1. Currently there are 2.9 workers for every retiree. Average salary is $50,000

Question

1. Currently there are 2.9 workers for every retiree. Average salary is $50,000 and average benefits are $15,000. What is the average tax rate consistent with a pay-as-you-go system in equilibrium?

2. Based on the previous question. It is estimated that in 2030 there will be 2.1 workers supporting each retiree. Assume that the average wage will stay at $50,000 in 2030 and the government wants to keep the tax rate at the current level (calculated in question 3). What are average benefits consistent with those values? Suppose the government wants to keep the average benefit at the current level ($15,000), then what should be the tax rate to keep the system in equilibrium?

Explanation / Answer

1) There are 2.9 workers for each retiree.

Avergare income in this case is 50,000. So that

2.9 * 50000 = 145000

This is the total income and we need to tax this to support average benefits of 15000

15000 * 100 / 145000 = 10.35%

The tax should be roughly 10.35%

2) Now the average is down to 2.1 in 2030

2.1 * 50000 = 105000

Tax rate 10.35% from the previous calculation

105000 * 10.35% = 10867.5

Average benefit will be reduced to 10867.5

3) If average benefits to remain same at 15000 then

15000 * 100 / 105000 = 14.29%

The taxe rate will have to increase to 14.29%

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