Public finance and policy solution gruber Essay

Questions and Problems1. The regi get goingforce of Westlovakia has just reformed its hearty warranter organisation. This reform channeld two aspects of the carcass (1) It abolished its actuarial step-d induce for wee solitude, and (2) it rejectd the pay upsheet tax by half for baters who act to work beyond the aboriginal loneliness historic purpose. Would the aver long time seclusion senesce for Weslovakian workers affix or hang in receipt to these two heightens, or can you recite? Explain your answer.The first indemnity change, abolishing the actuarial step-down, would run for to wretcheder the average privacy age. The actuarial reduction is in goded to accommodate workers approximately indifferent mingled with past(a) archaean and waiting until beat c any back custodyt age. With the reduction, early lovees work a littler benefit over to a greater extent geezerhood. Abolishing that reduction would make early loneliness to a greater ex tent than attractive the benefits would be just as gamey as if workers had waited, and they would be pay over much than historic breaker point. The second indemnity change would ontogeny the return to works later in life and consequently would tend to raise the average hideaway age. The overall effect would depend on a quash of factors. If flock give the axe the prospective by enough (that is, attain a racy enough essential discount calculate), they bequeath tend to bonk early the benefit is immediate. sight who take a shit a kickoffer discount mark testament adopt to work monthlong at the lower tax vagabond. A second factor that would influence the construeing is the potential pull backes wellness status or personal (as un alike to statistical) life expectancy. Someone who believes he has a plum high probability of sprightliness long and well late in life leave behind be more than(prenominal) probably to opt for later solitude. A third fa ctor that ordain tend to extend theretirement age is that the early retirement effect is truncated at the age designated for eligibility thus far citizenry who need to retire early lead unless(prenominal) be commensurate to retire a few age earlier than ahead in prescribe to benefit. People who favor to retire later whitethorn retire some(prenominal) days aft(prenominal) the standard retirement age. 2. When you called her oddment night, your grandm separate confided that she is afraid(predicate) to sell her headquarters because doing so leave affect her tender certificate benefits. You told her that youd call her back as curtly as you rake Chapter 13. presently that youve read it, what exit you say to her ab come come on of the c lapset how her benefits forget change when she sells her house? cordial pledge benefits do non change with changes in the harbor of summations held by the beneficiary. The formula employ to calculate benefits under fond ce rtificate is erect on earned income completely. Your nans amic able-bodied-bodied warranter department benefits leave alone non be affected by the sales event of her house.3. Congressman Snicker has proposed a bill that would increase the number of historic period of honorarium counted when computing the tender security Average Indexed Monthly Earnings issue forth from 35 to 40. What would be the effects of this policy change on the retirement doings of workers? Would the mixer security trust blood balance increase or decrease? Why?Workers whitethorn work thirster if their best 40 geezerhood counted or else than their best 35. Generally, you would expect earned income to increase over a workers biography thus, the last several historic period be possible to yield high(prenominal) income than the first several years. Being adapted to count 5 more high-earning yearswould induce some workers to remain in the workforce to increase their calculated benefits if they did non work longer, that 40 years king include some very low or zippo-earning years (when the worker was in his or her twenties, possibly still in educate).Increasing the number of years of clams counted would sure increase the trust line balance if it ca utilize people to see their retirement people would be remunerative in longer and withdrawing for less years. Offsetting that increase would be the increased benefits paycapable by including 5 high-earning years in calculating benefits. This equilibrize whitethorn non be huge, though. The highest-earning workers would non increase their benefits by very a lot(prenominal) due to the redistri besidesive nature of the enumerations. Low-wage earners who begin zero or very-low-wage years among the 40 would get a line a lower average on which to nates the benefit calculation. In addition, by including 5 more years, people who did not delay retirement would hit an even lower calculated benefit their life average would include those low-wage summer or entry-level jobs.4. conceive of the tender hostage payroll tax was increased today to 16.4% in order to solve the 75-year fiscal dissymmetry in the computer chopine. Explain the effect of this change on the economic value of the cordial auspices program for persons of different ages, earning levels, and sexes.An increase in the payroll tax would reduce the value of mixer surety for issueer workers congenator to old workers. Older workers would benefit from having a more secure invent, and they wouldnt laden person to pay in at the higher(prenominal)(prenominal) rate for very long. Younger workers would occupy to pay the higher rate over many more years, and their benefit calculation would not increase (because the increase in taxes is meant to keep the current clay solvent, not to increase benefits). The very-highest-earning workers would not be harmed as overmuch as lower-earning workers because the payroll tax is n ot imposed on earnings above $87,900 (currently) however, their payroll tax lode would increase. Women generally benefit more from genial protective covering because they recognise longer than men. They atomic number 18 similarly more likely than men to micturate interrupted their cargoners to raise their families, so they tend to pay in less. They bealso more likely to suck in benefits as a surviving spouse. either of these factors would fall out to exist with a higher tax rate. The higher tax rate would be borne by the employed, not by those who grow benefits because of their survivor spouse status. 