Elderly prove less vulnerable to inflation than many suppose

There's a widespread view that the elderly are suffering financially, especially with the rapid inflation of recent years. That may be true for some individuals. But, as a group, those over 65 have done quite well economically. Indeed, they probably added to their wealth slightly during the 1970s in real terms.

Research by economists John B. Shoven of Stanford University; Michael D. Hurd of State University of New York, Stony Brook; and others, show that:

* In the past 20 years, the percentage change in the cost of living has been essentially the same for all age groups. The elderly, though they may consume goods in different proportions than those younger, were not especially hard hit. Indeed, many benefited from a tendency of the official consumer price index (CPI) to overweigh the cost of owner-occupied housing, an area where prices soared in the 1970s. Their social security benefits were indexed to the CPI, but their actual housing costs did not rise so fast. Further, there was a period when social security benefits increased faster than inflation.

* Incomes of the elderly have been rising faster than the nonelderly, whether measured on a per household or a per capita basis. In fact, on a per capita basis, the before-tax incomes of the elderly are higher on average than those for the total population. That occured despite a significant drop in the percentage of the elderly working. Many took advantage of better pensions or other financial arrangements. In 1970, 27 percent of men over age 65 worked, as compared to about 18 percent today. This proportionate rise in the incomes of elderly households occurred despite a dramatic increase in the percentage of nonelderly in the work force, mostly because more women took paid jobs.

After taxes, the income advantage for many elderly will be even greater, because they pay no taxes on social security benefits and - since so many of them own their own houses - they benefit from what economists term ''the implicit income'' on those homes. In other words, they pay less for housing than if they rented. Further, they get a double personal exemption when filling out their income tax forms.

In fact, a much smaller proportion of the elderly are now poor than 20 years ago. Almost 27 percent of elderly couples fell below the official poverty line in 1959. This figure fell to 7.6 percent by 1978. ''While it may have risen slightly since, most of the impact of the recession in 1981-82 was . . . borne by the non-elderly,'' say Shoven and Hurd.

* The composition of the income of the elderly has changed markedly during the 1970s. The proportion of their income from paid jobs dropped; government-provided health care insurance increased (as income-in-kind), and social security and private pensions have grown somewhat in their share of the elderly's income.

To look more closely at the economic position of the elderly, Messrs. Shoven and Hurd tabulated detailed income statements and balance sheets for participants in a survey conducted by the Social Security Administration. Some 11,153 heads of households born between 1906 and 1911 were interviewed in 1969, when their ages ranged from 58 to 64. The survivors (some passed on, others were not available for other reasons) of this group were interviewed every two years thereafter to 1979. The results show how the incomes of a typical group of the elderly have evolved over time.

Taking account of government-provided health care or insurance and the real implicit return on owner-occupied housing (calculated at 3 percent of the market value of the home), the average household income of this group in constant 1968 dollars was $8,246 for 1968, $7,230 for 1974, and $6,768 for 1978. (In 1978 dollars, the 1978 average was $12,280.) The decline in real income is due solely to the fact that fewer of those surveyed were working as they got older.

However, the poorest 10 percent of this sample increased their real income. This real increase came between 1968 and 1974 as more of them became eligible for such government programs as medicare and social security.

In 1968, labor earnings amounted to 76 percent, on average, of the income of all those surveyed; by 1978, it accounted for only 17 percent, on average. The wealthy tend to work longer, so the 10 percent wealthiest households got a larger proportion of their income from labor earnings. (Even in 1978, some 28 percent of the income of the elderly wealthy in this survey sample came from labor earnings.)

On the other hand, income from pensions and social security did increase over that decade because of greater eligibility and retirement.

The economists made several other findings from this study:

1. Government programs, such as social security, supplemental security income , and medicare, tend to reduce income inequality among the elderly. Private pensions seem at least as concentrated as total income - in other words, they don't change the distribution of wealth among the elderly. The poorest 10 percent get only 4 percent of their wealth from such private pensions and annuities; the richest 10 percent get 15 percent.

2. Roughly 70 percent of those surveyed (probably typical for the elderly) kept their own homes for the full 10 years. The market value of their homes grew by 123 percent between 1969 and 1979.

3. Some one-fifth of the elderly were participants in the bond and stock markets during the decade, with an average of $30,000 invested in 1979.

4. Some 26.6 percent of households surveyed in 1979 received a private pension and 15.5 percent a government pension (not social security). Government pensions are indexed fully against inflation; private pension benefits are raised to offset about two-fifths of inflation.

5. The incomes of the elderly, at the median (meaning there are an equal number with incomes greater and with incomes lower than the median number), were substantially protected from inflation. Indexed government programs (social security and so forth) can take credit for much of this inflation protection.

The two economists conclude: ''The popular notion of the inflation vulnerability of the elderly is wrong: the elderly do not live on fixed incomes derived from assets that depreciate when inflation increases. Rather, a sustantial fraction of the elderly have an index of inflation vulnerability that is so low that inflation has no appreciable effect on their wealth.''

However, what's true on average was not true individually. Some of the elderly gained from the inflation of the 1970s; many others lost significant portions of their wealth. And it was the indexation of social security and other government programs that prevented this variability in inflation vulnerability from being worse.