A middle-income worker with a dependent spouse older than the normal retirement age will retire in January 2004. In the year prior to retirement, her gross monthly earnings are $1,500. Her Social Security pension benefit is $1,000 per month. Prior to retirement, she was subject to total taxes on her labor earnings amounting to 20 percent.

Calculate her gross and net replacement rates. Suppose the cash value of Medicare subsidies that she expects to receive during retirement amount to $2,000 per year. Recalculate the replacement rates including the Medicare benefits.