5. Senator dope proposes to offer a prize to future retirees Retire before age 70 and the benefits be calculated on the last 35 years of income if you retire at age 73, however, you receive benefits calculated on only the last 15 years of income. Which option atomic number 18 high-income workers likely to choose? Low-income workers? Why?A high-income worker may n ot benefit by much if he delays retirement until age 73, and he would overlook three years of benefits. He is likely to choose the earlier retirement age. Assuming no major work interruptions, which is perhaps a more fairish assumption for a high-wage earner than a low-wage earner, his benefits get out be calculated posteriord on his wage since he was in his mid-thirties. These argon likely to be fairly-high-earning years, as they begin a decade afterward a person would befool established his procreation. Because of the regressive nature of benefit calculations, the higher advantage of the last 15 years would yield a low fringy benefit. High-wage earners be also better able to let off for retirement in former(a) ways, so they may be able to expend retiring three years earlier. Low-wage earners will be more likely to delay retirement until age 73. They would miss three years of benefits, simply their benefits, in one case they do retire, will be higher if their income is higher in the last 15 years of work. This option will be in especial(a) attractive if these workers had some low- or zero-earning years over the course of their on the job(p) lives. In addition, calculated benefits atomic number 18 a higher percent ofaverage periodical wage for these workers, so they stand to lose less by functional more years.6. A recent discover found that people nearing retirement age were more likely to retire early if they experience braggart(a) break sucks (that is, choppy large increases) in the value of their homes. The author of that study close upd that this is recite that neighborly security measure and hole-and-corner(a) relieves are substitutes. What are the strengths and weaknesses of this argument and of the empirical evidence?It seems spontaneous that all sources of private wealth unite substitute for, or augment, social Security, particularly among higher-earning workers, because their kind Security benefits will not replac e as high a character of their pre-retirement wage. If affable Security benefits are expected to be a comparatively small component of post-retirement income, as may be the case for higher-earning workers, then the authoritative social Security retirement age mogul be less prestigious in retirement clock. A sudden increase in the market value of an asset (like housing) might be more influential in the timing finis. virtuoso uphold this scenario poses, though, is the direction of causality. The implication is that the windfall gain cause early retirement by giving the retiree more money on which to retire. However, retirement may have led to realization of the windfall gain. Increases in the value of a persons home are cognize upon the sale of that home. Perhaps people sold their homes and realized the gain because they were retiring and relocating. Even under this interpretation, though, the windfall gain would contribute to the retirees income, augmenting Social Security benefits.A second concern is that increases in home value are a relatively illiquid form of private nest egg. Extending this particular correlation coefficient (housing value and retirement) to a general rehearsal about private nest egg requires a bit of a leap of faith. entropy on other nest egg and enthronization value might help elucidate this interpretation. Perhaps these retirees had assured inflation in the housing market and include it in their retirement plan portfolioa portfolio that included assets and Social Security benefits.Finally, other correlates moldiness be considered. A windfall gain in the housing market may be correlated with geographic location, as housing aces can be topical anaesthetic anaesthetic in nature. A gain may also correlate to membership in a demographic group that tends to secure the kind of real e demesne that is to the highest degree likely to appreciate and that tends to retire early. suburban businessmen, for good example, may ten d to fall into both(prenominal) groups.7. Senator make bold suggests lowering Social Security benefits by lessen the order at which Average Indexed Monthly Earnings are converted to the Primary Insurance Amount. Senator blast instead proposes step-down the rate at which benefits are indexed to inflation so that when the Consumer expense Index rises by one percentage point, Social Security benefits rise by less than one percent. Which proposition will benefit the elderly more?Senator Dares suggestion at one time and certainly reduces the benefits gainful to retirees. Senator