Chapter 16 – Is the (Fiscal) Sky Falling: An Examination of Unfunded Social Security, Medicare, and State and
Local Pension Liabilities
Chapter 16 Is the (Fiscal) Sky Falling: An Examination of Unfunded
Social Security, Medicare, and State and Local Pension Liabilities
Multiple Choice
1. A defined benefit pension program is one in which
A) the plan that defines eligibility for retirement and benefits according to a set of rules and
a formula.
B) those in the plan, as well as their employer, contribute to an account according to a
formula, and the investment of that account is under the control of the employee.
C) everyone gets the same amount regardless of how much they work.
D) benefits are untaxed.
2. A defined contribution pension program is one in which
A) The plan that defines eligibility for retirement and benefits according to a set of rules and
a formula.
B) Those in the plan, as well as their employer, contribute to an account according to a
formula, and the investment of that account is under the control of the employee.
C) Everyone gets the same amount regardless of how much they work.
D) Benefits are untaxed.
3. Economists would label Social Security
A) a defined benefit pension program.
B) a defined contribution program.
C) a Ponzi scheme.
D) an unneeded intrusion into private savings.
4. If you overheard a worker say that her pension would give her 75% of her last year’s pay as
long as the sum of her age and years worked equaled or exceeded 85 you would know she
had
A) a defined benefit pension program.
B) a defined contribution program.
C) a Ponzi scheme.
D) been exempted from Social Security.
Chapter 16 – Is the (Fiscal) Sky Falling: An Examination of Unfunded Social Security, Medicare, and State and
Local Pension Liabilities
5. If you overheard a worker say that her pension would only give her what she put in and the
interest she garnered on those savings regardless of how long she had worked for the
company you would know she had
A) a defined benefit pension program.
B) a defined contribution program.
C) a Ponzi scheme.
D) been exempted from Social Security.
6. If you overheard a worker say that she has moved up the ladder as far as she can with her
current employer but may turn down an offer to move to another company because she is
worried about her retirement, you can be pretty sure she is
A) on a defined benefit pension program.
B) on a defined contribution program.
C) trapped in a Ponzi scheme.
D) being exempted from Social Security.
7. If you overheard a worker say that she has moved up the ladder as far as she can with her
current employer and she is going to take the job because they will continue making
payments into her 401K you can be pretty sure she is
A) on a defined benefit pension program.
B) on a defined contribution program.
C) trapped in a Ponzi scheme.
D) being exempted from Social Security.
8. Entitlements have a great deal in common with
A) defined benefit pension programs.
B) defined contribution programs.
C) Ponzi schemes.
D) private savings plans.
9. Which of the following are entitlements?
A) Medicare
B) Social Security
C) defined contribution programs
D) Medicare and Social Security
Chapter 16 – Is the (Fiscal) Sky Falling: An Examination of Unfunded Social Security, Medicare, and State and
Local Pension Liabilities
10. Public employees (more frequently than private employees) tend to have their retirements in
A) defined benefit pension programs.
B) defined contribution programs.
C) Ponzi schemes.
D) private savings plans.
11. Private employees (more frequently than public employees) tend to have their private
retirements in
A) defined benefit pension programs.
B) defined contribution programs.
C) Ponzi schemes.
D) Social Security.
12. Public employees (more frequently than private employees) tend
A) to begin and end their career with the same employer
B) participate in defined contribution programs
C) fall for Ponzi schemes
D) have well-funded private savings plans
13. Which of the following explains why public employees (more frequently than private
employees) tend be in defined benefit programs?
A) They tend to begin and end their career with the same employer.
B) They tend to move from employer to employer.
C) They tend to fall for Ponzi schemes.
D) They have well-funded private savings plans.
14. Which of the following explains why private employees (more frequently than public
employees) tend be in defined contribution program?
A) They tend to begin and end their career with the same employer.
B) They tend to move from employer to employer.
C) They tend to fall for Ponzi schemes.
D) They have well-funded private savings plans.
Chapter 16 – Is the (Fiscal) Sky Falling: An Examination of Unfunded Social Security, Medicare, and State and
Local Pension Liabilities
15. Which of the following explains why private employers (more frequently than public
employers) have tended to shift away from defined benefit programs?
A) Their employees have begun to reduce the amount they shift from one employer to the
next.
B) Their employees have begun to increase the amount they shift from one employer to the
next.
C) Their employees have increasing fallen victim to Ponzi schemes.
D) People have begun to create well-funded private savings plans.
16. In terms of yields on savings which of the following is the highest performer?
A) Defined benefit pension programs
B) Defined contribution programs
C) Ponzi schemes
D) Social Security
17. ERISA was passed to make sure which of the following was adequately funded?
A) Defined benefit pension programs
B) Defined contribution programs
C) Ponzi schemes
D) Social Security
18. ERISA focuses much of attention on
A) defined benefit pension programs.
