Chapter 36
Social Security
Multiple Choice
1. Social Security was enacted in the
A) 1870’s.
B) 1910’s.
C) 1930’s.
D) 1960’s.
2. Social Security was intended to
A) cover all of the income necessary for retirement.
B) provide retirement income for only those who did not save for themselves.
C) provide retirement income for only those without private pensions.
D) provide a safety net of retirement income to which recipients would add their savings and
pensions.
3. A pay-as-you-go system
A) has current retirees being paid out of the taxes of current workers.
B) has a sufficient amount of money on hand currently to pay out all future obligations.
C) has current retirees being paid out of the taxes of current workers and has a sufficient
amount of money on hand currently to pay out all future obligations.
D) always requires a trust fund.
4. A fully-funded system
A) has current retirees being paid out of the taxes of current workers.
B) has a sufficient amount of money on hand currently to pay out all future obligations.
C) has current retirees being paid out of the taxes of current workers and has a sufficient
amount of money on hand currently to pay out all future obligations.
D) never needs to run a surplus.
5. Which of the following types of income are subject to FICA taxes?
A) wages and salaries
B) capital gains
C) interest income
D) inheritance
6. Which of the following types of income are subject to FICA taxes?
A) Tips
B) Capital gains
C) Interest income
D) Inheritance
7. Which of the following types of income are subject to FICA taxes?
A) Business profit from the self-employed
B) Interest earned on checking accounts
C) Inheritance
D) Profits earned from dividends
8. For 2013, the maximum taxable income for Social Security purposes is
A) $51,125.
B) $97,500.
C) $113,700.
D) unlimited.
9. If in 2013, a woman made $50,000 on the job, $20,000 from a consulting business she
operated, and $25,000 in dividends on stock she owned, she would owe old-age Social
Security taxes on
A) $50,000.
B) $70,000.
C) $87,000.
D) $95,000.
10. If in 2013, a woman made $90,000 on the job, $20,000 from a consulting business she
operated, and $10,000 in dividends on stock she owned, she would owe old-age Social
Security taxes on
A) $80,000.
B) $97,500.
C) $110,000.
D) $120,000.
11. If in 2013, a woman made $100,000 on the job, $20,000 from a consulting business she
operated, and $10,000 in dividends on stock she owned, she would owe old-age Social
Security taxes on
A) $87,000.
B) $97,500.
C) $113,700.
D) $130,000.
12. The monthly average of the 35 highest earnings years adjusted for wage inflation is the
A) AIME.
B) PIA.
C) amount of the retiree’s monthly check.
D) the most the retiree can receive in interest without having part of their benefit reduced.
13. The amount single retirees receive in a monthly check if they retire at their retirement age is
A) their AIME.
B) their PIA.
C) constant throughout their lifetime.
D) the most the retiree can receive in interest without having part of their benefit reduced.
14. Retirees have their benefits adjusted annually by the ____ to compensate them for inflation
A) wage inflation rate.
B) price inflation rate as measured by the PPI.
C) price inflation rate as measured by the GDP deflator.
D) price inflation rate as measured by the elderly person’s index.
15. The PIA is generated with a formula such that
A) high income earners receive less than low income earners.
B) high income earners receive the same as low income earners.
C) higher income earners receive the same proportion of AIMA as low income earners.
D) higher income earners receive more money but a lower proportion of their AIME than
lower income.
16. Which of the following parts of Social Security was not part of the original program?
A) Medicare
B) Benefits to orphans
C) Benefits to widows
D) Retirement benefits
17. Which of the following parts of Social Security was not part of the original program?
A) Benefits to the disabled
B) Benefits to orphans
C) Benefits to widows
D) Retirement benefits
18. Employers and employees each pay a rate for Social Security that has risen from ___ to ___.
A) 1%, 5.45%
B) 2%, 25%
C) 1%, 7.65%
D) 15.3%, 5%
19. In 1982, the retirement age was raised in such a manner that it is 65 for everyone born before
1937
A) and 70 for everyone else.
B) and 67 for everyone else.
C) and 70 for everyone born in 1960 or after, with a gradual increase in between.
D) and 67 for everyone born in 1960 or after, with a gradual increase in between.
20. Most economists accept the need for a required pension system because
A) people will save less than is optimal knowing that they can rely on welfare.
B) people may not have the information necessary to calculate their correct level of savings.
C) economists believe that saving is good for the soul.
D) people will save less than is optimal knowing that they can rely on welfare and people
may not have the information necessary to calculate their correct level of savings.
21. Because of Social Security, people are retiring
A) earlier than ever.