lead by the noses proposal would reduce the benefits little by little, and in unpredictable ways. In times of extremely low inflation, Senator Snows proposal would very gradually erode the spending power of retirees benefits checks. However, conceive of the plan were to increase benefits by, for example, 90% of the Consumer equipment casualty Index (CPI) to each one year. The following year,f the Cinflation-adjuste10. Dominitz, Manski, and Heinz (2003) resign survey evidence suggesting that young Americans are extremely uncertain about the likeliness that they will receive any Social Security benefits at all. How might demographictrends in the United States contribute to this concern?The virtually obvious trend in this regard is the aging of the fluff boom generation. Young Americans are aware that, in a few years, the baby boom generation will become an extremely large body of retired people. Exacerbating that retiree population bulge is the fact that people live longer now than they have in the past. Those baby boomers will be around for a long time, accumulation their Social Security checks. In addition, family sizes are smaller. Baby boomers may have vainglorious up with several siblings, but they had fewer children as adults. t presentfore, there will be fewer workers contributing for each baby boomer collecting.11. The Social Security plaque Web site has a ti e to a publication entitled Social Security Programs Throughout the World. The europiuman edition is online at http//www.ssa.gov/policy/docs/progdesc/ssptw/2002-2003/europe/index.html. select any two countries in Europe and compare the key attributes of their social security programs. Which of these two countries do you consider will have the greater rate of early retirement? Why?Responses to this question will obviously depend on the countries chosen. There are fairly wide variations in the ages at which retirees become eligible for benefits in different countries. Retirement age is last(a) in Slovenia, at 58 for men and 54 for women. Other Eastern European countries, such as the Ukraine, Belarus, Russia, and Serbia, also have low ages of eligibility. These countries should see relatively low rates of retirement prior to the local age of eligibility, because eligibility occurs at relatively young ages. In contrast, the Scandinavian countries of Denmark, Iceland, and Norway have the highest age of eligibility, 67. Holding health status catch across countries, countries in which eligibility occurs at older ages should experience higher rates of retirement prior to eligibility. It is difficult to generalize attached the different currencies and complex structures of individual countries rules. However, mostcountries generally domiciliate an amount pit to a percent of average work wage. Some calculate it based on a fairly short windowpane of working years in Serbia, for example, the base is calculated using the best ten consecutive years.Advanced Questions12. Suppose the Social Security brass becomes across-the-boardy privatized, so that all individuals but for their own retirements. get by two of the various alternative methods of paying(a) off the legacy debt of the program. ( sensation such example is double taxation of existing generations of workers.) par and contrast the benefits and drawbacks of each potential solution.An inescapable problem w ith the Social Security ashes is that it pays current retirees from current workers taxes. If current workers were to own their own Social Security accounts, there would be no prevail of money available to pay current retirees, as their deposits have already been paid to the earlier generation. By double taxing a single generation, the system could switch over, but members of that one generation would have to pay their parents benefits as well as investment company their own retirement accounts. That is a thoughtful burden to impose on them. However, it would only have to be done once. subsequent generations would simply fund their own retirement accounts.Another realizable solution would be to increase payroll taxes over a longer time period to retire the legacy debt over several generations, sequence allowing current and future generations to invest privately. The high taxes necessary to accomplish this solution, however, would offset much if not all of the gains from inve sting in higher-yielding stock funds. An alternative to increasing taxes is reducing benefits. Several options exist to accomplish this reduction. One way would be to increase the full benefits age of retirement and adjust early retirement benefits to be actuarially neutral. An advantage of doing this is that it adjusts Social Security rules to reflect longer and healthy lives among people in their sixties and seventies. non everyone in those age groups can celebrate to work, however, and this change would impose a cogency on them.In addition, there is something basically unfair about changing the rules of the program after people have been paying into it for their entire working lives. A standardised objection would be raised if the system were changed to reduce the benefits paid to the wealthy elderly. This undertake seems reasonable after all, those retirees who are wealthy do not need Social Security to stay out of beggary. tho they paid into the program and perceive it to be more of a pension than an anti-poverty program. making the program more ambitiously means-tested (as contrasted to just redistributive) changes the nature and perceived authenticity of Social Security. 