B) defined contribution programs.
C) Ponzi schemes.
D) Social Security.
19. ERISA stands for
A) Equal Retirement, Investments, and Solvency Act.
B) Employee Retirement Income Security Act.
C) Employer and Retiree Income Security Act.
D) Employer Return on Income Security Act.
Chapter 16 – Is the (Fiscal) Sky Falling: An Examination of Unfunded Social Security, Medicare, and State and
Local Pension Liabilities
20. Besides retirement pension issues, ERISA focuses some attention
A) Ensuring employers adequately fund their payroll taxes.
B) Ensuring employers adequately fund their retiree health care plans (when they have
them).
C) Ponzi schemes.
D) Social Security.
21. If a defined benefit pension cannot, for whatever reason, make good on the promises to
retirees, the
A) retirees are out of luck.
B) retirees get an extra payment from Social Security.
C) pensions are paid by the Pension Guaranty Trust Corporation.
D) retirees must sue their former employer.
22. If a defined contribution pension cannot, for whatever reason, make good on their anticipated
payments to retirees, the
A) retirees are out of luck.
B) retirees get an extra payment from Social Security.
C) pensions are paid by the Pension Guaranty Trust Corporation.
D) retirees must sue their former employer.
23. Which of the following entities is compelled to pay premiums to the Pension Guaranty Trust
Corporation?
A) Defined benefit pension programs
B) Defined contribution programs
C) Ponzi schemes
D) Social Security
24. The degree to which Social Security is underfunded (in present value terms) is
A) $0.
B) $12 billion.
C) $3 trillion.
D) $12 trillion.
Chapter 16 – Is the (Fiscal) Sky Falling: An Examination of Unfunded Social Security, Medicare, and State and
Local Pension Liabilities
25. The degree to which state and local defined benefit pensions are underfunded (in present
value terms) is
A) $0.
B) $12 billion.
C) $3 trillion.
D) $12 trillion.
26. The degree to which state and local defined benefit pensions are underfunded (in present
value terms) is
A) $0.
B) $12 billion.
C) $4 trillion.
D) $12 trillion.
27. State and local government pensions tend to be
A) defined benefit pension programs.
B) defined contribution programs.
C) Ponzi schemes.
D) Social Security.
28. For the period from 2030 through 2085 the annual deficits of Social Security (in present
value terms) run approximately
A) $0.
B) $12 billion per year.
C) $3 trillion per year.
D) $200 billion per year.
29. For the period from 2030 through 2075 the annual deficits of Medicare (in present value
terms) run approximately
A) $0.
B) $50 billion to $100 billion per year.
C) $3 trillion per year.
D) $200 billion per year.
Chapter 16 – Is the (Fiscal) Sky Falling: An Examination of Unfunded Social Security, Medicare, and State and
Local Pension Liabilities
30. The Social Security Administration projects that the dependency ratio will
A) rise rapidly over the next 20 years (from around 20% to around 37%, stabilize for 20
years and then grow again.
B) rise rapidly over the next 20 years (from around 20% to around 37%, stabilize for 20
years and then fall.
C) rise rapidly over the next 50 years (from around 20% to around 57%).
D) remain relatively constant at around 20%.
31. The Social Security Administration refers to the percentage of people over age 65 as the
A) recipient ratio.
B) beneficiary ratio.
C) dependency ratio.
D) old-age ratio.
32. When combined, the underfunded nature of Social Security, Medicare, and State and local
pensions adds to
A) $32 billion.
B) $32 trillion.
C) $320 trillion.
D) About the same as GDP, $15 trillion.
33. When combined, between now and 2035, the annual underfunded amounts of Social Security
and Medicare will
A) grow from 1% to 4.5%.
B) fall from 4.5% to 1%.
C) remain at about 14%.
D) fall from 30% to 14%.
34. When combined, the annual underfunded amounts of Social Security and Medicare will be
about ___ of payrolls between 2035 and 2085.
A) 1%
B) 4.5%
C) 14%
D) 30%
Chapter 16 – Is the (Fiscal) Sky Falling: An Examination of Unfunded Social Security, Medicare, and State and
Local Pension Liabilities
35. State and local governments
A) accurately account for their pension liabilities.
B) understate the present value of their pension liabilities by using a discount rate that is too
high.
C) understand the present value of their pension liabilities by using a discount rate that is too
low.
D) overstate the present value of their pension liabilities by using a discount rate that is too
low.
36. Economists Novy-Marx and Rauh contend that to accurately state their pension liabilities,
state and local governments should use
A) the interest rate on U.S. treasuries.
B) the interest rate on what they hope to get on their stocks.
