatment of homeownership costs. The consequence of this defect was a
(generally upward) bias in the price index used to adjust benefits, particularly during the late
1970s and early 1980s when interest rates were unusually high. As a result, benefits were
higher than they would have been in the absence of the homeownership bias and, as shown
below, for some retirement cohorts the “overpayment” was substantial