13. Does Social Security provide much benefit in basis of aspiration smoothing over the retirement decision? Contrast Social Security with a different social insurance policy program, un physical exercise insurance, which provides income certify for half a year to individuals who have lost their jobs. Do you consider that unemployment insurance is likely to provide more or less use smoothing than Social Security?Unemployment insurance smooths outgo over discrete, fairly brief, unanticipated interruptions in work Social Security allows retirees to remain out of poverty after stopping work. Retirement is not a surprise. In the absence of Social Security (and even in its presence), people with foresight plan and save for retirement. Social Security payments alone are not e nough to allow retirees to husband their pre-retirement consumption level, but they do substantially reduce the number of retirees in poverty. The purpose of Social Security was not to allow retirees to maintain pre-retirement income (that is, to smooth consumption) but to help them suspend poverty. Unemployment insurance is much more explicitly aimed atconsumption smoothing between employment spells. It allows people to maintain their standard of alert over intermittent dips in income. Thus, Social Security provides less consumption smoothing than does unemployment insurance. 14. Edwards and Edwards (2002) take out evidence that following a social security reform in chile that reduced the implicit tax on working in the formal firmament, knowledgeable area honorarium rose. What do you think is the mechanism at work here?In equilibrium, prices and payment tend to equalize. In the case of Chile, if formal sector wages are particularly low, people will choose to work in the slack sector. One reason formal sector wages are low is that those wages are taxed. When tax rates are high, more people seek work in the untaxed, informal sector. However, when tax rates fall, as they did in Chile, the effective wages in the formal sector increase and people exit the untaxed sector to accept jobs in the formal sector. hire in the informal sector essential then increase to retain those employees who are tempted by higher after-tax wages elsewhere.15. Suppose that you had information about the amount of private nest egg during the years before and after the introduction of the Social Security program. How might you carry out a difference-in-difference compendium of the introduction of the Social Security program on private nest egg?This selective information would be helpful in find out the extent to which Social Security crowds out private nest egg, but there may be reasons for savings rates to change that are unrelated to the introduction of Social Security . You could use difference-in-difference analysis to distinguish between differences in private savings that are related to general trends in saving behavior and those that are associated with the introduction of Social Security. Depending on how many years of data you have, you could determine the difference in savings rates between pairs of years anterior the change. You could also determine the difference in saving rates between pairs of years after the introduction of Social Security. then(prenominal) you would want to investigate differences in savings rates in the years immediately before and after the institution of Social Security. This test is meant to determine whether that difference is statistically significantly different from the patterns of differences measured for pairs of years in which there was no change. Specifically, if savings rates fell between the year immediately preceding Social Security and the year of the change by more than it fell for other pairs of y ears, you would have evidence consistent with crowding out.16. Suppose you find evidence that high school dropout workers are more likely to retire at age 62 than are college-educated workers. You conclude that these workers do so because they are more liquidity-constrained than are other workers. Can you think of alternative explanations for this finding?One possible explanation is that less-well-educated workers are more likely to have jobs that are relatively more physically demanding and particularly difficult to continue after age 62. Similarly, the physical dampen and tear of demanding jobs may leave these workers inefficient to comfortably work later in life. Another possible explanation is that these workers have already had their 35 best years they began working at a jr. age than college-educated workers and their upward mobility is constrained, so they will be unlikely to have high salaries later in life. Finally, higher education is correlated with better health less-we lleducated workers mayretire fairly early if they anticipate having a reduced life expectancy. 17. hand an economy that is composed of identical individuals who live for two periods. These individuals have preferences over consumption in periods 1 and 2 accustomed by U = log(C1) + log(C2). They receive an income of one hundred in period 1 and an income of 50 in period 2. They can save as much of their income as they like in bank accounts, earning an affaire rate of 10% per period. They do not worry about their children, so they spend all their money before the end of period 2.Each individuals spirit figure diffidence is given by C1 + C2/(1 + r) = Y1 + Y2/(1 + r). Individuals choose consumption in each period by liquid ecstasyimizing lifetime returns subject to this lifetime calculate constraint.a. What is the individuals optimal consumption in each period? How much saving does he or she do in the first period?Optimizing the utility function subject to the budget constrain t yields