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Chap009 - Part 2 Analysis of Public Expenditure Chapter 9...

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Part 2 – Analysis of Public Expenditure Chapter 9 – Social Insurance I: Social Security and Unemployment Insurance 1. With adverse selection, insurance contracts with more comprehensive coverage are chosen by people with higher unobserved accident probabilities. To make up for the fact that a benefit is more likely to be paid to such individuals, the insurer charges a higher premium per unit of insurance coverage. 2. There are many possible implications of a voluntary Social Security system. One possibility is that people would save less for retirement, betting that society would not put up with having great numbers of elderly poor. Part of the effect of the Friedman program, then, would depend on the government's credibility when it promises not to bail out people who do not save enough to survive during retirement. 3. Use the basic formula for balance in a pay-as-you-go social security system: t =(N b /N w )*(B/w). Call 1990 year 1 and 2050 year 2. Then t 1 = .267*(B/w) 1 t 2 = .458*(B/w) 2 It follows that to keep (B/w) 1 =(B/w) 2 we require t 2 /t 1 =.458/.267=1.71. That is, tax rates would have to increase by 71 percent. Similarly, to keep the initial tax rate constant, we would require (B/w) 2 /(B/w) 1 =.267/.458=0.58. Benefits would have to fall almost by half. 4. If Social Security benefits are partially taxed for those who have other income over a certain level, then there is an implicit means test in receiving full, untaxed benefits.
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