Solutions and Activities to CHAPTER

13

SOCIAL SECURITY

Questions and Problems
1. The government of Westlovakia has just reformed its social security system. This reform changed two aspects of the system: (1) It abolished its actuarial reduction for early retirement, and (2) it reduced the payroll tax by half for workers who continued to work beyond the early retirement age. Would the average retirement age for Weslovakian workers increase or decrease in response to these two changes, or can you tell? Explain your answer.

The first policy change, abolishing the actuarial reduction, would tend to lower the average retirement age. The actuarial reduction is intended to make workers approximately indifferent between
They are also more likely than men to have interrupted their careers to raise their families, so they tend to pay in less.
They are also more likely to receive benefits as a surviving spouse. All of these factors would continue to exist with a higher tax rate. The higher tax rate would be borne by the employed, not by those who receive benefits because of their survivor spouse status.
5. Senator Deal proposes to offer a choice to future retirees: Retire before age 70 and the benefits are calculated on the last 35 years of income; if you retire at age 73, however, you receive benefits calculated on only the last 15 years of income. Which option are high-income workers likely to choose? Low-income workers? Why?

A high-income worker may not benefit by much if he delays retirement until age 73, and he would lose three years of benefits. He is likely to choose the earlier retirement age. Assuming no major work interruptions, which is perhaps a more reasonable assumption for a high-wage earner than a low-wage earner, his benefits will be calculated based on his wage since he was in his mid-thirties. These are likely to be fairly-high-earning years, as they begin a decade after a person would have completed his education. Because of the regres-

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Jonathan Gruber / Finance and Public Policy

CHAPTER 13 / Social Security

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sive nature of benefit calculations, the higher wages of the last 15 years would yield