1. Distinguish between welfare payments and wage subsidies. Explain the social justice argument for why society should set a weight of zero on the utility of the welfare recipient from a redistributive income support program seeking to maximize the welfare of society.
2. Suppose a pension scheme promises an entitlement of $1.2 million per person to old people who live on average for about 25 years after retiring at 70 years of age. The population currently comprises of 20 million people with the old constituting about 25% of this at present. First compute the annual total tax payment per member of the working population required to support this pension plan which is a PAYG scheme. Second, suppose the working population works for about 50 years and retires, assuming the dependency ratio stays the same, what is the implied growth rate in the population if each current worker receives the same designated pension as the scheme promises when they retire? Finally, suppose that private investments (such as government bonds) offered an annual rate of return of 2%. Discuss the social justice arguments that both the young (working) and old (retired) communities can make for either continuing with the plan or opting out of it in favor of the private insurance plan under two alternative scenarios: (i) if everyone knows that the dependency ratio will remain the same in the future. (ii) if the dependency ratio is increasing and everyone knows this. In your argument appeal to numerical values.
3. The US has a social security system that pays out benefits as a redistributive function of past earnings. Discuss this concept in light of social justice.
4. Consider an individual who has worked in the US since the age of 20 and retires at the age of 66 years. Life expectancy is about 80 years.The individual’s average indexed monthly earnings (35 year average of highest earning years) is $3000. Using contemporary information on the payment structure of social security in the US and applying this retroactively if needed, compute and demonstrate whether this individual is made better off, worse off, or no worse off by participating in the scheme. (Hint: What is the rate of return over the lifetime of income earned for this individual as given by his pension scheme?)
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