Deck 16: Social Security: Leading Issues and Approaches to Reform

Question 1

According to the wealth substitution effect, workers will save less as they substitute Social Security wealth for other types of wealth that could be financed by saving.

Answer 1

True

Question 2

The rate of return on Social Security shows the average annual net income earned on taxes "invested" in Social Security.

Answer 2

True

Question 3

The ratio of primary insurance amount (PIA) to average indexed monthly earnings (AIME) decreases as income increases.

Answer 3

True

Question 4

If the supply curve of labor is positive, then wage decreases will have no effect on the number of hours worked.

Question 5

In a fully-funded private retirement fund, assets only cover expenses and benefits for a few years.

Question 6

According to Martin Feldstein, Social Security has not had a significant impact on household savings.

Question 7

Projections show the OASI Trust Fund being exhausted by the year 2050.

Question 8

Because Social Security is a risky investment, its real rate of return is below the real rate of return of private investments.

Question 9

Social Security is indexed for inflation, while private insurance is not.

Question 10

If the supply curve of labor is vertical, then wage decreases will have no effect on the number of hours worked.

Question 11

Social Security may result in an increase in the supply of labor because it induces workers to retire at an earlier age.

Question 12

Social Security has significantly improved the financial status of the elderly.

Question 13

The income effect of a wage decrease says that when wages fall, workers must work more hours in order to make up for their wage reduction.

Question 14

According to the wealth substitution effect, Social Security allows parents to leave their children a bigger bequest, thereby reducing the children's incentive to save.

Question 15

Congress probably intended for workers to bear most of the burden of the Social Security payroll tax.

Question 16

Studies clearly indicate that Social Security has had a significant adverse effect on savings.

Question 17

Increasing the retirement age for OASI has been one option suggested for dealing with the exhaustion of the OASI Trust Fund.

Question 18

Most private retirement plans are indexed for inflation and receive preferential tax treatment in the federal tax codes.

Question 19

Social Security provides periodic benefit payments to retirees based on earnings averaged over most of the worker's lifetime.

Question 20

Social Security is financed primarily through the income tax.

Question 21

Which of the following would be most likely to cause savings to fall in response to the payment of Social Security benefits?

A) the induced retirement effect.
B) the wealth substitution effect.
C) the bequest effect.
D) the increased wealth effect.

Question 22

Which of the following statements is False?

A) A cut in Social Security benefits of 12.8 percent for each of the next 75 years would close the 75-year funding gap
B) If started now, the long-run Social Security deficit could be avoided by raising taxes.
C) If all surplus funds in the Social Security Trust Fund were invested in private securities, the long-run Social Security deficit would be eliminated.
D) Increasing the retirement age by four years would help finance pension liabilities.

Question 23

An effect that induces workers to substitute Social Security wealth for other types of wealth that could be financed by saving is:

A) the wealth substitution effect.
B) the induced retirement effect.
C) the bequest effect.
D) the income effect.

Question 24

Which projection of the Social Security long-run deficit is viewed as the best estimate?

A) Alternative II
B) Alterative III
C) Alternative I
D) Alternative IV

Question 25

Studies indicate that Social Security benefits have had:

A) a significant positive effect on savings.
B) a significant negative effect on savings.
C) a significant negative effect on the savings of the current generation of workers, but have had no effect on the savings of past generations of workers.
D) inconclusive results as to Social Security's effect on savings.

Question 26

The difference between Social Security and private insurance is:

A) private insurance is a pay-as-you-go system while Social Security is fully-funded.
B) private insurance is not indexed for inflation, while Social Security is.
C) private insurance benefits are subject to an earnings penalty, Social Security benefits are not.
D) private insurance benefits are treated more favorably in the tax code than Social Security benefits.

Question 27

The tendency of Social Security benefits to encourage people to retire earlier than they would in the absence of these benefits is:

A) the wealth substitution effect.
B) the induced retirement effect.
C) the bequest effect.
D) the income effect.

Question 28

In its broadest sense, Social Security refers to:

A) all the social insurance programs established by the Social Security Act.
B) only the old-age and survivors' insurance program administered by the Social Security Administration.
C) all public assistance programs administered by the federal government.
D) all social insurance programs administered by the federal government.

Question 29

The upper limit of the retirement age is:

A) 65 years.
B) 66 years.
C) 67 years.
D) 72 years.

