A worker earns $2,000 per month before taxes.He pays $140 per month payroll tax on those wages.In addition, the income taxes on those wages are $360 per month.On retirement, the worker receives a Social Security pension of $750 per month.Which of the following statements is true?

Question

Quizplus · Accepted Answer

The worker's net replacement rate is calculated by dividing the pension received by the net income (after taxes) while working. The net income is $2,000 - $140 (payroll tax) - $360 (income tax) = $1,500. The pension is $750. So, the net replacement rate is $750 / $1,500 = 0.5 or 50 percent.

A Worker Earns $2,000 Per Month Before Taxes