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# ps3-sol - Economics 321 Fall 2010 Problem Set 3 SOLUTIONS...

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Economics 321: Fall 2010 Helen Schneider Problem Set 3 SOLUTIONS 1. Initially, a worker paid for 20 percent of a retiree’s benefits. In the future, the same worker would be responsible for paying for half of a current retiree’s benefits. If benefits remained the same, then each worker’s tax burden would increase by approximately 30 percent of the cost of benefits. In terms of tax rates, each worker’s tax burden would increase by 2.5 (gross) or 2.5-1 = 150% (net). If tax rates remain the same, then benefits would need to fall by approximately 60 percent. (B/W) future /(B/W) currently = 0.2/0.5 = 0.4. If tax rates remained the same, then benefits would need to fall by 0.4-1 = -0.6 or fall by 60% . 2. a. Females have higher SSW than males because both pay the same taxes, but females live longer than males and so receive benefits for a longer time. b. Someone born in 1925 would have the higher SSW because of the tax-rate growth effect and wage and growth population effects got smaller starting in the 1970s. c. A low-wage worker has higher SSW because of how Social Security redistributes income. Some of this higher SSW will be offset by lower life expectancy of low-income workers. d. Single-earner couples have more SSW because even though only one person works, that couple gets 150% of the earner's benefit. The two-earner couple has to pay taxes on their full earnings even though they may not receive more benefits than the one-earner couple. 3.

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ps3-sol - Economics 321 Fall 2010 Problem Set 3 SOLUTIONS...

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