Social Security payments and tax revenues may be considered “on-budget”—i.e., as
ID: 1191179 • Letter: S
Question
Social Security payments and tax revenues may be considered “on-budget”—i.e., as part of the U.S. general budget no different than defense spending supported by income and other taxes including Social Security taxes—or “off- budget” spending supported by dedicated taxes. Why would Social Security be considered off budget?
a. Paid for by dedicated tax.
b. Cannot pay out more than revenues generated by tax and interest income on Trust Fund government bonds .
c. SS spending does not affect rest of budget.
d. a and b.
e. All of the above.
Why would Social Security be considered “on-budget”?
a. Trust funds is not real savings because funds already used to fund current government budget.
b. Special trust fund bond is not public debt therefore not a real obligation.
c. Shortfall in SS taxes versus SS payments would be funded by general budget.
d. Social Security payment and tax can be changed at any time by Congress.
e. All of the above.
If the idea of insurance is to share the risks of bad outcomes, in what sense does insurance share the risks.?
a. Assuming randomness of bad outcomes in a group, the probability of bad outcomes can be calculated, and insurance premiums set to cover the group’s costs.
b. Insurance transfers the risks from those individuals willing to bear it to those who are unwilling to.
c. Insurance transfers the costs to the young and healthy from the old and sick.
d. All are true.
How does adverse selection affect the ability of insurance companies to provide the benefit of risk sharing?
a. Insurance companies know more than the insured about its outcomes.
b. The individual thinks healthcare is a free good because it is paid for by a third party.
c. The probability of bad outcomes in a group is likely to be higher and less likely to be random.
d. All the above.
What is the adverse selection “death spiral” that might lead to the collapse of the healthcare insurance market?
a. Insurance premiums will be set to high.
b. Premiums will be set too low.
c. It will cause healthy individuals to leave the group.
d. Both a and c.
e. Both b and c.
Explanation / Answer
1.Ans-C.- it does not effect rest of govt spending. it has also been argued that the Social Security surplus is not a true surplus, but rather an advance payment for future benefits that should be separated from the surplus or deficit of the rest of government.
2,Ans-E
3.Ans-D
4.Ans-A
5.Ans-D In this world of asymmetric information, there is theoretically no way for an insurance company to make a profit, or to even exist in the private market. If the insurance company sells insurance at the average cost of medical care — what it expects to pay out on average — then people who know deep down that they’re healthy are going to prefer not to buy the insurance. People who know they are likely to get sick are more than willing to pay the average cost of medical care and sign up in droves. When that happens, the average cost of medical care that the insurance company sees goes up, so they have to charge higher rates for coverage. That means that the folks who expect to have ingrown toenails but no other health problems will drop coverage while the people who expect to get diabetes will stay on. That drives up the average cost of health insurance further, which means that the next healthiest group of people will stop buying coverage and only the most expensive stay on. Eventually only the most expensive person will be willing to buy insurance (and he or she probably won’t be able to afford it). The market fails, and insurance cannot be offered. The insurance market is broken.
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