Microeconomics Special Topic 2—The Economics of Social Security
MULTIPLE CHOICE
1. The payments made to the beneficiaries of the Social Security program are financed by
a.
insurance premiums previously paid into the system by the beneficiaries.
b.
current receipts derived from the Social Security payroll tax.
c.
income derived from funds that were previously invested in stocks and bonds.
d.
governmental savings accounts based on the amount of funds the recipient previously paid
into the system.
2. In 2010, the number of workers per Social Security beneficiary was approximately ____; by the year
2030, this figure is expected to ____.
a.
5; increase to approximately 8
b.
2.9; fall to approximately 2.1
c.
2.2; increase to approximately 3.2
d.
8; fall to approximately 5
3. When the Social Security system begins running a deficit during the years following 2018, the bonds
in the trust fund will be drawn down. The funds to redeem these bonds will have to come from
a.
higher taxes, spending reductions in other programs, or additional government borrowing.
b.
the surplus funds deposited in governmental banking accounts.
c.
equity capital being liquidated.
d.
the sale of private equities and securities that the government has been purchasing with the
funds.
4. Demographic conditions
a.
were much less favorable for the Social Security system in 1950 than is currently the case.
b.
are currently unfavorable because the number of retirees is growing rapidly as the result of
the high birth rate in the United States during 1930-1945.
c.
will be less favorable for the Social Security system once the baby boom generation
begins to retire around 2011.
d.
don’t affect the financial status of the Social Security system because it is based on the
same principles as private insurance programs.
5. The current Social Security system works to the disadvantage of blacks primarily because the
a.
average annual earnings of blacks are generally lower than other groups.
b.
average life expectancy of blacks is generally less than other groups.
c.
Social Security tax rates imposed on blacks are higher than those imposed on other groups.
d.
Social Security benefit formula is disadvantageous to blacks.
6. Social Security, officially known as Old Age and Survivors Insurance (OASI),
a.
collects funds from current workers and invests them in order to provide these workers
with a stream of income during the retirement phase of life.
b.
is based on the same principles as private insurance programs.
c.
is an intergenerational income transfer program.
d.
is a voluntary savings program run by the government.
7. The Social Security program is primarily a
a.
compulsory retirement income program set up on sound insurance principles.
b.
forced-savings program where workers save during their working years and receive the
principal and interest on these savings at retirement.
c.
program designed to tax current workers in order to provide benefits for current retirees.
d.
voluntary savings program run by the government.
8. The Social Security system of the United States is based on the pay–as–you-go principle. This indicates
that funding of the benefits paid to current retirees comes primarily from
a.
the income generated by the system’s ownership of stock.
b.
the tax payments of current workers.
c.
the funds that current retirees paid into their personal savings accounts during their
working years.
d.
money created by the Federal Reserve system.
9. The Social Security retirement program is financed by a 10.6 percent payroll tax that applies to
earnings up to an income cutoff that is adjusted upward annually by the growth rate of nominal wages.
As of 2011, the income cutoff was
a.
$15,000.
b.
$32,700.
c.
$106,800.
d.
$250,000.
10. Given the current tax rate structure and promised benefit levels, persons that are currently 40 years old
or younger can expect to earn approximately what real rate of return on their Social Security
contributions?
a.
0 percent
b.
2 percent
c.
10 to 12 percent
d.
15 to 20 percent
11. Which of the following best explains why the Social Security system will face financial difficulties in
the future?
a.
Too much Social Security revenue was invested in the private sector rather than in
government bonds.
b.
In the next two decades, the number of workers paying into the system will decline
sharply relative to the number of retirees collecting benefits.
c.
The federal government does not pay interest on the money it borrows from the Social
Security system.
d.
The funds in the Social Security trust fund were invested in high-risk ventures that failed
to pay off.
12. The current surplus of the Social Security system is expected to become a deficit sometime around
2018 because the
a.
payroll tax rate is scheduled to decline at that time.
b.
number of workers relative to the number of Social Security recipients will decline as the
baby boom generation moves into the retirement phase of life.
c.
stock market is not expected to perform nearly as well during the next two decades as was
the case during the 1980s and 1990s.
d.
growth rate of the U.S. economy is expected to slow during the next two decades.
