Question

I believe that the tax rate for Social Security is not high enough to pay me the benefits promised to me when I retire. At current tax levels, I believe that my benefit will be less than promised when I retire (this is the same as a higher implicit tax). As a result, I save money to make up for this shortfall in Social Security payments I believe will occur. This is an example of _______. a)Bernanke's paradox b)Crowding in theory c) Ricardian equivalence d)Friedman principle

Answer 1

This is an example of Ricardian equivalence.

Ricardian equivalence states that the individuals believe that the tax if reduced in the current period will lead to increased taxes in the future. So instead of increasing the consumption in the present period, they decide to save for the next period when the government will increase taxes.

In the example given, there individual believes that tax rate is not high for the payment at the time of retirement so saving today would help in making up for the shortfall of money.

So answer is C) Ricardian equivalence

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