The chapter states that the elderly population in the U.S. is growing more rapidly than the total population. In particular, the number of the total workers is rising slowly, while the number of retirees is rising quickly. Concerned about the future of Social Security, some members of Congress propose a “freeze” on the program.
a.) If total expenditures were frozen, what would happen to benefits per retiree? To tax payments per worker? (Assume that Social Security taxes and receipts are balanced in each year).
b.) If benefits per retiree were frozen, what would happen to total expenditures? To tax payments per worker?
c.) If tax payments per worker were frozen, what would happen to total expenditures? To benefits per retiree?
d.) What do your answers to parts (a), (b), and (c) imply about the difficult decisions faced by policy makers?
Suppose that your state raises its sales tax from 5 percent to 6 percent. The state revenue commissioner forecasts a 20 percent increase in sales tax revenue. Is this plausible? Explain.
a) If total expenditures were frozen, it means that the amount of money spent on Social Security benefits would remain the same. However, the number of retirees is rising quickly, so the number of beneficiaries would increase while the amount of money available to distribute in benefits would not change. As a result, the benefits per retiree would decrease.
On the other hand, if total expenditures were frozen, tax payments per worker would not change. This is because the funds collected through Social Security taxes are used to finance the benefits provided to retirees. Therefore, if the total expenditures were maintained at the same level, the tax payments per worker would also remain the same.
b) If benefits per retiree were frozen, it means that the amount of money given to each retiree in Social Security benefits would not increase over time. However, the number of retirees is increasing rapidly, so the total number of beneficiaries would still grow. As a result, the total expenditures on Social Security benefits would also increase, even if the benefits per retiree were frozen.
On the other hand, tax payments per worker would not be affected by freezing benefits per retiree. This is because the Social Security taxes collected are used to finance the benefits provided to retirees, and the amount collected from each worker would not change if benefits per retiree were frozen.
c) If tax payments per worker were frozen, it means that the amount of money collected from each worker in Social Security taxes would not increase over time. However, the number of retirees is increasing rapidly, so the total number of beneficiaries would still grow. As a result, the total expenditures on Social Security benefits would continue to rise even if tax payments per worker were frozen.
Similarly, if tax payments per worker were frozen, benefits per retiree would not be directly affected. The benefits provided to retirees are determined based on the funds available from tax payments and other sources, so if tax payments per worker were frozen, the benefits per retiree would likely not change.
d) The answers to parts (a), (b), and (c) imply that there are difficult decisions faced by policy makers regarding the future of Social Security. The rapidly growing elderly population and the slower growth of the total workforce pose challenges to maintaining the current level of benefits per retiree. Policy makers must consider strategies to ensure the financial stability of the program, such as adjusting tax rates, benefit levels, or retirement ages.
Regarding the sales tax scenario:
When the state raises its sales tax from 5 percent to 6 percent, the revenue commissioner forecasts a 20 percent increase in sales tax revenue. This projection may or may not be plausible, and it depends on several factors.
One factor to consider is the elasticity of demand. If the demand for goods and services is relatively inelastic, meaning people do not significantly change their consumption patterns in response to price changes, then the forecasted increase in sales tax revenue might be plausible. However, if demand is elastic, a price increase due to the higher sales tax rate might lead to reduced consumption and lower revenue than expected.
Another factor is the size and growth rate of the state's economy. If the state has a strong and growing economy, a 20 percent increase in sales tax revenue may be feasible. However, if the economy is stagnant or experiencing a decline, the forecasted increase might not be realistic.
It's also important to consider potential changes in consumer behavior. For example, if the higher sales tax rate motivates consumers to engage in cross-border shopping or online shopping to avoid the tax increase, the actual revenue increase may not meet the forecasted percentage.
In conclusion, the plausibility of a 20 percent increase in sales tax revenue depends on various factors such as the elasticity of demand, the state's economic conditions, and potential changes in consumer behavior. A careful analysis taking these factors into account would be necessary to determine the credibility of the revenue commissioner's forecast.