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Homework 8 Answer Key

Homework 8 Answer Key - Economics 1480 Answer key#8 Problem...

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Economics 1480 Answer key #8 Problem 1: Social Security Trust Fund Recall from lecture that the condition for a balanced budget for Social Security states that total benefits paid out of the system must equal receipts from the payroll tax system: (1) B × N b = t × N w × W where B equals benefits per retiree N b equals the number of retirees, or beneficiaries t equals the tax rate on workers N w equals the number of workers W equals the wage of workers This equation can be re-written as follows: (2) t = (N b / N w ) × (B/W) where N b / N w is known as the dependency ratio and B/W is the replacement ratio. As you know, the dependency ratio is expected to rise from 1/3 at current to 1/2 by the year 2030. Assume that the current tax rate on workers (t) is 10 percent and that current benefits per retiree (B) equal $15,000. Further, assume that the budget for Social Security is currently balanced. Assuming that the replacement rate (B/W) is held fixed, what will the tax rate on workers (t) need to be in 2030 in order for the budget to remain balanced?
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