13. As the baby boom generation, born during 1946 through 1960, reaches retirement age during the 2011
through 2030 period, the number of workers per Social Security beneficiary is expected to
a.
increase to five.
b.
remain constant at approximately seven.
c.
decline to approximately five.
d.
decline to approximately two.
14. Which of the following is true?
a.
All of the current revenues flowing into the Social Security system are needed for benefit
payments to current retirees.
b.
If the Social Security surplus was used to pay down the privately held federal debt, this
would reduce future taxes and, thereby, make it easier to deal with the retirement of the
baby boomers.
c.
During the 1980s and 1990s, most of the social security surplus was used to reduce the
national debt.
d.
When the Social Security surplus is used to cover the current operating expenses of the
federal government, it will make it easier for future taxpayers to provide promised Social
Security benefits to baby boomers.
15. When the Social Security surplus is used to cover the current operating expenses of the federal
government, it will
a.
make it easier for future taxpayers to provide promised Social Security benefits to baby
boomers.
b.
reduce the outstanding debt of the federal government.
c.
make it possible for Congress and the president to spend more without raising current
taxes or borrowing from the general public.
d.
increase the credibility of the Social Security benefits promised to future retirees.
16. The current Social Security System surplus of revenues relative to expenditures is used to purchase
a.
U.S. Treasury bonds.
b.
bonds issued by domestic corporations.
c.
U.S. stock.
d.
U.S. and foreign stock.
17. The Social Security system is currently generating tax revenues that exceed the benefits paid to
recipients. This surplus is
a.
being invested in foreign bonds, which will provide Americans with a source of income
when the baby boom generation retires.
b.
separated from other government revenue so politicians will not spend the money during
the current period.
c.
being channeled into earmarked private savings accounts.
d.
invested in government bonds, the redemption of which will require an increase in taxes
(or additional Treasury borrowing).
18. When the Social Security system enters its deficit years and the bonds held in the trust fund are drawn
down,
a.
overall taxes will be reduced as the trust funds are used to pay benefits to retirees.
b.
the payroll taxes used to finance Social Security benefits can be reduced because the trust
funds will be sufficient to pay the retirement benefits of the baby boom generation.
c.
taxes will have to be raised (or additional funds will have to be borrowed) in order to
redeem the bonds held in the trust fund.
d.
income taxes will have to be reduced in order to keep the revenues and expenditures of the
Social Security system in balance.
19. Will a large quantity of bonds held in the Social Security Trust Fund make it easier to deal with the
retirement of the baby boomers?
a.
Yes; the federal government will be able to redeem these bonds in the future without
raising taxes or increasing its borrowing.
b.
Yes; the interest on these bonds will provide the federal government with a stream of net
revenue in the future.
c.
Yes, but only if the federal government holds these bonds until they mature.
d.
No; the federal government cannot redeem the bonds without raising revenues for their
redemption from other sources.
20. The net value to the federal government of the bonds currently held in the Social Security Trust Fund
is
a.
approximately $1 trillion.
b.
now approaching $2 trillion.
c.
greater than $2.5 trillion.
d.
zero, because the federal government is both the payee and recipient of the interest and
principal represented by these bonds.
21. When the current Social Security surpluses end and the bonds in the trust funds are reduced in order to
make payments to retirees, the financing for the redemption of the trust fund bonds will come from
a.
higher taxes or more government borrowing.
b.
the surplus funds deposited in government banking accounts.
c.
equity capital being liquidated.
d.
the sale of private equities and securities that the government has been purchasing with the
funds.
22. Detailed studies indicate that, on balance, the Social Security retirement system
a.
redistributes a substantial amount of income from the rich to the poor.
b.
redistributes a substantial amount of income from whites to blacks.
c.
is particularly advantageous to those with a shorter life expectancy.
d.
is not particularly advantageous to the poor due to their shorter life expectancy.
23. Which of the following is true?
a.
Labor participation tends to increase as spousal earnings increase.
b.
Social Security works to the disadvantage of low-wage workers due to their shorter life
expectancy.
c.
Low-wage workers derive a higher rate of return from their Social Security taxes than
high-wage workers.
d.
High-wage workers generally begin full-time work at younger ages than low-wage
workers.
24. Which of the following is true?
a.
The regressive nature of the Social Security benefit formula works to the disadvantage of
blacks and other groups with below-average earnings.
b.
