Question

3. Suppose Social Security (government old age income support program) benefits are reduced by 25% in an effort to make the program more financially viable, while Social Security payroll tax rates are left unchanged.

a) How would this likely affect annual hours of work among workers close to retirement age (say, age 60)? Explain.

b) How would this likely affect annual hours of work among young workers (say, age 25)? Explain.

c) Would your answer for young workers be different if the benefit cut were accompanied by a cut in Social Security payroll tax rates to help workers save more for retirement? Explain.

Answer 1

a) Social security benefits are those benefits that are being provided to the retired old age people as an income support in their old age. As per the given caee, the retirement benefits under social security are being reduced by 25% while the social security payroll tax which would be imposed on the working class to provide the social security benefits would remain the same. In this situation, the older working class who are closer to tglhe retirement age would be left with a disadvantageous pay as the tax would be deducted from their pay while the benefits would also remain lesser. Ths would force many of the older working class to avail their leave benefits and thus would cause a decline in the annual working hours of such class.

b) In the case of young workers, the reduction of social security benefits would have lesser impact on the annual working hours. As the retirement age is far away from the current scenario, reduction of the annual working hours would be disadvantageous for the younger working population as the pay would be considerably reduced in the current stage. But, as the payroll tax has not been reduced, this would cause a disadvantage for the younger working population after retirement.

c) If the cut in the retirement benefits is being followed by a cut in the payroll tax also, this would mean that more amount would be credited for savings in the retirement age and hence would cause an increase in the particilation rate among the younger working class compared to the earlier scenario.