Question

The Social Security system levies a tax on workers and pays benefits to the elderly. Suppose that congress increases both the tax and the benefits.

for simplicity, assume that Congress announces that the increases will last for only one year.

a. How do you suppose this change would affect the economy? (Hint: Think about the marginal propensities to consume of the young and the old.)

b. Does your answer depend on whether generations are altruistically linked?

Answer 1

a) We can expect that young will have more propensity to save than the old since they will tend to save for their old age when they cannot work . So increasing taxes will reduce consumtion among the young since they have a lower marginal propensity to consume . Increase in benefits will increase consumption among old to a much higher level since they have higher propensity to consume . So that change in aggregate consumption in the economy will depend on the demographic composition of the economy and the degree of MPC .

b) Altruism or selflessness is the principle or practice of concern for the welfare of others . No it depends on the marginal propensity to consume .