Chapter 20 Social Security Introduction to Social Security Chapter Structure Social Insurance History of Social Security Types of benefits Eligibility for benefits Problems of the current Social Security system Reasons for Social Insurance Social insurance programs are necessary for several reasons: To help solve complex social problems To provide coverage for perils that are difficult to insure privately To provide a base of economic security to the population 3 Chapter 22 Page 1
Social Insurance Programs Old-Age, Survivors, and Disability Insurance (OASDI) Medicare Unemployment Insurance Workers Compensation 4 Basic Characteristics of Social Insurance Social insurance programs have certain characteristics that distinguish them from other government insurance programs: Most programs are compulsory This makes it easier to provide a floor of income to the population It also reduces adverse selection Programs are designed to provide a floor of income Programs pay benefits based largely on social adequacy rather than individual equity The benefits are heavily weighted in favor of certain groups, such as lowincome persons, large families, and retirees 5 Basic Characteristics of Social Insurance Benefits are loosely related to the workers earnings Programs, benefits, and benefit formulas are prescribed by law A formal means test may not be required A means test involves disclosing income and assets Full funding of benefits is unnecessary For example, it is not necessary to fully fund Social Security because workers will always enter the program and support it Programs are designed to be financially self-supporting Programs should be almost completely financed from the earmarked contributions of covered employees 6 Chapter 22 Page 2
Historical Background Severe economic and social problems caused by the Industrial Revolution The U.S. Social Security system was introduced in 1935 by President Franklin D. Roosevelt, as a response to our Great Depression The Social Security program is a foundation upon which individuals are to build Origins Of A Social Security System One political reaction to problems such as this is socialism Otto Von Bismarck introduced a social insurance program in 1880 (Prussia) The introduction was designed to destroy Prussia's socialist party by stealing their great issue Characteristics of The Current System Not a public assistance program Recipients of social security benefits pay for the benefits Not a private insurance program It is compulsory Benefits are predetermined by law Congress has taxing power Congress can change benefits. Social Security is a social insurance system Chapter 22 Page 3
Old-Age, Survivors, and Disability Insurance (OASDI) Commonly known as Social Security, OASDI is the most important social insurance program in the US Enacted in 1935, it covers more than 9 out of 10 workers Groups covered under the Social Security Program include: Employees in private firms Federal civilian employees State and local government employees Employees of nonprofit organizations Self-employed persons who earn $400/year or more Domestic employees in private homes who earn $1500/year or more (in 2006) Miscellaneous other groups, including ministers, US military personnel, and railroad workers 11 Old-Age, Survivors, and Disability Insurance (OASDI) A worker becomes eligible for benefits by attaining an insured status: To attain a fully insured status, a worker must have 40 credits In 2010 & 2011, a credit is earned for each $1120 of covered earnings A maximum of 4 credits can be earned each year You are currently insured if you have earned at least 6 credits in the past 13 calendar quarters The number of credits required to be disability insured depends on the age when you become disabled Eligibility for certain benefits depends on insured status: Fully insured: retirement and survivor benefits Currently insured: survivor benefits Disability insured: disability benefits 12 Chapter 22 Page 4
The Current Social Security System The current program has elements similar to private insurance (individual equity) There are also elements that are based on need (social adequacy) Operation of the Program Compulsory for all workers except full-time federal civilian employees, and the employees of a few states (in those states, newly hired employees pay the Medicare portion of the tax) Tax on wages is the main source of income Benefits are not fully funded (and never were) Insured Status A fully insured person has 40 quarters (10 years) of covered employment and is entitled to all appropriate benefits regardless of need A currently insured person has worked 6 of the 13 quarters prior to death and is entitled only to survivor (not retirement) benefits Chapter 22 Page 5
