1.

a. When was the Social Security Program established in the USA?

b. What are the economic circumstances and reasons for establishing Social Security?

2. Explain the following in the context of social security.

a. Defined Contribution Plan

b. Defined Benefits Plan

c. Pay-As-You-Go Plan

3. A private firm plans to establish an insurance scheme to safeguard individuals from losing their income due to ill health or old age. There are two types of individuals from the point of view of risks faced by the insurance firm, high risk and low risk.

Insurance plan works in the following manner. An individual purchases an insurance plan that promises him or her a regular monthly income after the retirement due to old age or after any serious mishap that forces the individual to retire. The individual pays a monthly premium until he or she retires. The premium is high is the individual is likely to retire early (high risk individual) and the premium is low if the individual is likely to retire late (low risk individual).

The type of individual (high risk or low risk) is known only to the individual and not known to the insurance firm.

The firm believes that low risk individuals are likely to pay $100 to $200 per month premium and high risk individuals are likely pay $300 to $500 per month premium. There are one million individuals in the country.

a. The firm believes that about 70% of the population is low risk and 30% of the population is high risk. To remain break-even, the firm requires at least $150 million.

i. What should be the minimum premium imposed on any individual to meet the financial need of the firm (note that the firm cannot identify low risk and high risk individuals separately).

ii. Which type of individuals (high or low risk or both) will participate in the insurance program?

b. If the firm believes that about 30% of the population is low risk and 70% of the population is high risk the firm requires at least $250 million to remain break-even.

i. What should be the minimum premium imposed on any individual for the firm to remain break-even?

ii. Which type of individuals (high or low risk or both) will participate in the insurance program?

iii. If only one type participates in the program, what should be the policies of the government to ensure that all individuals do receive insurance services?

4. GDP growth of a country depends on several factors. Few examples are technology, human capital, physical capital, public goods, and economic stability. Use the government institutions listed in Table 3-1 of Lecture 7, and identify how each of the government institution helps develop above factors by filling out the following table.