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Test Bank to accompany Rosen’s Public
Finance, Seventh Edition
Chapter 9
CHAPTER 9
–
Social Insurance I:
Social Security and Unemployment
Insurance
Multiple-Choice Questions
1.
A pay-as-you-go system
means
a)
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
their
working lives.
e)
all of the above.
2.
Asymmetric information
generally implies
a)
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
requires
a)
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 their
working lives.
e)
all of the above.
4.
An actuarially fair
return means
a)
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 been
paying Social Security
taxes, this is known as
a)
the Social Security effect.
b)
the wealth substitution
effect.
c)
the bequest
effect.
d)
the life cycle
hypothesis.
6.
The Social Security earnings test
a)
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.
54
Test Bank to accompany
Rosen’s Public Finance, Seventh Edition
Chapter 9
7.
Social Security pension benefits are
a)
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.
The Social Security Administration has
which program(s) to administer?
a)
disability payments
b)
health benefits
c)
pensions
d)
survivors' benefits
e)
all of the above
The
percentage of unemployed Americans that actually
collects unemployment insurance
benefits is
a)
9
percent.
b)
18 percent.
c)
25 percent.
d)
33 percent.
An earnings test
as it relates to Social Security implies
a)
benefits are reduced by
some predetermined amount for those who have not
reached normal retirement age.
b)
the amount of money
earned during the working life of an individual
determines
the amount of benefits
received.
c)
family earnings
determine the amount of benefits received.
d)
all of the above.
Social security taxes are projected to
fall short of benefits starting in
a)
2005.
b)
2010.
c)
2016.
d)
2020.
e)
2030.
Social insurance can be justified on
the grounds of
a)
adverse
selection.
b)
decision-
making costs.
c)
income
distribution.
d)
paternalism.
e)
all of the above.
8.
9.
10.
11.
12.
55
Test Bank to
accompany Rosen’s Public Finance, Seventh
Edition
Chapter 9
13.
The retirement effect is
a)
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.
The gross replacement rate is
a)
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.
A current
worker may save more towards retirement so that he
or she will have more to
leave his or
her children later. This altruistic motive is
known as the
a)
altruism
effect.
b)
bequest effect.
c)
income effect.
d)
savings effect.
14.
15.
Discussion Questions
1.
Suppose in the market for
labor that the labor supply curve is perfectly
inelastic. This
would
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 $$20,000 a
year. The
employee gets a 3
percent raise annually. After 5 years of working,
the employee quits
and never works
again. How much will this worker have earned over
her brief working
career? How much
will she have paid in Social Security and Medicare
taxes if the tax
rate is 7.45 percent?
3.
Suppose
that
the
ratio
of
retirees
to
working
citizens
is
currently
1
to
5,
meaning
that
there are 5 working
people for every retiree. Suppose that in thirty
years the ratio will
change to 1 to 2.
If benefits remain the same, what will happen to
the tax rate assuming
retirees
are
provided
benefits
in
a
pay-as-you-go
system?
How
much
would
benefits
decrease if the tax rate remained the
same?
4.
A
worker
within
the
middle-income
class
is
preparing
to
retire.
In
the
year
before
he
retired,
his
gross
monthly
earnings
are
$$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.
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