Problem Set 4 Answers - ECON 454, Fall 2007 Department of...

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ECON 454, Fall 2007 Department of Economics, University of Maryland Jessica Hennessey Problem Set #4 Answers Question 1 attention in particular to e¢ ciency implications (through potential behavioral responses to the change) and equity implications (who wins and who loses). Note that all reforms are intended to save the system money, con, as well as one potential winner and one potential loser. Other answers could de±nitely be appropriate! (a) Increase the number of years used to calculate bene±ts from 35 to 40. Pros/Cons ² Individuals may want to work longer to have years of higher income included in calculations ² Individuals may be ine¢ ciently working (overtime) at an old age in order to get 40 years of good work history Winners/Losers ² Those that already had 40 years of relatively equal income amounts ² Those that had 35 years or less of work; additional years will be zero going in to calculations (b) Reduce bene±ts for bene±ciaries with high asset levels (wealth). Pros/Cons ² Pro: Greater redistributive function for SS ² Con: Creates incentive for people not to save anymore Winners/Losers ² Winner: Low-income individuals who might bene±t from increased availability of bene±ts to be paid out ² Loser: Those with high asset levels who now have a reduction in bene±ts (c) Increase maximum income (currently $97,000) on which SS taxes are paid. Pros/Cons ² Pro: Greater redistribution from high income earners to low income earners ² Con: Possible disincentive to work since that income is now taxed Winners/Losers ² Winner: Low income individuals whose tax payments aren²t increased ² Loser: Those who are earning an income above $97,000 (d) Gradually increase the normal retirement age from 65 to 70. 1
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Pros/Cons Pro: Reduce moral hazard of retiring before socially optimal Con: Bad for those that are liquidity constrained as get old; need income to smooth consumption Winners/Losers Winner: Those that expect to live a long time Loser: Those that expect to die early, are liquidity constrained, or would have optimally retired at 65 Question 2 In his research, the author of your textbook found evidence that the elasticity of labor supply with respect the disability insurance program than in the unemployment insurance program?
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Problem Set 4 Answers - ECON 454, Fall 2007 Department of...

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