Q12. What do economists mean when the... [FREE SOLUTION]

Chapter 13: Q12. (page 283)

What do economists mean when they say Social Security and Medicare are 鈥減ay-as-you-go鈥� plans? What are the Social Security and Medicare trust funds, and how long will they have money left in them? What is the key long-run problem of both Social Security and Medicare? To fix the problem, do you favor increasing taxes or do you prefer reducing benefits?

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Social Security and Medicare are 鈥減ay-as-you-go鈥� plans because the payment for healthcare and other social security is received through the schemes during retirement, which comes from the current revenues collected from the Social Security and Medicare tax.

Social Security and Medicare trust funds are the revenues collected from the Social Security and Medicare tax to meet the expenses of the schemes when income falls short. The Social Security trust fund will exhaust in 2033, and the Medicare trust fund will be finished by 2024.

The fundamental long-run problem of both the social security and Medicare systems is the rising population of 62 years old and above.

The option may vary from person to person as increasing taxes and decreasing the benefits have distinct disadvantages.

Step by step solution

Meaning of social security and Medicare systems

Social Security and Medicare are 鈥減ay-as-you-go鈥� plans.The term 鈥減ay-as-you-go鈥� indicates that the current revenues are used to pay the social security retirees.Social Security and Medicare are the schemes of the U.S. government for providing funds to retirees.

The Social Security system delivers funds to old citizens (aged 62 years) during retirement. At the same time, Medicare is a health care program that provides funds to people aged 65 and above. These funds are derived from the current revenue from Social Security and Medicare tax.

Social Security and Medicare trust funds and their exhaustion time

Social Security and Medicare trust funds collect revenues from social security鈥檚 tax used to meet the deficit revenues.The annual budget for Social Security is $888 billion, which is paid at a tax rate of 12.4% at a set income level.

If they exceed the expenditure, the Social Security funds are stocked and used when the tax revenues fail to meet the payment in the future. Similarly, Medicare funds are reserved for meeting the healthcare requirement of senior citizens. The annual cost for the Medicare system is $510 billion, which is paid through the Medicare earnings tax.

The Social Security fund will deplete in 2033, a year earlier than what was projected in the previous reports of the trust fund due to Covid. The Medicare trust fund will exhaust in 2024. After the exhaustion of the trust funds, the social security and medicare requirements can only be met by the tax revenues up to some percent.

Basic problem for the social security and Medicare systems

The critical problem for the Social Security and Medicare trust funds is the growing population of grey-hair citizens. As the grey-haired population expands, the number of retirees will increase. Thus the present tax rates will not be sufficient to meet the annual cost of Social Security and Medicare trust funds.

Therefore, either tax rates will have to be increased, or the benefits from the funds will have to be reduced.

increase in taxes or decrease in benefits

The opinion for increasing taxes or decreasing the benefits may vary from person to person as both the options have their advantages and disadvantages.

Increasing the taxes might discourage the youngsters from gaining higher education and skills and advancing their careers. Or higher taxes might evoke anger in the higher-skilled workers.

Reducing the benefits, such as increasing the retirement age or excluding wealthy people from receiving the benefits of the funds, might instigate rebellion in the country, and the political support might be pulled off.