Benefit Determination Only covered earnings count. Earnings below a specified maximum are covered and subject to Social Security tax The Average Indexed Monthly Wage determines the amount of benefits received after it is translated into a PIA (primary insurance amount) using a transformation table that is regularly updated Retirement Benefits Payable to a retired worker and spouse at age 67, and dependent children or parents. Early retirement at age 62 means benefits are reduced; delayed retirement - increased Earnings from employment reduces Social Security benefits $1 for every $2 earned after the threshold is reached for a beneficiary under 65 Examples of Monthly OASDI Retirement Benefits at the Full Retirement Age (FRA) 18 Chapter 22 Page 6
When Is the Right Time to Draw Social Security? 20 Survivor Benefits Payable to surviving spouse caring for an unmarried child under age 16. Also payable to unmarried dependent children under 18 (under 19 if in school). If child is disabled, benefit ages change Benefits subject to a family maximum, and reduced when wage income is earned in a result similar to retirement test Chapter 22 Page 7
Survivor Benefits and the Blackout Period The possible period between: Youngest child s 18th birthday Widow s 62nd birthday Disability Benefits Payable to fully insured workers employed for 20 of the 40 quarters prior to disability Meet the definition of disability - disability must be permanent (expected to last more than 12 months). Definition: unable to perform any substantial gainful activity Chapter 22 Page 8
Medicare Separated into three parts: Part A provides hospitalization coverage Part B provides coverage for doctors benefits Part C provides managed care Part D provides prescription drug coverage Deductibles, participation, and maximum limits apply Medigap policies are designed to fill the gaps in Medicare Coverage A: Basic Hospital Inpatient hospital benefits Room and board in a semi-private room Nursing services Drugs furnished in the hospital Operating room costs Skilled nursing Care Home health care benefits Hospice Benefits Chapter 22 Page 9
Coverage B: Voluntary Supplemental Medical Benefits Doctor s Bills Hospital diagnostic studies Dental surgery Outpatient care Home health care Blood Excluded: routine physical exams, dental care, eyeglasses and hearing aids Coverage C: Medicare Advantage Plans Medicare Advantage Plans (Part C) are private health plans that are part of the Medicare program If beneficiaries choose this alternative, Medicare pays a set monthly amount to the private plan Most plans provide extra benefits and have lower co-payments than the original Medicare plan Plans include: Medicare HMOs Medicare PPOs Medicare Special Needs plans Medicare Private Fee-for-service plans 29 Managed Care and Medicare Is an available option for Medicare recipients where HMOs exist Allows coverage without being billed for much of the copayments and deductibles usually paid by the insured Chapter 22 Page 10
Part D: Prescription Drug Passed 2003 Anyone with Medicare coverage is eligible Must join a Medicare prescription drug plan or a health plan that provides the coverage Subject to deductibles and copays 31 Part D: Prescription Drug Plan Drug Cost Plan Pays Individual Pays Out of Pocket Cost $320 0% $320 $320 $321-2,930 75% 25% $652.50 $2,930-6,657.50 0% 100% $3,727.50 For $ 6,657.50 Total $4,700 Above $ 6,657.50 95% 5% 5% above $6,657.50 Medicare Supplemental coverage (Medigap) Purchased to cover the deductibles and co-payments Purchased to cover other portions of the Medicare program that causes cash outlays of the insured Chapter 22 Page 11
Financial Operation of the System Payroll tax paid half by the employer and half by the employee Current tax is 7.65% of covered earnings for a total of 15.3 percent (no wage limit on HI tax) Pay-as-you-go basis Does not keep large reserves like private insurance companies do Current Concerns About the Operation of Social Security Demographic trends show too few workers relative to retired people to continue to operate the system on the pay-as-you-go basis The current system has been accumulating large surpluses, however future projections show large deficits Proposed Solutions Revenues will have to be increased: higher tax rates; higher covered earnings; general tax revenues will have to be used Benefits will have to be lowered: retirement age will have to be increased; indexing for inflation will have to be less generous; benefits reduced or eliminated Chapter 22 Page 12
Proposed Solutions Taxation of Social Security benefits may have to be changed to increase revenue If additional benefits are to be provided, a fair funding mechanism must be determined Privatization of some parts of the social security system is being discussed Chapter 22 Page 13