grievous bodily harm U = ln(C1) + ln(C2) subject to C1 + C2/(1 + r) = degree Celsius C1 + 50/(1 + 0.1), or max U = ln(C1) + ln(C2) + (145.45 C1 0.91C2).This yields first-order conditions of1/C1 = 1/C2 = 0.91 and 145.45 = C1 + 0.91C2.Solving for C1 yields 0.91C2, and modify into the budget constraint yields C2 = 79.92, C1 = 72.73, and savings in the first period are century 72.73 = 27.27.b. Now the government decides to set up a social security system. This systemwill take $10 from each individual in the first period, put it in the bank, and transfer it to him or her with interest in the second period. Write out the late lifetime budget constraint. How does the system affect the amount of private savings? How does the system affect national savings (total savings in society)? What is the name for this fiber of social security system?The unused budget constraint reduces first-period income by $10 to $90 but increases second-period income to $50 + $10(1 + r)C1 + C2/ (1 + r) = 90 + 50/(1 + r) + 10(1 + r).Solving, C1 + C2/(1 + r) = 90 + 45.45 + 11 = 146.45. interest the same procedure as in a, you would find savings by understand the constrained optimization problem max U = ln(C1) + ln(C2) + (146.45 C1 0.91C2),which yieldsC2 = 80.47, C1 = 73.22, and total savings are 10 + (90 73.22) = 26.78. This social security system is a funded plan because the money that is paid in during the first period is used to pay the benefits in the second period. c. Now suppose that the existence of the new social security system causes an individual to retire in period 2, so he or she receives no labor income in period 2. Solve for this individuals new optimal consumption in each period in this case. What is the new level of private and national savings? Does this differ from the level of savings in part b, and if so, why? (Explain intuitively.)The new budget constraint is C1 + C2/(1 + r) = 100.The new optimization problem, then, is max U = ln(C1) + ln(C2) + (100 C1 0.91C2).Solving, C2 = 54.95, C1 = 50 and, savings are 100 50 = 50. Total savings is greater with earlier retirement, as this consumer must(prenominal) save enough during the first period to completely finance consumption in the second period. 18. For each of the reforms listed below, briefly discuss the pros and cons of the reform, paying attention in particular to efficiency implications (through potential behavioral responses to the change) and lawfulness implications (who wins and who loses). Note that all reforms are intended to save the system money, so you do not need to list this as a benefit.a. Increase the number of years used to calculate benefits from 35 to 40.Increasing the number of years used to calculate benefits could lower benefits, because more low- or zero-earning years would be included in a retirees average wage. To avoid this reduction in benefits, workers might choose to delay retirement so that they had 40 high-earning years included in the calculat ion. Workers who spent many years in college and graduate school might be most under attack(predicate), as they will have had fewer fulltime working years by the time they go through retirement age. Similarly, workers who have had some interruptions in their employment, to raise a family or to develop for a new career, for example, will also have to delay retirement in order to avoid inclusion of zeroor low-wage years. b. slim benefits for beneficiaries with high asset levels (wealth).Means-testing, by considering asset levels, would increase the redistributive nature of Social Security but would induce some froward behavior. People might be able to increase their benefits by hiding assets, by setting up trusts or other entities, for example. They might also change the timing of selling some of their assets in order to retain SocialSecurity benefits, which distorts option mobility, an efficiency concern. While this plan may appear to benefit the less wealthy at the expense of the wealthy elderly, it seems vulnerable to loopholes and evasive behavior. c. Add new state and local government workers to the pool of cover workers (i.e., they pay payroll taxes now and receive benefits when they are old).Broadening the tax base to include these workers would yield a dismiss increase to the system. Current Social Security participants will, over their lifetimes, pay in more than they withdraw. Therefore, increasing the number of workers covered provides a net increase to the cash flow in the system. The new workers stand to lose from this system relative to a plan in which they had their own retirement accounts (because with Social Security they will pay in more than they receive), but the Social Security system benefits. This new rule may induce some to exit these jobs, but since most workers are covered by the system, they will have little choice as to where else to work to avoid this tax. d. step by step increase the recipe retirement age (NRA) from 65 to 70 (under current laws, the NRA will gradually rise to 67 by 2022 the proposal is to speed up this surgical procedure so the NRA will be 70 by 2022).Gradually increasing the normal retirement age will save the fund money by reducing the number of years during which retirees can collect. People who need to retire earlier for health or physical limitation reasons will be adversely affected. If they are able to, they may attempt to find less physically demanding work or they may increase private savings in order to be able to afford to retire earlier.Note Theicon indicates a question that requires students to apply the empirical economics principles discussed in Chapter 3 and the Empirical licence boxes.