The welfare state and redistribution

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

"The public school is free." Not exactly: educating each student costs several thousand dollars a year, paid by the government.

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 take care of them).

Educating a high school student costs around $\$6,500$ a year; your school has $600$ students.

1. a) Calculate the total annual cost covered by the government.
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 free or reduced-price school lunch program, an operation covered by Medicaid, a neighbor's unemployment benefit).

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

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.

Household A earns $\$4,000$ per month and pays $\$800$ in total taxes and contributions; Household B earns $\$1,000$ and pays $\$100$. Both use public schools, health care, 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.

A freelance professional who bills $\$75,000$ 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 government 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 tax progressivity and ability to pay to justify why they should contribute a higher proportion of their income than a person with a salary of $\$16,000$.
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's perception has on a country's tax morale.

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 optimize social spending.

Follow these stages:

1. Research: Visit the Bureau of Labor Statistics or Census Bureau website or the federal budget portal and gather revenue data from federal income tax and sales tax, as well as expenditure allocated to education, healthcare, and Social Security for the most recently completed fiscal year.

2. Analyze: 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 the federal income tax versus the regressive nature of the sales tax in income redistribution.

3. Propose: Write a one-page report formulating a justified proposal to reallocate $5.0\%$ of the analyzed budget towards an item that enhances the social safety net in your local area (college scholarships, public transportation, or youth mental health).

Evaluation criteria:

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

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

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

Two campaign platforms: (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) Summarize what society gains and loses with each platform, 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.

Unemployment benefits are paid if you have worked and paid into the system before and now lose your job; they come out of the payroll taxes paid by all workers and are temporary.

1. a) Explain why having paid into the system before is required (it works like insurance).
2. b) Argue why the benefits are temporary and decrease over time (encouraging people to look for work; the money belongs to everyone).

The long-term care law helps people who cannot take care of themselves — a grandmother with Alzheimer's, a child with a disability —: it pays for caregivers, adult day centers, 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.

An appendicitis operation costs the public system around $\$4,000$, 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 health care works like a giant insurance plan (between the healthy and the sick, between young and old) and what advantage sharing the risk among millions of people has.

'My grandmother gets her pension because she saved hers in a government savings account.' Correct the sentence: explain the pay-as-you-go system, in which the contributions of today's workers pay today's Social Security benefits, and your grandmother's paid the retirees of her day. Argue what problem appears if there are many retirees 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 $\$200$ per month, and $400$ retirees.

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 $800$ retirees: calculate the new average pension.
3. c) Explain the challenge of population aging 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), similar to how Social Security works in the US.
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. Mrs. Paca contributed for $30$ years with an average salary of $\$1,600$.

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 cafeteria costs $\$4$ per meal. Low-income families pay $\$1$ and the city puts in the rest. There are $60$ students with subsidized lunches who eat there $170$ days a year.

1. a) Calculate the annual cost of the subsidized lunches for the city.
2. b) Calculate how many full meals for students without a subsidy that spending is equivalent to, and write an argument in favor of keeping the subsidies (equal opportunities, health, school performance).

The town 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 population 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 city budget items will experience greater spending pressure and which will lose users.
2. b) The City Council has an extraordinary investment fund of $\$600,000$ 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 city-owned housing for affordable rent and create a coworking/remote-work 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.

Analyze 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 full retirement age.

2. Increasing the Social Security and Medicare payroll tax rates paid by businesses and workers.

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

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.

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

1. a) Classify as universal or means-tested: the flu vaccine, the textbook grant, the neighborhood health center, 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 city council designs a rent assistance program of $\$200$ a month for families with an income below $\$1,200$. The Vives family earns $\$1,150$ and the Soler family, $\$1,210$.

1. a) Analyze the problem of the "cliff-edge effect": is it fair that a $\$60$ difference decides $\$200$ 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 raise.