Lesson 7 Flashcards
(14 cards)
meaning social security
= insurance against living longer than expected and outliving one’s savings
annuity
= an insurance plan that charges a premium and then pays a sum of money at some regular interval for as long as a policyholder lives
why do people want social security?
because of consumption smoothing: reducing consumption in high earning years in order to increase consumption in low earning years
social security actions for risk averse person
- buy health insurance
- buy life insurance to assure that family will be fine if he dies
- buy annuity to assure a steady income in retirement years
reasons for government intervention
- asymmetric info & adverse selection (you don’t know everything about: how long they life etc) –> make it mandatory
- paternalistic view (people don’t often save money for their retirement, can’t let them live in poverty)
- moral hazard (if government will “save” people when they retire, they will let that happen –> mandatory to let them pay)
- administrative costs (uniform rules easier instead of detailed data on certain individuals)
- income redistribution (makes it more equal since everybody get’s the same)
formula for financing>: pay-as-you-go
Nb x B = t x Nw x W
OR
t = Nb/Nw x B/w
dependency ratio
Nb/w
replacement ratio
B/w
how to compensate for increasing dependency ratio (more people)
increase wage = difficult to manipulate
increase tax = not popular
decrease average benefit per retirement person = not popular
raise retirement age
economic behavior effects (3)
- wealth substitution effect
= workers realize that why are paying in now to receive a guaranteed retirement income. They view this as forces saving –> crowd out private savings - retirement effect
= social security induces people to retire earlier –> people may save more in order to finance a longer retirement - bequest effect
= intergenerational redistribution –> leads to people saving more to finance a larger bequest to children to offset thi
3 considerations for income redistribution
- how do you the fine poo? What do you count?
- reasons to redistribute
- Pareto imrpovement, equality, commodity egalitarianism tec.. - value in-kind transfers (payments in commodities/services as opposed to cash)
how does the graph of in-kind transfers look like?
- X-axis: “Groceries” (or any in-kind good)
- Y-axis: “All other goods”
without transfer: person has a normal, downward-sloping budget line (reflects their income and prices)
with in-kind transfer: The budget line becomes a “kinked” shape:
It starts out flat, the person gets €50 worth of groceries no matter what.
After that, the usual trade-off resumes.
money: whole budget line shifts outward (parallel shift).
The person can now choose any combination of groceries and other goods.
This allows for a higher utility in many cases, because people choose what they value most
what is the goal of welfare spending?
- Provide a minimum level of income to people in poverty,
- Help people meet basic needs like food, housing, and healthcare,
- Protect people from falling into severe hardship during tough times (like unemployment or illness)
–> however, you don’t want them to never start working
graph of welfare spending
x-as: lesuren per month
y-as: income
