Week 11: Fiscal Challenges in the Long Run II

Question 1

The Fiscal Problem of the Twenty-First Century

Answer 1

With current policies in place it is likely that:

• Gov spending will rise to 40% of GDP
• Annual budget deficits could reach 20% of GDP

Question 2

Info on Ageing Population (3 points)

Answer 2

The share of the population aged over 80 will increase rapidly
Dramatic increase in the fraction of population that is 65-80+
The share of working age population is expected to decrease by 2050

Question 3

Age Dependency Ratio

Answer 3

measure of the number of dependents aged 0-14 and over 65, compared with the total population aged 15-64

Question 4

What are the reasons for the current unsustainable policies? (4)

Answer 4

• Increased generosity of entitlement programs
• Pay – as – you go vs fully funded pension systems
• Rise in share of population receiving pension benefits for longer
• Rise in health care expenditure

Question 5

Financing the Social Security Program in US

Answer 5

Social security:

• Finances by an employment tax on wage income
• Pay as you go system – current worker pays the benefits of the current recipients

Question 5

Financing the Social Security Program in US

Answer 5

Social security:

• Finances by an employment tax on wage income
• Pay as you go system – current worker pays the benefits of the current recipients

Question 6

What happens as ‘baby boomers’ retire in the US?

Answer 6

• The ratio of workers to retirees will fall

- Need increased taxes and/or reduced benefits

Question 7

‘Baby Boomer’

Answer 7

member of the demographically large generation born between the end of WWII and the mid-1960s

Question 8

Explanations for increasing health care costs

Answer 8

• Expensive medical technologies
• Waste and fraud in health care system
• People living longer

Question 9

Possible Solution for Social Security in US (3)

Answer 9

1. consumption subject to diminishing returns but adding additional months of life is not subject to DR
2. therefore, health spending rises more than consumption
3. • Likely optimal for health care expenditures to rise as a fraction of GDP as incomes rise
     Possible solutions (other than increasing taxes) – private health insurance, mandated savings in individual health-spending accounts

Question 10

Why can economic growth not solve the the problem of rapidly growing expenditures on health care?

Answer 10

it is simply one of many factors that can help to solve budgetary problems