The US Social Security system provides workers with the option of retiring at age 62 and having a lower monthly Social Security benefit or waiting until age 66 and receiving their full benefits.This year, an individual who retires at the age of 62 would receive $2265 per month, while an individual who retires at the age of66 will receive $3011 per month. Each year, the benefit level changes with inflation. For example, next year, the payment to someone who retires at 62 would be $2265 (1+inflation rate).

A.You are advising a family friend who just celebrated his 61st birthday. Assume that the appropriate discount rate is 6%, inflation is expected to be 2.5% per year in the foreseeable future, and that the person you are advising expects to live until age 80.If no changes are expected to occur in the program, would you suggest him to retire at 62 or wait until 66?

B.Policymakers are concerned about the long-term variability of Social Security and are considering dramatic changes to the program.Social Security currently raises $1,003 billion per year in income and pays $1,000 billion per year in benefits. With the retirement of the Baby Boomer generation and longer life expectancy in general, benefit levels are expected to increase at the rate of 3.5% per year(2.5% inflation plus 1% annual increase in the number of beneficiaries). At the same time, income (FICA taxes) is expected to grow only at the rate of inflation (2.5%).Currently, the Social Security Trust Fund Reserves have a balance of $2,895 billion. Using a 35 year forecast period, estimate the solvency of the Social Security system.That is, will there be sufficient funds to cover the Social Security payments in 35 years? Assuming a discount rate of 6%.

C. To bring the system to solvency and keep a balance of at least $1,000 billion (in present value), by how much would they have to modify benefits this year? That is, what should be the maximum payment level in the next year?