Currently there are 2.9 workers for every retiree. Average salary is $50,000 and average benefits are $15,000. What is the average tax rate consistent with a pay-as-you-go system in equilibrium?
1. Based on the previous question. It is estimated that in 2030 there will be 2.1 workers supporting each retiree. Assume that the average wage will stay at $50,000 in 2030 and the government wants to keep the tax rate at the current level (calculated in question 3). What are average benefits consistent with those values? Suppose the government wants to keep the average benefit at the current level ($15,000), then what should be the tax rate to keep the system in equilibrium?
2. In her novel “Sense and Sensibility”, Jane Austen wrote, “If you observe, people always live forever when there is any annuity to be paid them.” Relate this quotation to the issue of adverse selection in annuity markets.