C) the interest rate that they have to borrow at.
D) an interest rate of 0%.
37. Economists Novy-Marx and Rauh contend that states are
A) accurately stating their pension liabilities.
B) understating the value of both their assets and liabilities.
C) accurately stating the value of their assets but understating the value of their pension
liabilities.
D) accurately stating the value of their assets but overstating the value of their pension
liabilities.
38. Economists Novy-Marx and Rauh contend that cities are
A) accurately stating their pension liabilities.
B) understating the value of both their assets and liabilities.
C) accurately stating the value of their assets but understating the value of their pension
liabilities.
D) accurately stating the value of their assets but overstating the value of their pension
liabilities.
39. Economists Novy-Marx and Rauh contend that
A) states are in fine shape with regard to their pension liabilities but that cities are not.
B) states and cities are in fine shape with regard to their pension liabilities.
C) states and cities are in poor shape with regard to their pension liabilities.
D) cities are in fine shape with regard to their pension liabilities but that states are not.
Chapter 16 – Is the (Fiscal) Sky Falling: An Examination of Unfunded Social Security, Medicare, and State and
Local Pension Liabilities
40. Economists Novy-Marx and Rauh contend that if Chicago wanted to adequately fund its
pension systems for its public workers it would have to put on
A) a one-time tax of nearly $42,000 per household.
B) a one-time tax of nearly $420,000 per household.
C) an annual tax of nearly $42,000 per household.
D) an annual tax of only $42 per household.
41. Economists Novy-Marx and Rauh contend that if New York wanted to adequately fund its
pension systems for its public workers it would have to put on
A) a one-time tax of nearly $39,000 per household.
B) a one-time tax of nearly $390,000 per household.
C) an annual tax of nearly $39,000 per household.
D) an annual tax of only $39 per household.
42. Economists Novy-Marx and Rauh contend that if San Fransisco wanted to adequately fund
its pension systems for its public workers it would have to put on
A) a one-time tax of nearly $35,000 per household.
B) a one-time tax of nearly $350,000 per household.
C) an annual tax of nearly $35,000 per household.
D) an annual tax of only $35 per household.
43. Economists Novy-Marx and Rauh contend that if Boston wanted to adequately fund its
pension systems for its public workers it would have to put on
A) a one-time tax of nearly $31,000 per household.
B) a one-time tax of nearly $310,000 per household.
C) an annual tax of nearly $31,000 per household.
D) an annual tax of only $31 per household.
44. The core-theory relied upon most to answer questions with regard to unfunded liabilities is
A) consumer and producer surplus.
B) externalities.
C) elasticity.
D) present value.
Chapter 16 – Is the (Fiscal) Sky Falling: An Examination of Unfunded Social Security, Medicare, and State and
Local Pension Liabilities
45. The core-theory relied upon most to answer questions with regard to unfunded liabilities is
A) unemployment.
B) inflation.
C) future value.
D) present value.
46. The dire predictions about the underfunded nature of Social Security, Medicare, and state and
local pensions could be wrong because
A) interest rates may turn out to be higher in the future.
B) GDP grown may turn out to be higher than it is currently predicted to be.
C) unemployment rates may turn out to be higher than they are currently predicted to be.
D) taxable incomes may turn out to be lower than they are currently predicted to be.
47. The dire predictions about the underfunded nature of Social Security, Medicare, and state and
local pensions could be wrong because
A) interest rates may turn out to be higher in the future.
B) taxable incomes may turn out to be higher than they are currently predicted to be.
C) unemployment rates may turn out to be higher than they are currently predicted to be.
D) taxable incomes may turn out to be lower than they are currently predicted to be.
48. The dire predictions about the underfunded nature of Social Security, Medicare, and state and
local pensions could be wrong because
A) interest rates may turn out to be higher in the future.
B) benefits could be curtailed from what they are currently predicted to be.
C) unemployment rates may turn out to be higher than they are currently predicted to be.
D) taxable incomes may turn out to be lower than they are currently predicted to be.
Chapter 16 – Is the (Fiscal) Sky Falling: An Examination of Unfunded Social Security, Medicare, and State and
Local Pension Liabilities
49. The dire predictions about the underfunded nature of Social Security, Medicare, and state and
local pensions could be wrong because
A) interest rates may turn out to be higher in the future.
B) modest changes to the programs could be enacted soon.
C) unemployment rates may turn out to be higher than they are currently predicted to be.
D) taxable incomes may turn out to be lower than they are currently predicted to be.
50. If GDP grows at 4.5% rather than 3.5%, over a 25 year period that would result in __ than
anticipated.
A) 25% more GDP.
B) 28% more GDP.
C) 50% more GDP.
D) nearly 100% more GDP.