In 1980 the combined employee and employer Social Security tax was 15%, and the monthly wage was $2,400.

In 1980 the combined employee and employer Social Security tax was 15%, and the monthly wage was $2,400. The number of workers was 90 million and the number of beneficiaries was 10 million.

Calculate the average Social Security benefit.
By 2010 the inflation adjusted monthly wage was $2,600, the number of workers was 80 million, and the number of beneficiaries was 20 million. What would the tax rate have to be to provide the same inflation adjusted monthly benefit that you were able to calculate for part a? (If you were unable to determine the benefit in part a, use $3,000 for this problem.)

Expert Solution

a. the total wage bill=2400x90million=216000million

the total social security ta share=15%x216000million=32400million

hence average social security benefit=total social security tax/number of beneficiaries=32400million/10million=3240

b. now the total wage bill=2600x80million=208000million

and let's say required social security tax rate =r

hence total social security fund=208000million x r

average social security benefit=208000million x r/20million=10400 x r

we are given, 10400r=3240 or r=3240/10400=0.3115 or 31.15%

hence the tax rate should be 31.15%

Rahul Sunny answered 2 years ago

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