ECO 450 WK 11 Final Exam

ECO 450 WK 11 Final Exam

True/False Questions

  1.   The Social Security pension system is a fully funded retirement plan.

  2.   Social Security pension benefits are transfers from workers to retirees.

  3.   Social Security pensions are financed by voluntary contributions by workers.

  4.   The gross replacement rate measures the ratio of taxes paid per year by workers to their annual Social Security pension when they retire.

  5.   In the year prior to retirement, a worker earned $20,000 and paid $5,000 in taxes on those earnings. His annual Social Security pension is $10,000 per year. Then it follows that his net replacement rate is 50 percent.

  6.   The gross replacement rate for Social Security pensions is the same for all workers independent of their preretirement earnings.

  7.   The annual growth in wages subject to Social Security taxes is 3 percent. Given the payroll tax rate, the growth in funds available to pay pension benefits is also 3 percent.

  8.   The asset-substitution effect of Social Security pensions discourages saving.

  9.   The availability of Social Security pensions to workers over normal retirement age results in an income effect unfavorable to work but no substitution effect.

10.   The bequest effect of Social Security encourages workers to save less.

11.   The normal retirement age for Social Security old-age pensions is 67 for people born in the United States in 1960 or later.

12.   Workers in the United States can retire under Social Security at age 62 with lower pensions than they would receive at their normal retirement age.

13.   As of 2009, retired workers between the ages of 62 and their normal retirement age were subject to an “earnings test” that reduced their pension by $1 for each $2 of earnings after a certain minimum level of earnings.

14.   Reducing the replacement rate will have no effect on the tax rate necessary to finance pensions under a pay-as-you-go, tax-financed pension system.

15.   Workers who quit their jobs are eligible for unemployment insurance benefits in the United States.

16.    By 2050, the expected percentage of the U.S. population that is considered elderly will be less than 20%.

17.    Social Security was created in 1965.

18.    On average, the elderly are less likely to be poor when compared to the rest of the U.S. population.

Multiple Choice Questions

  1.   The Social Security retirement system:

a.    is a fully funded pension system.

b.   is a tax-financed system that pays benefits from taxes that are invested to return principal and interest to workers when they retire.

c.    is a tax-financed retirement system that finances pensions by taxing workers each year and transferring the bulk of revenues obtained directly to retirees.

d.   does not use taxes on workers to pay pensions to retirees.

         2.     The gross replacement rate:

a.    measures a worker’s monthly retirement benefit divided by monthly earnings before taxes in the year prior to retirement.

b.   measures a worker’s monthly retirement benefit divided by monthly earnings after taxes in the year prior to retirement.

c.    is an increasing function of gross monthly earnings prior to retirement.

d.   is independent of gross monthly earnings prior to retirement.

  3.   A worker earns $2,000 per month before taxes. He pays $140 per month payroll tax on those wages. In addition, the income taxes on those wages are $360 per month. On retirement, the worker receives a Social Security pension of $750 per month. Which of the following statements is true?

a.    The worker’s gross replacement rate is 50 percent.

b.   The worker’s net replacement rate is 50 percent.

c.    The worker’s net replacement rate is 38 percent.

d.   The worker’s net replacement rate is 75 percent.

  4.   The growth in hourly wages over the past 50 years has averaged about 2 percent per year. How­ever, the growth in Social Security pensions has far exceeded this 2-percent rate. The growth in tax revenue to finance Social Security benefits in excess of 2 percent per year can be accounted for by:

a.    increases in payroll tax rates.

b.   use of other taxes beside the payroll tax to pay Social Security benefits.

c.    an increase in the number of workers paying Social Security taxes.

d.   either (a) or (b)

e.    either (a) or (c)

  5.   Given the structure and level of gross replacement rates and the expected future growth of labor earnings subject to the payroll tax, the tax rates used to tax payrolls were increased in the 1980s because:

a.    the number of retirees per worker will increase.

b.   the number of retirees per worker will decrease.

c.    wages are expected to decline.

d.   the size of the work force is expected to increase.

  6.   Which of the following is likely to increase the net federal debt as a share of GDP?

a.    a federal budget surplus.

b.   a federal budget deficit.

c.    a recession.

d.   either b or c.

  7.   The asset-substitution effect of the Social Security retirement system leads all workers to:

a.    save more for retirement.

b.   save less for retirement.

c.    save absolutely nothing for retirement.

d.   work more

8.   Which of the following is a consequence of a growing federal budget deficit in the United States?

a.    A decrease in the federal debt outstanding.

b.   An increase in the federal debt outstanding.

c.    A decrease in the portion share of federal government expenditures that must be allocated to interest in the future.

d.   An increase in national saving.

  9.   The induced-retirement effect of the Social Security pension system induces workers to:

a.    save less for retirement.

b.   save more for retirement.

c.    reduce savings for retirement to zero.

d.   work more after retirement.

10.   Unemployment insurance benefits are:

a.    financed by payroll taxes levied on workers.

b.   financed by payroll taxes levied on employers.

c.    both (a) and (b)

d.   financed by sales taxes.

11.   Which of the following is true about the Social Security pension system in the United States?

a.    Pensions received by retired workers are based entirely on their contributions to the Social Security pension trust fund and the investment return on that fund.

b.   Pensions received by married retirees with dependents are greater than that received by those without dependents.

c.    Gross replacement rates are inversely related to preretirement earnings.

d.   both (b) and (c)

12.   Which of the following can decrease tax rates necessary to pay pensions for a pay-as-you-go pensionsystem?

a.    an increase in replacement rates

b.   a decrease in the retirement age

c.    an increase in the size of the work force

d.   an increase in the number of retirees

13.   Unless legislation is introduced to change the normal retirement age, people born in 1960 or later will be able to retire with full Social Security benefits at age:

a.    62.

b.   65.

c.    66.

d.   67.

         14.   The earnings test for retirees:

a.    increases their incentive to work.

b.   is applied to all retirees.

c.    is applied only to retirees below normal retirement age.

d.   reduces pension benefits by $1 for each $2 of earnings.

e.    both (c) and (d)

15.   A nation has 40 million current retirees and a work force of 100 million. Which of the following is true?

a.    The replacement rate is 40 percent.

b.   The replacement is 2.5.

c.    The dependency ratio is 0.4.

d.   The dependency ratio is 2.5.

16.   Social Security tax rates can be reduced if:

a.    taxable wages decline.

b.   the retirement age is lowered.

c.    the retirement age is raised.

d.   the work force decreases in size.

         17.    A retiree subject to the earnings test under Social Security:

a.    can earn as much as he or she chooses without losing Social Security pension benefits.

b.   has his or her Social Security pension benefits reduced by one dollar for each dollar of labor earnings.

c.    has his or her Social Security pension benefits reduced immediately by one dollar for each three dollars of labor earnings.

d.   has his or her Social Security pension benefits reduced by one dollar for each two dollars of earnings after a certain minimum amount per year.

         18.    A pay-as-you-go social security retirement system is:

a.    exemplified by the current U.S. social security system.

b.   exemplified by the current Chilean social security system.

c.    designed to have retirees set aside a contribution specifically for themselves during their earlier working life.

d.   both (a) and (b).

        19.     Approximately, what percentage of beneficiaries of U.S. Social Security are retired workers?

a.    50%

b.   60%

c.    70%

d.   80%

         20.    The Social Security Act was implemented in the United States in:

a.    1927.

b.   1935.

c.    1947.

d.   1965.

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ECO 450 WK 11 Final Exam