Social Security works to the disadvantage of blacks and other groups with below-average
life expectancy.
c.
Blacks derive a higher rate of return from their Social Security taxes than whites.
d.
Hispanics derive a lower rate of return from their Social Security taxes than both whites
and blacks.
25. Which of the following groups derive the highest rate of return from the taxes they pay into the Social
Security retirement system?
a.
blacks
b.
whites
c.
Hispanics
d.
married women working full-time
26. Under the current Social Security system, married persons may draw benefits based on
a.
only their own earnings.
b.
their own earnings or draw 50 percent of the benefits earned by their spouse.
c.
their own earnings plus 50 percent of their spouse’s earnings.
d.
their own earnings plus 100 percent of their spouse’s earnings.
27. Which of the following tends to increase the attractiveness of a retirement system based on savings
and investment rather than pay-as–you-go principles?
a.
a persistent increase in the number of workers relative to the number of retirees
b.
a large number of workers relative to the number of retirees
c.
a reduction in the number of workers relative to the number of retirees
d.
a persistent increase in the life expectancy of retirees.
28. Which of the following countries have moved toward a retirement system based more on personal
retirement accounts (and savings and investment principles) rather than pay–as–you-go principles?
a.
United Kingdom
b.
Canada
c.
France
d.
Japan
29. Social Security
a.
collects taxes from current workers and invests this money to repay the workers when they
retire.
b.
is based on the same principles as private insurance programs.
c.
is an intergenerational transfer program that takes money from current workers and
transfers it to current retirees.
d.
is designed so that administrative decisions can be made independent of political concerns.
30. Which of the following best explains why the Social Security system is expected to face financial
difficulties in the near future?
a.
Too much Social Security revenue was invested in the private sector rather than in
government bonds.
b.
The federal government does not pay interest on the money it borrows from the Social
Security system.
c.
The funds in the Social Security trust fund were invested in high-risk ventures that failed
to pay off.
d.
The number of workers paying into the system is expected to decline relative to the
number of retirees collecting benefits.
31. When the Social Security system enters its deficit years and the bonds held in the trust funds are drawn
down,
a.
overall taxes will be reduced as the trust funds are used to pay benefits to retirees.
b.
the payroll taxes used to finance Social Security benefits can be reduced because the trust
funds will be sufficient to pay the retirement benefits of the baby boom generation.
c.
income and other federal taxes will have to be raised (or additional funds will have to be
borrowed) in order to redeem the bonds held by the trust fund.
d.
income taxes will have to be reduced in order to keep the revenues and expenditures of the
Social Security system in balance.
32. In approximately what year will Social Security outlays begin to exceed revenues?
a.
2008
b.
2017
c.
2050
d.
3030
33. A shortfall of tax revenues at current rates relative to promised benefits for a government program is
called
a.
a personal retirement account.
b.
an expected equity.
c.
a promissory note.
d.
an unfunded liability.
34. (I) Current Social Security retirees typically receive real benefits that are equal to three or four times
the amount of their contributions into the system.
(II) Current young workers can expect to receive real benefits less than their contributions into the
system.
a.
I is true; II is false.
b.
I is false; II is true.
c.
Both I and II are false.
d.
Both I and II are true.
35. The surplus in the Social Security retirement system is currently held in the form of
a.
U.S. Treasury bonds.
b.
gold.
c.
U.S. corporate stock.
d.
cash reserves in major U.S. banks.
36. The Social Security system is currently generating tax revenues that exceed the benefits paid to
recipients. This surplus is
a.
being invested in foreign bonds, which will provide Americans with a source of income
when the baby boom generation retires.
b.
being invested in government bonds, which will require an increase in general tax
revenues when the bonds come due.
c.
separated from other government revenue so politicians will not spend the money during
the current period.
d.
being channeled into earmarked private savings accounts.
37. As the baby boom generation retires in the future, Social Security will have to
a.
reduce benefits to retirees.
b.
increase taxes on workers.
c.
borrow money.
d.
utilize some combination of a, b, and c.
38. In 2009, the Social Security payroll tax did not apply to annual income above
a.
$15,000.
b.
$32,000.
c.
$106,800.
d.
$200,000.
