From the way we analyze our supply and demand tax diagrams (earlier lectures), we see that the suppliers of labor (employees) would be totally responsible for the paying the tax, despite the fact that the tax was levied on employers. 7. The worker will have earned a total of approximately $107k. She will have paid approximately $6634 in taxes. 8. Initially, a worker covered 20% of the social security benefits for a retired person. In the future, the same worker would be responsible for paying for half of a current retiree's benefits. If benefits remained the same, then each worker's tax burden would increase massively. If tax rates remained the same, and benefits as well, then the number of beneficiaries would have to be reduced, say by increasing the retirement age to 75 years (or more), or by excluding from the beneficiaries those who have earned or saved a lot of money during their working years. More Questions (suggested possible answers right below, but please try to answer the questions before looking) 9. One argument is that work disincentives in the system of Social Security have seen the number of persons in the program increase dramatically. The argument is that knowing that you will get a government hand-out later in life, you stop working as early as possible and save less in the process. Assuming this to be the case, do you have any ideas about what incentives could be put in place to reverse, or at least slow, this trend? 10. This is a trick question: What would you think might be the economic reasoning behind the idea that firms in industries with higher levels of turnover be required to pay more in unemployment insurance payments? 11. Do you think that when you retire there will still be Social Security? If so, do you feel that benefits will be at present levels or tax rates will have increased? Finally, has our discussion about Social Security changed your ideas regarding your own personal savings strategy for your retirement? Answers to Essay Questions 9. Increasing the retirement age would see fewer people in the program. Other solutions include removing the survivor's benefits and introducing a more stringent wealth threshold that says that those persons with a certain wealth are not allowed to receive benefits. Perhaps you can think of other solutions as well. (Some would like to get rid of the Social Security Program entirely and end "laziness" once and for all. - this, of course is an extreme view, but some "libertarian, right-wingers" types do believe this.) 10. The higher tax rate on these firms in unstable industries or firms that show unstable market performance is in fact a subtle penalty for potential mismanagement or misuse of economic opportunity. It is a tax code way of inducing firms to try to remain consistently profitable so they do not have to consider shedding (a.k.a, canning or giving the boot to) workers on a cyclical basis. 11. This is a personal question but, recently the former chairman of the Federal Reserve, Alan Greenspan, has warned that benefits will need to be reduced for future recipients or that there will need to be huge increases in taxes. Many working adults today are changing their saving patterns because of this outlook. Remember the 10-15% savings out of each paycheck rule! Medical Care Issues As we have discussed, medical care is one of the most sought-after and expensive commodities in our economy. Just about everyone wants and needs (sometimes desperately) this commodity at some point. At times we are willing to pay just about anything to obtain it. The market for medical care is subject to all types of market-imperfections such as Adverse Selection and Asymmetric Information. It needs to be regulated and it also needs massive insurance schemes so that people can afford it. Thus, adequate medical care becomes an issue for Social Insurance run by the government, and as such becomes a big part of the government budget. If you are interested, you can read to text (Chapters #9 and #10). These are detailed, descriptive, and interesting chapters on the medical care issue. Not too difficult. I believe that a good read of the material will be sufficient. But, with our time constraints and missing four lectures, what I prefer that you know are the fundamental issues facing a national health care, e.g. adverse selection, relatively inelastic, but growing demand, etc. and some of the health care reforms that have been discussed on a political level. (12) Here are some terms you will want to be familiar with - i.e. be able to define and describe their importance to Public Economics. Asymmetric Information in the Health Care Market Adverse Selection in the Health Care Insurance market Medicare Paternalism in the provision of Health Care Commodity Egalitarianism in the provision of Health Care (13) Now here is a question that will show you how insurance companies calculate their loss-payouts. Simple, but instructive: Suppose there are two drivers, Jermaine and Janet. Jermaine is not a very safe driver. In fact, there is an 80% chance that he will have an accident within the next year. Janet is a relatively safe driver. Her chances of having an accident in the next year are only 20%. If Jermaine is involved in an accident, he will cost the insurance company $30,000. If Janet is involved in an accident, she will only cost the company $5,000. What is the expected pay-out that the company can expect from insuring these two? (Answer below) (14) We have discussed the aging of the American population. This means that costs of medical care are going to skyrocket. More people needing care, more expensive procedures being performed. From your perspective right now, do you think it may be a good idea to reduce medical benefits to the elderly, or should we just raise taxes and be done with it? Do you think that your view on this subject may change as you get older? (15) There appears to be general agreement that Medical care in general and the Government Medicare Program in particular carry Positive Externalities. A government subsidy to the medical profession could get the economy (the market for medical care) to the socially efficient level of output with an affordable price for consumers. Construct an externality diagram and show the size of the subsidy. This subsidy will have to come from taxes or general revenues. Justify the subsidy not only in terms of externalities to the community but also in terms of its benefits to the companies in the medical care industry. Suppose that the subsidy is financed from a tax on Beer. Show the loss of welfare to the beer market, and argue against both the subsidy and the tax on the basis of the First and Second Fundamental Theorems of Welfare Economics. Answer to (13) - The expected payout is 30,000(.8) + 5,000(.2) = $25,000. Answer to (14) - This is obviously a personal question (very normative). But face it, unless there is some sort of restructuring of the medical system, it may be necessary to reduce benefits, increase premiums, or limit coverage of certain types of care. All of this would happen over time. One solution may lie in greater emphasis on preventative care against smoking and obesity as well as teaching the benefits of exercise and so forth. BUT, in a "free" society like the USA, there are still political forces that believe that the government has no right to tell people how to be healthy.