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.

Educating a secondary school pupil costs around $6.500\ \text{€}$ a year; your school has $600$ pupils.

1. a) Calculate the total annual cost assumed by the State.
2. b) Calculate how much a family with two children at that school 'saves' compared with paying for a private school at that price.
3. c) Explain why public education is the greatest tool for equal opportunities.

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.

In the country of Desigualia, the $80/20$ ratio is $8$ (the richest $20\ \%$ earns $8$ times more than the poorest $20\ \%$). To reduce it, the Government is considering two alternative economic proposals:

• Proposal A: Increase the Minimum Interprofessional Wage by $25\ \%$ and keep current tax rates frozen.

• Proposal B: Maintain market-determined wages and implement a more progressive personal income tax (IRPF) brackets to fund a guaranteed subsidy for incomes below the poverty line and full study grants.

1. a) Predict the impact of Proposal A on inequality: what immediate positive effects and what possible economic risks (in low-skilled employment or prices) could it generate?
2. b) Analyze how Proposal B acts on inequality: why do economists distinguish between redistributing current income (in the short term) and leveling starting opportunities (in the long term)?
3. c) Justify which of the two proposals reduces the social gap more sustainably in the long term without jeopardizing public revenue collection.

'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.

The council designs a rent assistance of $200\ \text{€}$ a month for families with an income below $1.200\ \text{€}$. The Vives family earns $1.150\ \text{€}$ and the Soler family, $1.210\ \text{€}$.

1. a) Analyse the problem of the 'cliff-edge effect': is it fair that a $60\ \text{€}$ difference decides $200\ \text{€}$ of assistance?
2. b) Propose a better design (the assistance decreasing gradually as income rises, instead of being cut off abruptly) and explain why it avoids traps like turning down a pay rise.

In Spain, around $27\ \%$ of children live in households at risk of relative poverty (with incomes below $60\ \%$ of the national median income), despite the vast majority of these families having employment and basic subsistence services guaranteed.

1. a) Interpret the concept of relative poverty: why is this indicator used to measure social cohesion in developed economies instead of the concept of absolute poverty? Explain why a person can be considered poor in this context even when their basic biological needs are met.
2. b) To tackle this problem, a regional government has a budget of $40$ million euros and is debating between two policies:

• Policy 1: A direct monthly cash transfer of $120\ \text{€}$ per child to families below the threshold.

• Policy 2: Guaranteeing free places in nursery schools for ages $0$ to $3$ and free school meals for these families.

Evaluate both policies: which one provides more immediate relief to household liquidity, and which one acts more effectively to break the «poverty trap» in the long term? Justify your decision.