Three friends from college meet up for their 10th college reunion and are discus
ID: 2786331 • Letter: T
Question
Three friends from college meet up for their 10th college reunion and are discussing the chances that Social Security will be there for them when they want to retire. Todd currently makes $25,000 per year, Dana earns $50,000 per year, and Jen earns $75,000 per year. Assume they were 22 when they graduated and that each of them will continue to earn the same annual salary for the next 30 years and will then retire. They each expect to live exactly 20 years after they retire. Also, each of them is single and will stay that way. You may assume there is no inflation for the next 50 years. (Unrealistic, I know, but it keeps the focus the SS costs and benefits rather than having to think about adjusting for inflation every year.) You'll probably want to use the formula I gave you on homework #5. 2· a) Calculate the amount of Social Security taxes each person will pay this year. b) Calculate the present value of the Social Security taxes each person will pay over their lifetime if the real interest rate is 3%. Calculate the monthly benefit each individual would receive if they were to retire today. Calculate the present value of the benefits each will receive during their retirement (you can assume the benefit formula stays the same and that the real interest rate is 3%.) Comment on your answers. c) d) c)Explanation / Answer
A Social Security tax is the tax levied on both employers and employees to fund the Social Security program. Social Security tax is usually collected in the form of payroll tax or self-employment tax. Also known as Old Age, Survivors, and Disability Insurance.
Answer a - Social security tax comprise of two components - Social security (6.2%) and medicare and 1.45% and is levied on both employer and employees hence total 12.4% SST and 2.9% Medicare.
From Employees perspective, the amount of social security tax to be paid by each person would be as under:
Todd - SST ($25000*6.2%) = $1550 and Medicare ($25000*1.45%) = $362.5 = Total = $1912.5
Dana - SST ($50000*6.2%) = $3100 and Medicare ($50000*1.45%) = $725 = Total = $3825
Jen - SST ($75000*6.2%) = $4650 and Medicare ($75000*1.45%) = $1087.5 = Total = $5737.5
Answer b -
Present Value of SST to be paid over the life time
TOD = $23,637.74
DANA = $47,275.48
JEN = $70,913.22