. For each of the reforms listed, briefly discuss the pros and cons of the refor
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Question
. For each of the reforms listed, briefly discuss the pros and cons of the reform, paying attention in particular to efficiency implications (through potential behavioral responses to the change) and equity implications (who wins and who loses). [Note that all reforms are intended to save the system money, so you do not need to list this as a benefit.]
1. Increase the number of years used to calculate benefits from 35 to 40.
2. Add new state and local government workers to the pool of covered workers (i.e., they pay payroll taxes now and receive benefits when they are old).
b. Reduce benefits for beneficiaries with high asset levels (wealth).
Explanation / Answer
1. Increasing the number of years used to calculate benefits from 35 to 40 is a win win situation for workers but a lose on the govt. side as the govt. now need to pay more at retirement to the employees which increases the Net Present value of obligations to the govt..The employees would now be more inclined to enroll in the retirement scheme in which the govt. pays the retirement benefits,there would be less savings by them for their retirement which would increase the spending levels during their lifetime otherwise this scheme would also cause the employees to become less cautious of their retirement savings whereas the govt. now needs to pay out more therefore needs to control its spending behavior and may be raise taxes to cover those future obligations.
2. Add new state and local government workers to the pool of covered workers is a win win situation for workers but a lose on the govt. side as the govt. now need to pay more at retirement to the employees which increases the Net Present value of obligations to the govt.But the govt at the same time is receiving additional pays in form of payroll taxes also.the govt. now needs to pay out more therefore needs to control its spending behavior and also to properly manage the money so that to cover future obligations.The already covered workers need to become more cautious of their retirement savings as the pool of covered workers has increased ,the new covered workers have now less incentives to save for retirement and this increases their spending behavior.
b)Its a gain for govt. as they now need not pay to benefits for beneficiaries with high asset levels and a loss for the beneficiaries with high asset levels.At the same time beneficiaries with high asset levels need to increase savings to their retirement due to decreased benefits while for govt. there are reduced net future obligations.
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