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Final

ECON 241 Final: Short & long question answer prep (based on past questions)


Department
Economics
Course Code
ECON 241
Professor
Arthur E Stewart
Study Guide
Final

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ECON 241 Fall 2016 Exam
Format / tips:
Most of focus will be on:
Poverty
Aging population
Policy discussion with EI / UI (deficit, debt, retirement programs etc)
Econ contexts before midterm 2 would be part of short answers if included
Anything else he or TA mentioned?? (i’m going tomorrow, i’ll ask then!)
Past Exam Short Answer Questions (5 points)
Explain/define the term and why it is important to social policy
1. Adequacy of social assistance
2. Change in the nature of work from the early 1970s thru the mid 1990s
3. Spousal Allowance
4. National child benefit supplement
5. Welfare wall
6. Intergenerational transfer
7. Gini coefficient (on midterm)
8. Guaranteed income supplement (probably not on this final bc it was on the midterm)
9. The seniors benefit (probably not on this final bc it was on the midterm)
10. Aging population
11. Poverty among single-parent female households
Long Answer Questions (15 points)
1) The World Bank argued that countries should have a second pillar in their retirement
system and that is should be a mandatory, fully-funded and privately managed
contributory public pension system. They offered arguments on seven separate
issues in favour of this. Discuss the merits of their arguments.
WB’s suggestion for pension has 3 pillars, from which it (or Canada?)
considers the second pillars to be a mandatory addition to the commonly
implemented first one. It also suggests a third pillar that is an adapted and
voluntary version of the second pillar.
First pillar = basic guaranteed standard of living to seniors, usually flat rate
benefit financed out of general tax rev
Second pillar = contribution public pension (more below)
Third pillar = privately managed, fully funded and defined contribution
7 reasons (????)
Firstly, the World Bank argues that a privately managed/fully funded scheme is more
likely to increase savings, increase investment, increase productivity, and increase
the overall economic growth. The WB argues that the key element in here is that
private management seeks the highest possible return on the funds. Pay-as-go
schemes can be privately managed. However, the difference has to do with the size
of the asset pool. Fully funded schemes are larger and have a bigger impact on
growth than pay-as-you-go schemes.

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Secondly, the World Bank argues that the fully funded scheme will have less of an
impact on labour markets. This is a valid consideration because in a fully funded
scheme, you can set the tax rate independent of the relative cohort sizes vs.
retirement. In a pay-go scheme, that tax rate depends on the relative size of the
cohort workers vs. cohort of retirees.
Thirdly, privately managed and fully funded schemes are less likely to be captured
by governments. The issue here is one of public vs. private management. A pay-as-
you-go privately managed scheme would not be subject to capturing.
Fourthly, the intergenerational transfer is inherent in pay-as-you-go and is absent in
a fully funded scheme. With a fully funded scheme, each individual funds his or hers
own retirement. It’s an individual account, meaning there is no intergenerational
transfer what so ever. In a pay-as-you-go scheme, there is an intergenerational
transfer.
Fifthly, the WB criticized the fully funded schemes because they don’t do a very
good job at protecting the working poor or those whose careers have been
interrupted. However, this is counterintuitive because this is the job of the 1st pillar in
the Occupational Pension Plan.
Sixthly, privately managed schemes raise regulatory issues. However, this is not a
problem in Canada. It is important to notice that whatever regulatory regime you
come up with, you must balance somehow the security of investment with the pursuit
of the highest return.
Lastly, who bears the risk? A fully funded scheme is a defined contribution scheme.
Meaning, the risk is borne by individuals. On the other hand, the risk is borne by
society in a pay-go scheme. Large sums of private wealth disappeared in the crash
of 2008. Everybody received the same amount because it was financed through
taxes (as a society as a whole bearing the risk).
2) Consider the following quote: “Poverty among Canadian seniors is a thing of the
past. Seniors are well-served by the elements of public policy that support them.
Looking forward, there is no reason for concern with regard to the poverty of seniors
in Canada.” Discuss this quote.
- TA suggested by first off stating that this question is false
- Over, 90% of seniors’ income comes from the government
- True, that poverty among seniors has decreased from past (about 70%
decrease from 1980 to 2011), however poverty still present among seniors
and still more prevalent among single seniors vs average Canadian
- Elderly women more in poverty than men
- Because they entered workforce later in life (recent inclusion) + live
longer than men (outlive pension)
- Elderly couple less likely to experience poverty than singles
- Single person burdens all cost i.e. rent etc
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- Impact for policy: role of public pensions for single vs married elderly
are different
- Example, spousal allowance,
- On depth of poverty: True that among those in poverty, the least deep is the
elderly → thus, those aged 65+ in poverty, on average not going to be very
much below poverty line
- However, elderly - especially women - have high incidence of poverty
- Thus, it means that a lot of older women in poverty but not by much
- In addition to this, must also consider “near poverty”, those that are just above
poverty line but not living at a much higher standard
- Common for elderly as pension + all the govt transfer do not go very
far even at their highest
- Trend observed is that more and more seniors are working, 2011 saw more
55-64 year olds working than 15-24 year olds, participation rate almost
doubled from 2002 to 2012
- FOUR REASONS
- 1. Need to work, to earn basic living
- 2. Shortfall in savings, dont have enough money to save bc paying
down debt
- 3. Retirement savings went to children’s educations, now need more
- 4. Want to work (bored I guess)
- Either way, #1-3 = elderly do not have enough to make ends meet
- Since retirement is still somewhat mandatory (not legally mandatory I think?),
this means government needs do more work
- We also have to look at how the different policies right now serve seniors -
example, CPP & GIS
- GIS has a 50% tax back rate (up to 70% for couple) for income earned
while in retirement, and this counts CPP as income
- So every $1 in CPP = $0.5 - $.70 less in GIS
- Other retirement income = OAS, and that’s dependent on your final
salary + working life, vs GIS that is guaranteed level of income
- So, if you’ve been a poor person all your life, OAS is not going to be
much, CPP is not going to be much and GIS will still be reduced
because you’re getting some level of CPP
- Disincentives you from contributing to CPP, spend $1 for $1 at
the moment
- Obviously bad for government as well, as CPP is already short
on cash!
- Annual income if you’re under full benefits
- (CPP is variable for everyone, and also changes GIS so not included
in this, and other benefits can also be added i.e. spousal allowance,
survivor’s benefit, health benefits, etc, but those are not available for
everyone so not counted here)
- Single: OAS + GIS = $17,310
- Couples: OAS + GIS = $26,368
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