39. Based on average life expectancy, which of the following groups would you expect to collect Social
Security benefits for the greatest number of years?
a.
college graduates
b.
blacks
c.
persons with AIDS
d.
single males
40. Most married women who choose to work can expect to receive
a.
substantially higher Social Security benefits than if they had not worked and thus not paid
into the system.
b.
substantially lower Social Security benefits than if they had not worked and thus not paid
into the system.
c.
approximately the same Social Security benefits than if they had not worked and thus not
paid into the system.
d.
benefits based on their husbands’ salary plus 50 percent of their own salary.
41. (I) Because married women are permitted to receive benefits based on either their own earnings or 50
percent of the benefits earned by their spouse, whichever is greater, the payroll tax takes a big chunk of
the earnings of many working women without providing any significant additional benefits to them.
(II) Because blacks have a shorter life expectancy, they are economically disadvantaged by Social
Security relative to whites and Hispanics.
a.
I is true; II is false.
b.
I is false; II is true.
c.
Both I and II are false.
d.
Both I and II are true.
42. Which of the following countries has not taken steps to privatize its Social Security system?
a.
United States
b.
Mexico
c.
United Kingdom
d.
Chile
43. During the last two decades, most of the surplus generated by the Social Security system was
a.
used to finance current government expenditures.
b.
invested in government bonds that will make it possible for the federal government to pay
future retirement benefits without an increase in federal taxes.
c.
used to pay down the national debt.
d.
invested in bonds offered by foreign governments and businesses that will provide a
stream of future income for the finance of retirement benefits.
44. The Social Security Trust Fund
a.
will provide a stream of future revenue for the federal government.
b.
is a “pot” of money set aside for the payment of future benefits.
c.
is a net asset of the U.S. Treasury worth approximately $2 trillion.
d.
is of zero asset value to the federal government.
45. By 2030, the number of workers per Social Security beneficiary will be approximately
a.
two.
b.
three.
c.
four.
d.
six.
46. The bonds held in the Social Security Trust Fund
a.
are a valuable asset of the federal government.
b.
will generate a future stream of net income for the federal government.
c.
are an IOU from one government agency (the U.S. Treasury) to another (the Social
Security Administration).
d.
are necessary to provide retirement benefits for future retirees.
47. What will the federal government have to do in order to redeem the bonds in the Social Security Trust
Fund?
a.
raise taxes
b.
cut expenditures on other government programs
c.
borrow additional funds
d.
Some combination of a, b, and c.
48. If the U.S. economy grew rapidly in the future, would this eliminate the long run deficit of Social
Security?
a.
No; future Social Security benefits are tied to nominal wages and therefore increases in
real incomes will also increase the future retirement benefits.
b.
Yes; a rapid real growth rate would increase tax revenues without increasing the real
benefit levels of future recipients.
c.
Yes, more rapid growth would lead to inflation and this would help eliminate the system’s
long run deficit.
d.
Yes, but only if the rapid growth led to a substantial increase in net exports.
49. Which of the following is true?
a.
The regressive nature of the Social Security benefit formula works to the advantage of
groups with below average earnings.
b.
Groups with an below average life expectancy gain from Social Security because they will
typically draw retirement benefits over a more lengthy period of time.
c.
The life expectancy of Hispanics at age 20 is generally lower than the figures for whites
and blacks.
d.
Hispanics derive a higher return from their Social Security taxes than whites, and
substantially higher than blacks.
50. The structure of the Social Security system is particularly advantageous to
a.
blacks.
b.
those with life shortening diseases such as diabetes.
c.
groups with below average earnings and above average life expectancy.
d.
groups with above average earnings and below average life expectancy.
51. On average, persons with more education tend to draw Social Security benefits for a
a.
longer period of time than average
b.
shorter period of time than average
c.
period of time that is comparable to the U.S. average
d.
longer period of time if they have a master’s degree but a shorter period of time if they
have a Ph.D.
52. Persons who die before age 65 or soon thereafter, receive little or nothing from their Social Security
payroll tax payments. Which of the following groups is harmed the most by this attribute of the
Social Security retirement system?
a.
High-income workers.
b.
Hispanics.
c.
Heavy cigarette smokers.
d.
College graduates.
ESSAY
53. Briefly explain why the Social Security system will face a “crisis” in the coming years.
ANS:
54. Jane states that “Social Security is an unfair program. It discriminates against married women in the
workforce and middle-income recipients.” Evaluate this view.