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Suppose you are 20-year old and the government offers you the following deal: At your retirement (at 70), the government will pay you $1 less
Suppose you are 20-year old and the government offers you the following deal:
- At your retirement (at 70), the government will pay you $1 less in social security benefits;
- In return, government will reduce the payroll tax you pay now by 8.7 cents in order to finance the social security program.
Assume only two-life periods current (now) and the future , you are a risk averse rational citizen (prefers more to less), and that the social discount rate (interest rate) is 5% for the foreseeable future.
- Would you accept the deal? Why or why not?
- What is the impact of this program on the government net obligation (budget) now and in the future?
- What if you believe that the social discount rate was 7%, instead of 5%, would you accept the deal? Why or why not?
- What if the government will reduce payroll tax today by only one half (i.e., 4.35 cents), what is the impact in the current period? In the long run?
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