A middle-income worker will retire in January 2017. In the year prior to retirement, her gross monthly earnings are $4,500. Her Social Security pension benefit will be $1,500 per month. Prior to retirement, she was subject to total taxes on her labor earnings amounting to 20 percent.
a. Calculate her gross and net-of-tax replacement rates following retirement.
b. Suppose the cash value of Medicare subsidies that she expects to receive during retirement amount to $4,000 per year. Recalculate the replacement rates including Medicare.