Question

Score 44 years ago the maximum earings of a worker subject to Social Security tax (SST) was $9,000. The maximum earnings subject to SST now is $118,500. What compound annual increase has been experienced over this 44-year period of timo? How does it compare with a 3% annual increase in the consumer price index over the same period of time? The compound annual increase in SST over 44 years is %. (Round to two decimal places.) The increase in SST over 44 years is the 3% annual increase in the consumer price index. score score less than score greater than score

Answer 1

Answer: 1. 6.03% (See note 1) 2. greater than (See note 2) Note-1 Calculation of compound annual increase in SST over 44 years Present Value(P) = $9000 Future Value(F) = $118500 Years(n) = 44 Let Interest(i) = i then, 118500 =9000 *(1+i)44 (1+i)^44 = 118500/9000 (1+i)^44 = 13.1667 (1+i) = (13.1667)^1/44 1+1 = 1.060334 1 = 1.060334 - 1 I = .060334 I = 6.03% Note 2 Given that there is 3% annual increase in the CPI over this 44-year period of time.That means the calculated Annual increase is more than twice the CPI.