Midterm Topic 10

Question 1

three government outlays / spending

Answer 1

1. government payments for goods and services
2. government transfers to domestic households or firms without an exchange of goods and services
3. interest as payments for government borrowing from private sector or foreign governments

Question 2

discretionary government spending

Answer 2

government can evaluate those expenditures each year and change its budget policies

Question 3

mandatory government spending

Answer 3

obligations with long-run commitments that might be (politically or legally) too expensive to break

Question 4

Why does private saving go down in a balanced budget, with taxes going up?

Answer 4

the private sector spreads the burden of current tax increases across both periods and reduces current saving, shifting future resources to the current period.

Question 5

twin deficit

Answer 5

budget deficit increases and the current account deficit increases

Question 6

trade-off between PAYG system and fully funded system

Answer 6

based on which market returns are greater: future labor markets vs. current assets markets

if generation expects greater growth in future labor markets than assets markets, PAYG system is better. opposite (assets markets > future labor markets) means a fully funded system works better.

Question 7

reform policies for a struggling PAYG system

Answer 7

1. immigration–> increasing size of working population, N
2. fertility and labor force participation policies (child care, parental half-time, matchmaking)–>increasing size of working population, N
3. Increasing retirement age–>decreasing size of retiree population and increasing working population (S goes down, and N goes up)
4. Reducing pension benefits
5. increasing social security taxes (-b goes down, or t goes up)
6. multi-pillar systems that combine PAYG with fully funded features, holding reserves for future obligations, R [Nt = Sb +R]
7. income sources (beyond labor income? interest income? firm profits? capital income?) and income caps (i.e. from 100 k to 200k)
8. switch form PAYG to fully funded, phasing it out slowly. (operate by birth years, slowliy decreasing contributions and benefits).

Question 8

PAYG

Answer 8

working age population income goes to retirees (transfer). overlapping generations and agreements across contributions vs. benefits.

returns from future labor markets –> look at working age population growth, n, and real wage growth, gw. “workers per retiree”

Question 9

fully funded

Answer 9

working age income –> retirement (saving)
acquire assets and accumulate wealth. within generations.

returns on experienced asset markets (must look at volatility in asset markets and assess risk).

Question 10

what system to use if population growth rate is sufficiently large

Answer 10

PAYG are more efficient if the population growth rate is sufficiently large. However, if the population growth rate is too low, PAYG social programs hurt some generations.

Question 11

when does PVLR (social security) > PV LR (no social security)?

Answer 11

if - b / (1+n) + b/(1+r) > 0 , or n>r, then it’s worth it to pursue the PAYG system. when an economy experiences an insufficient employment growth rate, then a PAYG system performs worse.