B) later than ever.
C) at the same age they always did: 65.
D) in their forties and getting government retirement benefits.
22. The asset substitution effect tends to
A) cause a decrease in savings.
B) cause people to retire early.
C) cause an increase in savings.
D) cause people to retire later.
23. The bequest effect tends to
A) cause a decrease in savings.
B) cause people to retire early.
C) cause an increase in savings.
D) cause people to retire later.
24. The induced retirement effect
A) causes an increase in savings because people retire later.
B) causes an increase in savings because people retire earlier.
C) causes a decrease in savings because people retire later.
D) causes a decrease in savings because people retire earlier.
25. If you overhear a group of people talking about their plans to save for their retirement and
one of them says that it causes them to save less because, as they reason it, “the government
is saving for me” you would attribute this to the
A) slovenly effect.
B) bequest effect.
C) induced retirement effect.
D) asset substitution effect.
26. If you overhear a group of people talking about their plans to save for their retirement and
one of them says that it causes them to save more because, as they reason it, if there wasn’t
Social Security “I could never retire; there is, so I will and I need to save for that. You would
attribute this to the
A) slovenly effect.
B) bequest effect.
C) induced retirement effect.
D) asset substitution effect.
27. If you overhear a group of people talking about their plans to save for their retirement and
one of them says that it causes them to save less and the other says they will save more, you
would conclude
A) that both are rational, they just have different perspectives.
B) neither are rational, Social Security affects no one’s saving.
C) the person increasing saving is rational and the other is irrational.
D) the person decreasing saving is rational and the other is irrational.
28. If you save less because the government is going to tax you and later provide you with a
benefit, then this reduction in savings is referred to by economists as the
A) slovenly effect.
B) bequest effect.
C) induced retirement effect.
D) asset substitution effect.
29. If you save more because Social Security allows you to retire earlier than you would have
retired had Social Security neither taxed you nor provided you with benefits, then this is
referred to by economists as the
A) slovenly effect.
B) bequest effect.
C) induced retirement effect.
D) asset substitution effect.
30. If you save more because Social Security motivates you to provide a greater level of
inheritance for your children, then this is referred to by economists as the
A) slovenly effect.
B) bequest effect.
C) induced retirement effect.
D) asset substitution effect.
31. The net effect of savings of the asset substitution, induced retirement and bequest effects
combined is that people save ________they would have without Social Security.
A) less than
B) more than
C) the same as
32. Current calculations make it clear that for the vast majority of young workers, the rate of
return on Social Security taxes and benefits will be
A) lower than what would have been generated in private stock-market investments.
B) roughly equal to what would have been generated in private stock-market investments.
C) greater than what would have been generated in private stock-market investments.
D) taxed more heavily than what would have been generated in private stock market
investments.
33. Calculations make it clear that for the majority of current retirees, the rate of return on Social
Security taxes and benefits was
A) lower than what would have been generated in private stock-market investments.
B) roughly equal to what would have been generated in private stock-market investments.
C) greater than what would have been generated in private stock-market investments.
D) riskier than what would have been generated in private stock market investments.
34. Present value analysis suggests that the real rate of return on Social Security is
A) more than 10%. for high income earners.
B) around 10%.for workers of all income levels.
C) roughly 3% for low income earners and negative for high income earners.
D) roughly 3% for high income earners and negative for low income earners.
35. Present value analysis suggests that high income earners
A) make a competitive real rate of return through Social Security.
B) can make an average real rate of return through Social Security only if they live to age
65.
C) can make an average real rate of return through Social Security only if they live to age
100.
D) cannot make an average real rate of return through Social Security even if they live past
100.
36. Using rate-of-return analysis to determine who benefits and who does not benefit from the
current structure of Social Security is
A) embraced by all.
B) embraced not only by financial planners, but also by most economists.
C) rejected by everyone.
D) rejected by those that view the program as social insurance, rather than as an investment.
37. The precipitous fall in stock prices between March 2000 and Dec 2002
A) emboldened those in favor of partial privatization of Social Security.
B) greatly affected the payouts associated with Social Security.
C) undercut political support for partial privatization of Social Security.
D) caused the government to increase Social Security payments.
38. Under Social Security the surplus (the excess of tax receipts over benefit payments)
A) is invested in stocks and corporate bonds.
B) is invested in the form of US Treasury Notes (i.e. government debt).
C) does not exist; the system runs at a deficit.
D) is held in a “lockbox” for current workers when they retire.
39. The workers per retiree ratio
A) had been above 16 prior to 1950 and is now around 1.
