UT ECO 321 - Problem Set 4 Ch13-16_Solution (8 pages)

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Problem Set 4 Ch13-16_Solution



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Problem Set 4 Ch13-16_Solution

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Pages:
8
School:
University of Texas at Austin
Course:
Eco 321 - Public Economics

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Economics 321 Public Economics Prof Marika Cabral Fall 2017 UT Austin Problem Set 4 Solution 1 Ch 13 Consider two households the Smiths and the Joneses The Smiths are a two earner household both Dick and Jane Smith work and earn the same amount each year The Joneses are a one earner household Sally Jones works while Harry Jones is a homemaker and stay at home dad Use the way spousal benefits are treated in the Social Security system to address the following a How do the relative rates of return on Social Security payroll taxes compare for the two families All else equal the Joneses will get a better return on their payroll tax contribution This is because only Sally pays in to the Social Security system but Harry is still entitled to a 50 spousal benefit and a full spousal benefit if Sally dies first Both the Smiths had payroll taxes withheld and neither gets a free benefit like Harry This is complicated by the progressivity of the system for converting AIME into PIA however b After the kids go off to college Harry considers taking a small part time job How might the Social Security system of taxes and benefits affect his decision Harry will have to pay payroll taxes if he works but his work is unlikely to increase his net Social Security benefit since he will be unlikely to earn enough to have a large enough personal Social Security benefit to make it worth taking his own benefit instead of half of his wife s The payroll tax will tend to discourage him from working c Suppose that both families have retired and have started to receive Social Security benefits By what fraction will these benefits fall for each of these families if one member of the household dies What implications does this have for relative consumption smoothing in these two households Total Social Security income will fall by 50 for the Smiths since the two Smiths originally had equal benefits and one of the two benefits is lost upon death Total Social Security income will fall by only 1 3 for the Joneses Prior to the death they received 150 of Sally s benefit Sally s benefit plus a 50 spousal benefit After death the survivor receives only 100 of Sally s benefit The steeper drop off for the Smiths may make it harder for them to consumption smooth 2 Ch 13 Lalaland is an extremely stable country with 200 000 residents half of whom are young workers and half of whom are retirees At the end of each year the 100 000 retirees die the 100 000 young workers retire and 100 000 new young workers are born Workers earn a total of 5 000 for the year Lalaland operates a pay as you go social security system where each current worker is taxed 2 500 and the revenue collected is used to pay a 2 500 pension to each retiree The neighboring



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