Question
Problem 4: Baby Boom. Suppose that all workers live for two periods (young and old). All workers earn income of $300 when young and $0
Problem 4: Baby Boom. Suppose that all workers live for two periods (young and old). All workers earn income of $300 when young and $0 when old. Suppose there is an unfunded Social Security system. In every period, the government taxes each young agent $50 and immediately pays each old agent an even share of the tax revenue. In addition, suppose there is a baby boom. So where all generations were the same size, now one and only one generation is twice as large as the others. a) When the baby boom generation is young, what are the social security benefits of the older generation as compared to the usual benefits? b) Once the baby boom generation is old, what social security benefits does it receive compared to the usual social security benefits? c) What could the government do to smooth out the effect of the baby boom? Assume that the government has no other funds that it can use to solve the problem.
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