Question

Consider two households, the Smiths and the Joneses. The Smiths are a two-earner household: both rick and Jane Smith work and earn the same amount each year. The Joneses are a one earner household: Sally Jones works while Harry Jones is a homemaker and stay-at-home dad. Use the way spousal benefits are treated in the Social Security system to address the following:

a. How do the relative rates of return on Social Security payroll taxes compare for the two families?

b. After the kids go off to college, Harry considers taking a small part-time job. How might the Social Security system of taxes and benefits affect his decision?

c. Suppose that both families have retired and have started to receive Social Security benefits. By what fraction will these benefits fall for each of these families if one member of the household dies? What implications does this have for relative consumption smoothing in these two households?

Answer 1

All else equal , the joneses will get a better return on their payroll tax contribution . This is because only Sally pays in to the social security system, but Harry is still entitled to a 50% spousal benefit ( and a full spousal benefit if Sally dies first ) .Both the Smiths and payroll taxes withheld, and neither gets a free benefit like Harry. ( This is complicated by the progressivity of the system for converting AIME into PIA , however .)

Answer b

Harry will have to pay payroll taxes if he works , but his works is unlikely to increase his net social security benefit since he will be unlikely to earn enough to have a large enough personal Social Security benefit to make it worth taking his own benefit instead of half of his wife's . The payroll tax will tend to discourage him from working .

Answer c

Total Social Security income will fall by 50% for the Smiths since the two Smith originally had equal benefits and one of the two benefits is lost upon death . Total Social Security income will fall by only 1/3 for the Joneses .Prior to the death , they received150% of Sally 's benefit ( Sally's benefit plus a 50% spousal benefit ). After death , the survivor receives only 100% of Sally's benefit .The steeper drop off for the Smiths may make it harder for them to consumption smooth