The welfare state and redistribution

Explain what the welfare state is and name four services or benefits it guarantees (healthcare, education, pensions, unemployment benefit, care support). Describe one that you have used this week and another that someone in your family uses, even if you do not realise it.

'The state school is free.' Not exactly: educating each pupil costs several thousand euros a year, paid by the State.

1. a) Explain who really pays for it and why it is said to be 'free at the point of use'.
2. b) Give two other examples of 'free' services that are paid for with taxes and argue why it is worth knowing what they cost (to value them and look after them).

Explain in your own words what redistribution is: how tax money comes more from some pockets than others and returns as services for everyone and support for those who need it most. Illustrate it with a concrete example (a school meal grant, an operation in public healthcare, a neighbour's unemployment benefit).

Household A earns $4.000\ \text{€}$ per month and pays $800\ \text{€}$ in total taxes and contributions; Household B earns $1.000\ \text{€}$ and pays $100\ \text{€}$. Both use state schools, healthcare, and public streets equally.

1. a) Calculate what percentage of its income each household pays.
2. b) Explain in what sense the system redistributes: who puts more into the common pot and who receives more relative to what they have.

'My grandmother gets her pension because she saved hers in a State money box.' Correct the sentence: explain the pay-as-you-go system, in which the contributions of today's workers pay today's pensions, and your grandmother's paid the pensioners of her day. Argue what problem appears if there are many pensioners and few workers.

In the imaginary country of Longevia, pensions operate on a pay-as-you-go basis: current workers' contributions pay for current pensions. There are $1.000$ workers who each contribute $200\ \text{€}$ per month, and $400$ pensioners.

1. a) Calculate the average monthly pension that the system can pay out.
2. b) Twenty years later, there are the same $1.000$ workers contributing the same amount, but $800$ pensioners: calculate the new average pension.
3. c) Explain the challenge of population ageing and name two possible responses (increasing contributions, working for more years, arrival of migrant workers, supplementing with private savings).

In $1990$, there were about $5$ working-age people for every retired person in Spain; today there are about $3$ remaining, and this is expected to reach $2$.

1. a) Explain what this trend means for the pay-as-you-go pension system (where today's workers pay today's pensions).
2. b) Propose two measures to sustain the system and comment on a downside of each (raising taxes or contributions, raising the retirement age, attracting workers from abroad).

Some welfare state services are universal (for everyone, rich or poor: healthcare, education) and others are means-tested (reserved for those who need them: school canteen grants, minimum income).

1. a) Classify as universal or means-tested: the flu vaccine, the textbook grant, the neighbourhood health centre, and rent assistance for families with no income.
2. b) Explain one advantage of the universal model and one advantage of the means-tested model.

A freelance professional who bills $75.000\ \text{€}$ per year working from home on their computer claims: "I have private health insurance, I don't have children, and I work for foreign clients. Therefore, the State withholding $35\ \%$ of my income in taxes is robbery because I receive nothing in return from public services."

1. a) Rebut their argument by demonstrating how their economic activity and income depend, directly and indirectly, on public goods and institutions funded by taxes that they take for granted.
2. b) Use the principles of fiscal progressivity and economic capacity to justify why they should contribute a higher proportion of their income than a person with a salary of $16.000\ \text{€}$.
3. c) State under what circumstances this citizen would have a legitimate economic grievance regarding the tax system (for example, in relation to tax fraud or the inefficiency of public spending) and analyze what effect that citizen perception has on a country's tax morale.

Analyse the following statement: «The public pay-as-you-go pension system is economically unviable: as there are more and more retirees and fewer contributors, in a few years it will completely collapse».

1. a) Explain the financial operation of a pay-as-you-go system (as opposed to a private funded system) and why the contributor-to-pensioner ratio is crucial for its sustainability.
2. b) Assume that in the coming decades this ratio falls from $2,2$ to $1,4$ workers per pensioner. Evaluate the pros, the cons, and which group is harmed by each of these three adjustment options:

1. Raising the statutory retirement age.

2. Increasing social security contribution rates paid by businesses and workers.

3. Financing part of the pension deficit through general taxes (such as personal income tax or VAT).

1. c) Based on your analysis, justify whether the initial statement is rigorous or whether it confuses an inevitable technical bankruptcy with the need for political and economic reform.