chapter 16 Flashcards
(36 cards)
public policy
The definition is a plan of action to address some
issue of concern. Pretty basic, but public policy is that—a plan of action by the government to
address an issue of public concern. For any given problem, there are different courses of action we
could take to address the problem. The government has to choose one of those courses of action.
Whatever one it chooses becomes our public policy
social security
retirement benefit, disability payments, payroll tax
retirement benefit
The first one is a retirement benefit. As the name implies,
this is money you get from the government once you’re retired. You should not depend on Social
Security for your entire income when you’re retired. That’s not what it does. It supplements your
income to help you pay your bills. So, when you get a professional job, you need to be putting away
money for your own retirement. Consider that the cake, and then Social Security benefits are icing
on the cake. They will help you complete your retirement funding, but you should be putting away
money on your own
disability payments
The other type of Social Security benefit I want you to know about is disability payments. If you’re
disabled from working for over a year, Social Security will pay you money to help replace the wages
that you’re losing as a result of that disability
payroll tax
a tax that
takes money out of people’s paychecks
gross pay
total money that you earn
net pay
what you actually get after money has been subtracted from your income
retirement age
Number one, Congress could pass a law increasing the retirement age. In other words, you have to
wait longer to get Social Security benefits. The age for a full retirement under Social Security used to
be 65 years old, but for most people that’s now been increased to 67. So, the government has done
a little bit of this. But if Congress were to change it again and push it to like 70, then people would
have to wait longer to receive their benefits. That would mean less money is taken out of the system.
This is one proposed fix
income cap
Another one is to change the income cap. Remember, you pay a 6.2 percent tax on your wages but
only up to $168,600. One proposal is to increase that cap. Maybe push it up to $300,000, or $500,000.
Or, maybe remove the cap altogether. Tax every dollar someone makes. You could do different things
with this cap, but if you change it, you would bring more tax revenue into the system because you’re
taxing more of the dollars that people make
tax rate
A third alternative is to increase the tax rate. Right now, you pay a 6.2 percent tax. Maybe increase it
to 6.5 or 7 percent. If the tax rate goes up, more dollars come into the Social Security Trust Fund
because people are paying a higher percentage of their income
means tested
Another alternative is to make Social Security means tested. Right now, if you worked and put
money into the system, you’re automatically entitled to take money out of the system. If we were to
make it means tested, we would say to certain people, “You already have enough money to retire on.
You don’t need Social Security, so you don’t get it. We’re going to save these Social Security benefits
for people whose retirement income is so low that they really do need the money to supplement their
income and pay their bills.” That’s the way Medicaid is, by the way. Everyone pays taxes that fund
Medicaid, but the only people eligible for Medicaid are poor people. So, the means-tested proposal
would introduce that idea into Social Security
privatize
And then the last idea that has been proposed is to privatize Social Security. Right now, it’s a
government program. It’s funded and operated by the government. If we privatized it, that means
people’s Social Security money would be put in private funds like stocks, and bonds, and stuff like
that. The way it runs today, you have a fixed benefit. They have a formula that they will put your
information into, and out will come the number, and that’s how much money you get paid for Social
Security. It’s fixed. No matter how the economy is doing, that’s the number you’re entitled to. If we
privatized it, the amount you get would depend on the state of the economy, just like any other
investment. If you put money in the stock market, and the stock market goes down, you end up with
less money. But if the stock market goes up, you end up with more money. So, the idea here would
be to make your Social Security funds like other investments. You try and be as wise as you can to
invest in the right stocks, and bonds, and mutual funds to grow the money, but the amount you get
out is not fixed. It will depend on how successfully you navigated the market
medicare
Now let’s talk about Medicare. This is a health insurance program operated by the government for
older people. Just like Social Security, Medicare is funded through a payroll tax, but the tax is lower.
The worker pays 1.45 percent of their income, and then the employer matches another 1.45 percent
for a total of 2.9 percent. So, the amount coming out of your check is 1.45 percent of your income.
Unlike Social Security, there’s no cap on how much income gets hit by this tax. Every dollar a person
makes, no matter how many dollars they make, gets hit by this 1.45 percent tax (and the employer
has to match another 1.45 percent). So, if someone makes $200 million, all $200 million are taxed.
Since Medicare is funded through a payroll tax, it faces the same long-term viability problem that
Social Security has. There are fewer workers paying tax to fund the program because fewer babies
are being born, and there are more people taking benefits out of the program because people are
living longer. How do we solve this problem? Some of the proposals that were made with Social
Security could also be applied here. You could increase the age that someone has to reach before
they’re eligible for the benefits. You could increase the tax rate so more than 1.45 percent gets taken
out of your check. You could make it means tested. So, there are ideas out there. You could probably
get creative and come up with some other plan as well. But until the government does come up with
some other plan, you have the same situation as with Social Security
payroll tax
Just like Social Security, Medicare is funded through a payroll tax, but the tax is lower
medicaid
The next program is Medicaid. Sometimes I get tongue tied on these and mix up Medicare and
Medicaid, but they’re different programs, so you need to make sure you understand the difference.
