TAILIEUCHUNG - Lecture Economics: The basics (2/e): Chapter 18 - Michael Mandel

Chapter 18 - Economics of retirement and healthcare. After reading the material in this chapter, you should be able to: Apply the life cycle theory of retirement and identify the main sources of retirement funds; explain the difference between defined benefit and defined contribution retirement plans; summarize the demographic challenge facing social security and describe the possible solutions;. | Chapter 18 Economics of Retirement and Healthcare McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Learning Objectives Apply the life cycle theory of retirement and identify the main sources of retirement funds. Explain the difference between defined benefit and defined contribution retirement plans. Summarize the demographic challenge facing Social Security and describe the possible solutions. Describe the healthcare life cycle, its problems, and the role of health insurance. Discuss reasons why healthcare spending is rising so quickly. 18- Basics of Retirement Retirement means that someone no longer has income from work and must finance their level of spending. The life-cycle theory of retirement says people spend when they are young, save during the latter part of their working lives, and then spend while they are retired. That is, they build up a nest egg and then spend it down. 18- Basic Financial Life Cycle Youth: Spend on education and buying a home Middle Age: Build up savings Old Age: Use savings for medical and living costs Age Net worth Peak earning years Retirement Borrowing for home and education 18- Where Adults over 65 Get Their Money, 2009 Percentage of average income for people 65 and over Earnings from Work 26% Social Security 41% Public and Private Defined Benefit Pensions 18% Defined Contribution Plans and Individual Retirement Accounts 1% Income from assets 11% All Other 3% 18- Problems with the Life-Cycle Theory Two things can go wrong with the life-cycle theory: The retirement poverty problem occurs because poor people often cannot save much for retirement. The retirement uncertainty problem occurs because individuals don’t know how long they will live. 18- Employer Retirement Plans Employer retirement plans are provisions for retirement that your employer contributes to on your behalf. There are two types of employer retirement plans: First, a defined benefit plan provides .

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