Essay on public finance and policy solution gruber

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Solutions and Activities to CHAPTER

13

SOCIAL SECURITY

Questions and Problems
1. The government of Westlovakia has just reformed its social security system. This reform changed two aspects of the system: (1) It abolished its actuarial reduction for early retirement, and (2) it reduced the payroll tax by half for workers who continued to work beyond the early retirement age. Would the average retirement age for Weslovakian workers increase or decrease in response to these two changes, or can you tell? Explain your answer.

The first policy change, abolishing the actuarial reduction, would tend to lower the average retirement age. The actuarial reduction is intended to make workers approximately indifferent between
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This offset may not be huge, though. The highest-earning workers would not increase their benefits by very much due to the redistributive nature of the calculations. Low-wage earners who have zero or very-low-wage years among the 40 would have a lower average on which to base the benefit calculation. In addition, by including 5 more years, people who did not delay retirement would have an even lower calculated benefit: their lifetime average would include those low-wage summer or entry-level jobs.
4. Suppose the Social Security payroll tax was increased today to 16.4% in order to solve the 75-year fiscal imbalance in the program. Explain the effect of this change on the value of the Social Security program for persons of different ages, earning levels, and sexes.

An increase in the payroll tax would reduce the value of Social Security for younger workers relative to older workers. Older workers would benefit from having a more secure plan, and they wouldn’t have to pay in at the higher rate for very long. Younger workers would have 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 system solvent, not to increase benefits). The very-highest-earning workers would not be harmed as much as lower-earning workers because the payroll tax is not imposed on earnings above $87,900
(currently); however, their

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