Exercises: 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.

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).

The figure shows the journey of money in the welfare state: households and businesses pay taxes and contributions, the State collects them and returns them as services and benefits. One of the outputs is unlabelled.

1. a) State two items that could go in the empty box (think about public services you know: roads, security, culture, justice) and explain why they fit.
2. b) Explain in your own words the complete circuit shown in the figure and in what sense this circuit "redistributes" income.

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.

Unemployment benefit is paid if you have worked and contributed before and now lose your job; it comes out of the contributions of all workers and is temporary.

1. a) Explain why having contributed before is required (it works like an insurance).
2. b) Argue why it is temporary and decreases over time (encouraging people to look for work; the money belongs to everyone).

'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.

'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).

The dependency care law helps people who cannot look after themselves — a grandmother with Alzheimer's, a child with a disability —: it pays for carers, day centres or family assistance. Explain why a society decides to pay for this collectively instead of leaving it to each family alone, and how it relates to the idea that these are risks that can happen to anyone.

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 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).

In the country of Repartia, the pension is calculated like this: for each year contributed, $2,5\ \%$ of the average salary of the last few years. Doña Paca contributed for $30$ years with an average salary of $1.600\ \text{€}$.

1. a) Calculate what percentage of the salary she is left with as a pension and her monthly pension.
2. b) Her son has contributed for $12$ years with the same average salary: calculate what pension he would be entitled to today.
3. c) Explain why the system rewards contributing for many years.

The school canteen costs $4\ \text{€}$ per menu. Low-income families pay $1\ \text{€}$ and the council puts in the rest. There are $60$ pupils with grants who eat there $170$ days a year.

1. a) Calculate the annual cost of the grants for the council.
2. b) Calculate how many full menus of pupils without a grant that spending is equivalent to, and write an argument in favour of keeping the grants (equal opportunities, health, school performance).

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.

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.

An appendicitis operation costs the public system around $4.000\ \text{€}$, paid with taxes; in a private insurance system, each family would pay its premium, and whoever has no insurance, the whole operation.

1. a) Compare both systems: who bears the risk in each one?
2. b) Explain why public healthcare works like a giant insurance scheme (between the healthy and the sick, between young and old) and what advantage sharing the risk among millions of people has.

Two election manifestos: (A) raise taxes on high earners to hire more doctors and reduce waiting lists; (B) cut taxes for everyone and let whoever wishes pay for private health insurance.

1. a) Summarise what society gains and loses with each manifesto, and who benefits or suffers most in each case.
2. b) State your position using the unit's concepts: redistribution, universal services, and freedom of choice.

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.

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.

The municipality of Cerezales has $3.000$ inhabitants: $900$ people over $65$ years old, $1.600$ of working age, and $500$ under $16$ years old. Demographic projections indicate that in a decade the elderly will represent $40\ \%$ of the census and minors will barely account for $10\ \%$.

1. a) Interpret the data by calculating the current demographic dependency ratio (dependent population over working-age population) and predict which municipal budget items will experience greater spending pressure and which will lose users.
2. b) The City Council has an extraordinary investment fund of $600.000\ \text{€}$ and must choose between two mutually exclusive projects:

• Project 1: Build a regional adult day-care center and set up a home care service.

• Project 2: Rehabilitate municipal housing for affordable rent and create a coworking/teleworking space aimed at attracting young working families.

Evaluate the opportunity cost of each option and justify which of the two strategies would better guarantee the long-term economic viability of the town.

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.

To curb overcrowding in medical practices, an autonomous community introduces a moderating fee (co-payment) of $4\ \text{€}$ for each primary care visit. Two years later, the Regional Department of Health publishes the following data:

• Visits for minor conditions (colds, minor check-ups) have decreased by $22\ \%$.

• Emergency room admissions due to complications from chronic conditions in low-income patients have increased by $16\ \%$.

1. a) Interpret these economic and healthcare results using the concepts of elastic/inelastic demand and preventive healthcare costs versus hospital care costs: did the measure succeed in saving money for the public system, or did it increase total spending? Justify your deduction.
2. b) Design a management alternative to relieve congestion in primary care clinics that does not introduce financial barriers or disincentivise medical monitoring for vulnerable patients. Justify its fairness and its budgetary impact.

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.

The School Council of an educational centre with $600$ students wants to create a «School Welfare Fund» to guarantee educational equity (learning materials, field trips, academic support). To design it, it must solve two economic dilemmas:

1. a) Revenue source: It is debated between charging a flat fee of $15\ \text{€}$ per student or establishing a progressive fee based on family income brackets ($0\ \text{€}$ for vulnerable families, $15\ \text{€}$ for middle incomes, and $35\ \text{€}$ for high incomes). Evaluate both options by applying the principles of tax equity (vertical and horizontal) and analyse the incentive problems or «free-rider» risks posed by a voluntary or self-declared fee.
2. b) Expenditure allocation: With an estimated budget of $9.000\ \text{€}$, design the allocation of resources by choosing what proportion you would allocate to universal services (which benefit all students equally) and how much to targeted aid (exclusive to vulnerable students). Justify your proposal economically by resolving the conflict between universalism and targeting within the welfare state.

Topic Challenge. Where does public money go and how does it reduce inequalities? Your mission is to act as a youth economic adviser and design a brief report to evaluate and optimise social spending.

Follow these stages:

1. Research: Visit the INE website or the State Budget portal and gather revenue data from personal income tax (IRPF) and VAT (IVA), as well as expenditure allocated to education, healthcare, and pensions for the most recently completed financial year.

2. Analyse: Construct a table using the data collected. Calculate what percentage of total social spending each item represents (for example, if healthcare accounts for $14,5\%$) and reflect on the progressive nature of IRPF versus the regressive nature of VAT in income redistribution.

3. Propose: Write a one-page report formulating a justified proposal to reallocate $5,0\%$ of the analysed budget towards an item that enhances the welfare state in your local area (study grants, public transport, or youth mental health).

Evaluation criteria:

• Accuracy in obtaining and calculating percentage data from official sources.

• Understanding of the state's redistributive role and the differences between direct and indirect taxes.

• Feasibility, coherence, and socio-economic justification of the proposed reallocation.