Question 30

In a fully-funded private retirement plan:

A) benefits are paid only if assets are sufficient to cover all obligations.
B) assets tend to only be large enough to cover benefits and expenditures for a year or two.
C) assets tend to be large enough to cover benefits and expenditures for many years.
D) benefits are small relative to the size of the fund from which benefits are paid.

Question 31

Which of the following statements concerning Social Security is correct?

A) Workers and employers appear to share the burden of the payroll tax equally.
B) Rates of return based only on monetary benefits and costs average 4-5%.
C) Rates of return based only on monetary benefits and costs average 1-2%.
D) There are no non-monetary benefits associated with Social Security.

Question 32

Estimates indicate that more than 45 percent of the elderly would have incomes below the federal poverty line in the absence of Social Security.

Question 33

The sum of 35 years of indexed earnings divided by 420 determines:

A) the rate of return.
B) the social benefit.
C) primary insurance amount.
D) average indexed monthly earnings.

Question 34

Most of the revenues for Social Security are generated by:

A) the payroll tax.
B) the personal income tax.
C) state sales taxes.
D) excise taxes.

Question 35

The poverty rate for the elderly has averaged about 2 percentage points less than the poverty rate for the population as a whole since 1982.

Question 36

The normal retirement age is:

A) 65 years.
B) 65 years and 6 months.
C) 67 years.
D) it varies based on year born.

Question 37

It is difficult to compare the rate of return on Social Security to the rate of return on private investments because:

A) rates of return on Social Security are higher because it is a riskier investment.
B) rates of return on Social Security are lower because it is a less risky investment.
C) private investments provide insurance against old-age poverty.
D) private investments are indexed for inflation.

Question 38

Which of the following is characteristic of Social Security?

A) Its benefits are indexed for inflation.
B) It has historically been a pay-as-you-go insurance plan.
C) Its benefits are not based solely on of individual contribution.
D) All of the above.

Question 39

Which statement concerning pension plans in other countries is correct?

A) Pension plans in countries such as Canada and Germany appear to be in better financial shape than Social Security in the U.S.
B) Pension plans in countries such as Japan and the United Kingdom appear to be in better financial shape than Social Security in the U.S.
C) Social Security and pension plans in the other developed countries face almost exactly the same financial situation.
D) Pension plans in other developed countries are in worse financial shape than Social Security in the U.S.

Question 40

Social Security benefits are:

A) indexed to account for changes in average national wages between the year the earnings were realized and age 55.
B) indexed to account for changes in average national wages between the year the earnings were realized and age 60.
C) indexed to account for changes in average national wages between the year the earnings were realized and age 65.
D) indexed to account for changes in average national wages between the year the earnings were realized and age 70.

Question 41

Penny's wage rate decreases because of the imposition of a payroll tax, Penny decides to work fewer hours. This is an example of the:

A) induced savings effect.
B) income effect of a wage decrease.
C) substitution effect of a wage decrease.
D) reverse-endowment effect of a wage decrease.

Question 42

Which of the following may account for the decrease in the labor force participation rate of men 65 and older?

A) Social Security benefits.
B) Growth in private pensions.
C) Rising income.
D) All of the above.

Question 43

Sara earned $10,000 at age 40. Assume that the average national wage when Sara was age 60 is $39,800, and is $15,000 when she was age 40. The indexed value of earnings is:

A) $26,350.
B) $27,350.
C) $26,530.
D) $25,400.

Question 44

The behavior of the PIA/AIME ratio indicates that:

A) the Social Security benefit formula produces more generous benefits to lower- than to higher-income retirees.
B) the Social Security benefit formula produces more generous benefits to higher- than to lower-income retirees
C) the Social Security benefit formula produces equal benefits to lower and higher income retirees.
D) the Social Security trust has an imbalance.

Question 45

A decrease in the wage rate will have a smaller impact on hours worked if the:

A) labor supply curve is upward sloping.
B) labor supply curve is vertical.
C) labor supply curve is horizontal.
D) labor supply curve is negatively sloped.

Question 46

Social Security benefits cause Michael to retire at age 65 instead of 75. In order to finance the longer period of retirement Michael decides to increase his rate of savings. This is an example of the:

A) induced wealth effect.
B) bequest effect.
C) early retirement effect.
D) induced retirement effect.

Question 47

Use the following diagram to answer the following questions.

Refer to Payroll. Suppose a payroll tax of 7% is imposed. By how much will the wage rate of the workers fall?

A) Wage rates will not fall.
B) 7%
C) 10.6%
D) This cannot be determined from the above diagram.

