Chapter_11_v2 - Part 3 Public Expenditure: Social Insurance...

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Part 3 – Public Expenditure: Social Insurance and Income Maintenance Chapter 11 – Social Security 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. Individuals who do not save enough for their retirement years may believe that the government will feel obliged to come to their aid if they are in a sufficiently desperate situation. With this belief, younger individuals may purposely neglect to save adequately. One justification for the compulsory nature of Social Security is to address the inefficiently low saving caused by moral hazard. 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. Social Security redistributes incomes from younger generations to older generations, from men to women, from high- to low-income individuals, and from two-earner to one- earner married couples. Social Security benefits older generations because it is largely financed on a pay-as-you- go basis. The most extreme example is Ida Fuller, the first Social Security beneficiary, who paid only $24.85 and received benefits of $20,897 over her lifetime. Women have gained because they have lived longer. The text cites Liebman’s calculations, which show that among people who retired in the 1990s, on average men came out behind by about $43,000 while women came out ahead by $37,000. For recent and future retirees, generally the higher the earnings, the smaller the gain from Social Security. For example, a high-earner single male who retires in the year 2015 is expected to lose $196,350 to Social Security, whereas a low-earner single male retiring at
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Chapter_11_v2 - Part 3 Public Expenditure: Social Insurance...

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