CHAPTER 9 – Social Insurance I:Social Security and Unemployment InsuranceMultiple-Choice Questions1. A pay-as-you-go system meansa) you pay for your dinner as you go to the table to eat.b) current working citizens pay for current retired citizens.c) there is no need for taxes since current workers pay for current retirees.d) retirees are paid from accounts that have accumulated with interest over theirworking lives.e) all of the above.2. Asymmetric information generally impliesa) information between parties is not equal.b) all parties are fully informed.c) information is costless.d) information is too costly to transmit.e) a and c.3. A fully funded plan requiresa) you to pay for your dinner as you go to the table to eat.b) current working citizens to pay for current retired citizens.c) no taxes since current workers pay for current retirees.d) retirees to be paid from accounts that have accumulated with interest over theirworking lives.e) all of the above.4. An actuarially fair return meansa) returns on investments are indexed to the stock market.b) returns on investments have to be positive.c) benefits received, on average, would be equal to the premiums paid.d) premiums for insurance are generally paid by the government.e) none of the above.5. When workers save less during their working lives due to the fact that they have beenpaying Social Security taxes, this is known asa) the Social Security effect.b) the wealth substitution effect.c) the bequest effect.d) the life cycle hypothesis.6. The Social Security earnings testa) applies only to workers between 65 and 69 years of age.b) was redesigned in the 1980s to include foreign workers.c) has a tax rate of no more than 16.9 percent.d) does all of the above.7. Social Security pension benefits area) subject to income taxes for those with certain income levels.b) nontaxable for all retirees.c) subject to state, but not federal, income taxes.d) subject to capital gains taxes.e) all of the above.8. The Social Security Administration has which program(s) to administer?a) disability paymentsb) health benefitsc) pensionsd) survivors' benefitse) all of the above9. The percentage of unemployed Americans that actually collects unemployment insurancebenefits isa) 9 percent.b) 18 percent.c) 25 percent.d) 33 percent.10. An earnings test as it relates to Social Security impliesa) benefits are reduced by some predetermined amount for those who have notreached normal retirement age.b) the amount of money earned during the working life of an individual determinesthe amount of benefits received.c) family earnings determine the amount of benefits received.d) all of the above.11. Social security taxes are projected to fall short of benefits starting ina) 2005.b) 2010.c) 2016.d) 2020.e) 2030.12. Social insurance can be justified on the grounds ofa) adverse selection.b) decision-making costs.c) income distribution.d) paternalism.e) all of the above.13. The retirement effect isa) when people retire later than they normally would have due to Social Security.b) when people decide not to retire at all because of problems with Social Security.c) when people retire earlier than they normally would have due to Social Security.d) when people save less for their retirement due to Social Security.e) none of the above.14. The gross replacement rate isa) the proportion of pretax earnings replaced by unemployment insurance.b) a rate of employment in key sectors of the economy.c) the percentage of each paycheck that is removed for unemployment insurance.d) the rate that tax receipts are used to cover tax expenditures.e) none of the above.15. A current worker may save more towards retirement so that he or she will have more toleave his or her children later. This altruistic motive is known as thea) altruism effect.b) bequest effect.c) income effect.d) savings effect.Discussion Questions1. Suppose in the market for labor that the labor supply curve is perfectly inelastic. Thiswould mean that the supply curve is vertical. Furthermore, suppose that demand is normal and downward sloping. Your textbook has explained that unemployment taxes are paid entirely by the employer (demanders). Who actually pays the tax in the scenario described above?2. Suppose that a fresh college grad gets a new job initially paying $20,000 a year. Theemployee 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 and Medicare taxes if the tax rate is 7.45 percent?3. Suppose that the ratio of retirees to working citizens is currently 1 to 5, meaning thatthere are 5 working people for every retiree. Suppose that in thirty years the ratio will change to 1 to 2. If benefits remain the same, what will happen to the tax rate assuming retirees are provided benefits in a pay-as-you-go system? How much would benefits decrease if the tax rate remained the same?4. A worker within the middle-income class is preparing to retire. In the year before heretired, his gross monthly earnings are $2,000. His Social Security benefits will be $1,200 per month. Before he retired, his income was subject to a tax of 25 percent. Find his before-tax and after-tax replacement rates.True/False/Uncertain Questions1. Having unemployment insurance available makes people work less.2. The percentage of retired older workers has decreased dramatically since the introductionof Social Security.3. Social Security benefits have played an important role in the improved economic statusof the elderly over time.4. Unemployment taxes are collected from both employees and employers.5. A pay-as-you-go system of financing Social Security is not as good as a fully fundedsystem.6. A worker can begin receiving benefits as early as age 62.7. Social Security is used to redistribute income.8. Average indexed monthly earnings are derived from the worker’s earnings history anddetermine the primary insurance amount (PIA).9. Having a Social Security program makes people less inclined to save for their ownretirement.10. The gross replacement rate is typically 95% of pretax earnings.Essay Questions1. Work disincentives in the system of Social Security have seen the number of persons inthe program increase dramatically. What incentives could be put in place to reverse, or at least slow, this trend?2. Why should firms in industries with higher levels of turnover be required to pay more inunemployment insurance payments?3. Do you feel that when you retire there will still be Social Security? If so, do you feel thatbenefits will be at present levels or tax rates will have increased? Finally, has this discussion changed your plans regarding your own personal savings for your retirement?Answers to CHAPTER 9 - Social Insurance I:Social Security and Unemployment InsuranceAnswers to Multiple-Choice Questions1. b2. a3. d4. c5. b6. a7. a8. e9. d10. a11. c12. e13. c14. a15. bAnswers to Discussion Questions1. The suppliers of labor (employees) would be totally responsible for the paying the tax,despite the fact that the tax was levied on employers.2. The worker will have earned a total of approximately $106,182. She will have paidapproximately $7,910.59 in taxes.3. Initially, a worker paid for 20 percent of a retiree’s benefits. In the future, the sameworker 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 by approximately30 percent of the cost of benefits. If tax rates remained the same, then benefits wouldneed to fall by approximately 60 percent.4. His before-tax replacement rate would be 1,200/2,000 = 0.6. His after-tax replacementrate would be 1,200/1,500 = 0.8.Answers to True/False/Uncertain Questions1. U2. F3. T4. F5. U6. T7. T8. T9. U10. FAnswers to Essay Questions1. Increasing the retirement age would see fewer people in the program. Other solutionsinclude 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.2. The employees in these industries are more likely to need unemployment benefits in thefuture.3. This is a personal question but, as recently as August 2004, the current chairman of theFederal Reserve, Alan Greenspan, has warned that benefits will need to be reduced for future recipients or that there will need to be increases in taxes. Many working adults today are changing their saving patterns because of this outlook.。