Medicaid is a government-run health insurance program for poor people. Medicare is based on your
age; Medicaid is based on your income. So, the government is going to help pay for the medical bills
of people who fall below a certain income level.
How is the program funded and operated? It does not have a special payroll tax like Social Security
and Medicare, so the government has to come up with the money for Medicaid out of its regular
budget. This is money they get from the federal income tax, or borrowing, or however else they raise
money to cover their general expenses
cooperative program
Medicaid is a cooperative program run by the federal government and the states. Each state has a
Medicaid program, and it’s part of an agreement with the federal government. The agreement says
the federal government will send some money to the states to pay for Medicaid, as long as the state
government contributes some money from its budget. So, you have state and federal funds coming
together to pay the benefits that people receive. And then each state is relatively free to run the
program within its own jurisdiction. The federal government is providing some rules that every state
has to comply with, but there is some freedom on a state-by-state basis for individual states to come
up with their own rules. For this reason, eligibility varies across the country. Some states might have
a tougher standard, and other states might have an easier standard to satisfy. So, if someone wants
to know if they’re eligible for Medicaid, they need to check with the appropriate authority in the state
where they live.
federalism
This is an example of federalism affecting a government policy. You remember earlier in the course,
we had a whole discussion about federalism, which means the division of power between national
and state levels of government. Medicaid is run jointly by the national government and the states.
Each of them contribute money to the system, but each state has some freedom to run the program
within its jurisdiction as it sees fit. And because of that, the rules for eligibility differ on a state by
state basis.
business cycle
Now, let’s move on and talk about economic policy. To start this discussion, you need to understand
the concept of a business cycle. If you just use your imagination, the business cycle is like a graph
with a line that goes up, then it goes down, then it goes up, then it goes down. Kind of like those heart
monitors in the hospital, or maybe a roller coaster. What are we measuring that goes up and down?
The answer is GDP (gross domestic product)
GDP (gross domestic product)
GDP is a number that reflects how much is being
produced in your country. We’re talking about goods and services. So, if GDP is going up, it means
businesses are doing well. They’re producing more things; they’re providing more services. If GDP
goes down, it means we’re contracting. Businesses are not producing as much, and there aren’t as
many services being performed in the economy. It’s a measure of productivity, and it’s never just a
straight line. We’re either increasing our production or decreasing our production. So, it moves in a
cycle, and it’s a measure of the health of our economy.
Inflation
Those higher prices are inflation. Inflation is defined as an increase in the prices for goods and
services. We don’t want GDP to go up so high and so fast that we get sticker shock at the gas pump,
for example. Same thing goes with the lows. When GDP declines, unemployment increases because
now there’s less demand for goods and services. Businesses are producing less, which means they
don’t need as many workers. They’re laying people off. Well, if the lows in the business cycle get too
low, then there are too many people out of work, which means fewer people are making money,
which means there’s less money to spend, which takes demand down even more. That’s going to
cause businesses to produce even less, and then you can get locked in a vicious pattern of decline
unemployment
Now, think about the relationship of GDP to unemployment. When the roller coaster track is going
up, that means our GDP is increasing. We’re producing more goods and services. That would mean
a lot of people have jobs because they’re the ones doing that production. So, unemployment would
be low. When GDP is going up, there are fewer people out of work because we need workers to
provide those services and to produce those goods.
Well, when it peaks out and then GDP starts going down, that means we’re producing less. If we’re
producing less, there are fewer people working, because if you’re not putting out products or
services, then you don’t need people to do those things. So, you get layoffs and stuff like that. When
GDP is going down, unemployment is going up. Hopefully that makes sense. There’s an inverse
relationship between GDP and unemployment
recession
This is where the words recession and depression come in. A recession is defined as a period of two
or more quarters of consistent economic decline. In other words, a recession is a bad low in the
economy
depression
A depression is a super bad low. Things dip even below recession level, and we’re just
stuck in a really bad pattern of people being laid off, which creates less money in the economy, which
creates even less demand for products. So, even more people are getting laid off, and
unemployment gets really high
fiscal policy
Who makes fiscal policy? Congress and the president. The tools they use to make fiscal policy are
taxes and spending. Think about how it would work. Let’s assume the economy is in a recession.
There’s a lot of unemployment; not much demand for goods and services because people don’t have
a lot of money