B) had been above 16 prior to 1950 and is now around 3.
C) had been above 16 prior to 1950 and is now around 10.
D) had been above 16 prior to 1950 and is now around 20.
40. The demographic bulge that is at the heart of Social Security’s long term problems is
attributable to a baby boom that occurred
A) after World War I.
B) after World War II.
C) in the 1960’s.
D) in the 1980’s.
41. The 2010, Social Security Trustees report held that under intermediate assumptions the
system would be bankrupt in
A) 2015.
B) 2033.
C) 2054.
D) 2087.
42. The solvency of Social Security can be extended if
A) the retirement age is reduced.
B) the program is means tested.
C) the cap on taxable earnings is lowered.
D) the tax rate is reduced.
43. The solvency of Social Security can be extended if
A) the retirement age is increased.
B) the cap on taxable earnings is lowered.
C) the trust fund invests in government bonds.
D) the tax rate is reduced.
44. The solvency of Social Security can be extended if
A) the retirement age is reduced.
B) the cap on taxable earnings is raised.
C) the trust fund invests in government bonds.
D) the tax rate is reduced.
45. The solvency of Social Security can be extended if
A) the retirement age is reduced.
B) the cap on taxable earnings is lowered.
C) the trust fund invests in government bonds.
D) the tax rate is increased.
46. The solvency of Social Security can be extended if
A) the retirement age is reduced.
B) the cap on taxable earnings is lowered.
C) the trust fund invests in private corporate securities.
D) the tax rate is reduced.
47. In 2012 the Social Security trust fund held
A) $4 trillion in cash.
B) $6.4 trillion in government bonds.
C) $4 trillion in stocks.
D) $40 trillion in gold.
48. In 2012 the Social Security trust fund held
A) Enough to deal with all future liabilities.
B) More than enough to deal with all future liabilities.
C) $6.4 trillion in government bonds, and when combined with expected future taxes, that
will be enough to deal with future liabilities.
D) $6.4 trillion in government bonds, and when combined with expected future taxes, that
will still not be enough to deal with future liabilities.
49. Posner, Schieber and Shoven suggesting indexing Social Security benefits of wealthy retirees
for
A) wage inflation, rather than price inflation.
B) core price inflation (price inflation excluding food and energy) overall price inflation.
C) price inflation, rather than wage inflation.
D) food and energy inflation.
50. If you index Social Security benefits for prices rather than wages, this is likely to
A) reduce benefits.
B) increase benefits.
C) prevent Social Security bankruptcy altogether.
D) bring about Social Security bankruptcy earlier.
51. Indexing Social Security benefits for prices rather than wages would
A) reduce benefits drastically and immediately.
B) reduce benefits slowly (by about 1% per year) overtime.
C) have no impact on benefits.
D) increase benefits.
52. Current projections predict the number of U.S. workers per retiree in 2030 to be
A) 16.
B) 6.1.
C) 3.3.
D) 2.2.
53. Before Social Security 51 percent of men over age 65 worked; today that number is
A) 43 percent.
B) 32 percent.
C) 22 percent.
D) 9 percent.
54. In his second term, President George W. Bush revived his earlier proposal to
A) place some Social Security taxes of young workers in private accounts under their
control.
B) place all Social Security taxes of young workers in private accounts under their control.
C) reduce by one-half the Social Security tax rates on employers.
D) eliminate entirely the Social Security taxes paid by employers.
55. The event that occurred in the second term of President George W. Bush which effectively
halted discussions of Social Security reform was
A) the invasion of Iraq.
B) the surge in Iraq.
C) Hurricane Katrina.
D) a breakdown of political stability in Afghanistan.
56. During the 2008 Presidential campaign, candidate Barack Obama proposed
A) eliminating entirely the Social Security taxes paid by employers.
B) reducing by one-half the Social Security tax rates on employers.
C) raising the “income cap” for Social Security taxes from $106,800 to $250,000.
D) re-imposing the 6.2% (old-age) Social Security tax on incomes over $250,000 per year.
57. In 2011, which of the following temporary changes to Social Security was enacted to boost
the economy?
A) Benefits were increased by 10%.
B) The portion of payroll taxes paid by employees was reduced from 6.2% to 4.2%.
C) The portion of payroll taxes paid by employers was reduced from 6.2% to 4.2%.
D) The maximum taxable earnings was reduced to $40,000.
58. In terms of Social Security taxes, the self-employed pay 2011,
A) only the employee portion.
B) only the employer portion.
C) both the employee and employer portions.
D) no tax.