Suppose that the ratio of retirees to working citizens is currently 1 to 5, meaning that there are 5 working people for every retiree. Suppose that in thirty years the ratio will change to 1 to 2. If benefits remain the same, what will happen to the tax rate assuming retirees are provided benefits in a pay-as-you-go system? How much would benefits decrease if the tax rate remained the same?
What will be an ideal response?
Initially, a worker paid for 20 percent of a retiree's benefits. In the future, the same worker
would be responsible for paying for half of a current retiree's benefits. If benefits remained the
same, then each worker's tax burden would increase by approximately 30 percent of the cost
of benefits. If tax rates remain the same, then benefits would need to fall by approximately 60
percent.
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