If the federal government decides to reduce social security benefits to future retirees and increase the contribution (S...
If the federal government decides to reduce social security benefits to future retirees and increase the contribution (Social Security taxes) on all workers, what will probably happen to the supply of funds available in the capital markets? And what will be the effect on interest rates?
Homework Answers
If social security benefits are redued and social security taxes are increases, fed will have surplus fund. Therefore fed will not issue new bonds. Supply of bonds will be less.
On the other hand demands for long term bonds will most probably go up. This is because people want to invest in long term bonds to secure their retirement funds
With low supply and increasing demands for bonds, interest rates will come down
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