Final answer:
The statement that Social Security benefits do not keep pace with inflation is false, as benefits are adjusted using the CPI to reflect inflation. Some economists argue overpayments may occur, but this view is contested and adjustments are meant to maintain beneficiaries' purchasing power.
Step-by-step explanation:
The question addresses the criticism that Social Security benefits do not keep pace with inflation. This statement is generally considered to be false because Social Security payments are adjusted for inflation through Cost-of-Living Adjustments (COLAs), which are based on the Consumer Price Index (CPI). However, some economists argue that using the CPI to adjust Social Security payments may result in overpayments due to the federal budget deficit.
They claim that the CPI does not accurately reflect the lower inflation experience of seniors, as their spending habits differ from the general population. Moreover, the CPI might not capture the real changes in the cost of living due to factors like substitution bias and changes in quality and availability of new goods.
Arguments regarding overpaying Social Security recipients often stem from concerns about the federal budget and the desire to ensure that Social Security remains solvent without contributing to the deficit. However, this is countered by the fact that Social Security has its own source of funding through payroll taxes and its trust fund, separate from general revenue. Additionally, the method of inflation indexing using the CPI is seen as necessary to protect the purchasing power of Social Security benefits over time.