Chapter 10

Question 1

How does the population grow according to the provided equation?

Answer 1

Each period, there are N’ young and N old alive.

The growth equation is ¢ = +(1 )N n N

Question 2

What must total social security benefits equal according to the government’s budget balance?

Answer 2

Total taxes on the young.

The equation is Nb N t¢= 1 b t n = +

Question 3

What happens to the budget constraint of an old consumer when social security is introduced?

Answer 3

Shifts from AB to DF, making the consumer better off.

This is illustrated in Figure 10.8.

Question 4

What is the condition for consumers to be better off in pay-as-you-go social security?

Answer 4

If n > r.

This causes the budget constraint to shift out from AB to DF.

Question 5

What is the equation for disposable income when old with social security benefits?

Answer 5

y¢ – t.

When young, disposable income is represented as y – b.

Question 6

What indicates that the population growth rate is beneficial in pay-as-you-go social security?

Answer 6

The population growth rate must exceed the real interest rate (n > r).

This means the old in the initial period are better off at the expense of the young and future generations.

Question 7

What is a fully funded social security system?

Answer 7

A mandated savings program where assets are acquired by the young, which are sold in retirement.

It is effectively a forced savings program.

Question 8

Under what condition does fully funded social security make a difference?

Answer 8

If the social security system mandates a higher level of saving than the consumer would choose without it.

This is considered a binding constraint.

Question 9

What are the two problems encountered by fully funded social security programs?

Answer 9

• Inefficient management due to political interference
• Potential moral hazard problem

These issues arise if the government manages the public pension fund.

Question 10

How does a pay-as-you-go system avoid issues faced by fully funded social security?

Answer 10

It does not require the government to decide on morally appropriate investments.

Political activity can focus on more productive ways.

Question 11

What is the moral hazard problem in fully funded social security?

Answer 11

If retirement accounts are insured, managers may take on too much risk.

Government insurance and regulation could create costs that make pay-as-you-go preferable.