Question 48

"The prospect of Social Security benefits has induced workers to retire at earlier ages." Is this statement true or False? Defend your answer.

Question 49

According to Martin Feldstein,

A) Potential output in the US was not affected by Social Security.
B) The labor supply curve is vertical.
C) Potential output in the US was reduced by $84 billion in 1996.
D) None of the above are correct.

Question 50

It is generally thought that the earnings penalty will:

A) only have an impact on the number of hours that younger workers are willing to work.
B) have a large negative impact on the number of hours that older workers are willing to work.
C) have an insignificant effect on the number of hours that older workers are willing to work.
D) cause older workers to retire from the labor force at an earlier age.

Question 51

Joan knows she will be receiving Social Security benefits upon retirement. This allows her to save less of her income and increase consumption. This is an example of:

A) the wealth substitution effect.
B) the induced retirement effect.
C) the bequest effect.
D) the mitigated savings effect.

Question 52

Mark and Jim have contributed the same amount to Social Security. Mark's spouse did not work while Jim's spouse was in the labor force. In terms of their real rate of return earned on Social Security, we would expect to find:

A) Jim's real rate of return to exceed Mark's.
B) Mark's real rate of return to exceed Jim's.
C) Mark's and Jim's real rates of return to be the same.
D) Jim's real rate of return to exceed Mark's during the initial years in which benefits are received. However, after the tenth year, Mark's real rate of return will exceed Jim's.

Question 53

In order to deal with the exhaustion of the Social Security Trust Fund:

A) the retirement age for OASI could be increased.
B) Social Security should become a fully-funded system.
C) the retirement age for OASI could be decreased.
D) the Social Security tax base could be decreased.

Question 54

Use the following diagram to answer the following questions.

Refer to Payroll. Suppose there is no payroll tax in effect, which demand curve represents the value of the output produced by labor?

A) Da.
B) Db.
C) S₁
D) This cannot be determined from the above diagram.

Question 55

Use the following diagram to answer the following questions.

Refer to Payroll. In the absence of a payroll tax, labors' earning will equal the area:

A) G + K + F
B) G + K
C) F
D) G + K + F + B + C

Question 56

The delayed requirement credit means that:

A) workers who retirement before the normal retirement age receive extra Social Security benefits when they retire.
B) workers who delay retirement beyond the normal retirement age receive extra Social Security benefits when they do retire.
C) workers who start work later in their life will have to wait longer to receive Social Security benefits.
D) workers who delay retirement beyond the normal retirement age receive reduced Social Security benefits when they do retire.

Question 57

Which best describes the predictions of the best estimate of the long-run Social Security deficit?

A) The Trust Fund will be exhausted by the year 2045.
B) The Trust Fund will be exhausted by the year 2041.
C) The Trust Fund will be exhausted by the year 2023.
D) None of the above.

Question 58

Use the following diagram to answer the following questions.

Refer to Payroll. The area of G + K represents:

A) labor's earnings in the absence of a payroll tax.
B) the amount of the payroll tax remitted to the federal government.
C) labor's earnings after a payroll tax.
D) value of the output produced by labor.

Question 59

Income from Social Security receives more favorable treatment in the federal tax code than income from private retirement funds because:

A) private retirement income is subject to federal income taxation.
B) the contributions that employers make on behalf of workers are not included in income subject to taxation.
C) private retirement income is not subject to federal income taxation.
D) a and c are correct.

Question 60

Among the factors accounting for the rapid build-up of the Social Security trust fund is:

A) a significant increase in fertility rates resulting in an increase in the size of the labor force.
B) a significant fall in fertility rates.
C) a decrease in the number of people who are self-employed.
D) a large increase in the labor force due to the entrance of baby-boomers.

Question 61

Who bears the burden of the Social Security payroll tax?

Question 62

"Social Security benefits have significantly lowered savings in the United States." Is this statement true or False? Defend your answer.

Question 63

Evaluate the following statement. "The real rate of return on certain private investments far exceeds the return that can be earned on Social Security. People would be better off if government would allow them to take the money they would have paid into Social Security and invest it in the private sector."

Question 64

Calculate the PIA for a person born in 1940 and retiring at normal retirement age (65 years, 6 Months) who earned $230,000 while working.

Question 65

Evaluate the following statement: "Because the Social Security earnings penalty lowers the financial reward for each hour worked when earnings exceed the penalty-free amount, it reduces the number of hours worked by the elderly."