MI 5: Government Budget Deficits

Question 1

Social security

Answer 1

• old age, survivor, disability insurance

- $900 B, 24% gov spending, 5% GDP

Question 2

Medicare

Answer 2

• health insurance for people over 65
• $600 B, 15% gov spending, 3% GDP
• healthcare costs rising faster than inflation

Question 3

Benefits of SS

Answer 3

• reduced uncertainty (uncertainty causes market failure)

- reduced poverty among elderly (35% in 60s to 10% in 95)

Question 4

Financing SS

Answer 4

• payroll tax (FICA)
• 15% of wages, capped at $110, 000 income
• PAYGO: current workers pay for current retirees

Question 5

Economic Costs

Answer 5

• savings diverted to SS: reduces business investment, HHS lose opportunity to earn higher r
• labor market effects: reduces labor, tax wedge between employer and employee benefits

Question 6

PAYGO equation

Answer 6

Benefits = taxes

delta benefit = delta tax rate + delta yearly wage + delta labor force

Question 7

future changes needed because:

Answer 7

workers/retirees is decreasing

payroll taxes haven’t increased since 1990

Question 8

possible solutions

Answer 8

increase tax rate
(raise annual cap)
cut benefits
(reduce COLA, progressive index, lower SS payments)
raise retirement age
supplement w/ individual PRA plans

Question 9

payroll taxes:
hourly earnings:
labor force:

Answer 9

haven’t increased
change is decreasing
increasing but at a lesser rate