Once again we have a contentious issue: Social Security. Like Unemployment Insurance, this government transfer (expenditure) program began in the Great Depression of the 1930s when Americans were desperate for more economic security. For most people at that time, there was no feeling that the future was bright. Today, I would think that the future is brighter for more people than back then, but the social insurance programs have not only remained in place, but have grown huge over time. They have become an essential part of the American Economy. So why is there a problem? Well, part of the problem lies in the on-going debates (and political arguments) about the proper role of government in a free-market economy. Another part of the problem is one of finance: as the costs of these programs rise, are the taxpaying American People, as a nation willing to foot the bill with more taxes? Or, are will willing to cut back on other federal government programs like aid to education, or research to help develop the best laser-guided bomb? Anyway(s), social insurance programs are here to stay, so the problem of finance will have to be solved eventually. It just a matter of time and of political will. In the meantime we look at some of the basic economic aspects of the social insurance programs and hopefully you will be in a better position to take advantage of these programs should you have to at some point in your lives. So, let's turn to some questions: I don't expect you to know all of the many details about social security for a final exam. However, as examples, you certainly should be familiar with concepts such as Asymmetric information, Adverse Selection, Moral Hazard, Pay-as-you-go, the Social Security Replacement Ratio, The Social Security Dependency Ratio, Government Paternalism, and Fully Funded. I WILL GO OVER ALL OF THESE TERMS IN LECTURE WITH EXAMPLES Short Answer Questions (short answers below, but please try the questions before checking the answers. The questions are not too difficult) 6. Suppose in the market for labor that the labor supply curve is perfectly inelastic. This would mean that the supply curve is vertical. Furthermore, suppose that demand is normal and downward sloping. I mentioned in lecture that that social security taxes are taxes are shared equally by the employer and the employee. Who actually pays the tax in the scenario described above? 7. Suppose that a fresh college grad gets a new job initially paying 20,000 a year. The employee gets a 3 percent raise annually. After 5 years of working, the employee quits and never works again. How much will this worker have earned over her brief working career? How much will she have paid in Social Security taxes if this worker's share of the tax rate is 6.20 percent?