HR 205 Ch07 martocchio 6e

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Part Two: Retirement, Health Care, and Life
Insurance
Chapter Seven: Government-Mandated Social Security
Programs
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.

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Learning Objectives
 In this chapter you will gain an understanding of:
− origins and introduction of Social Security
programs.
− administration and funding of Social Security
programs.
− structure of the OASDI program.
− structure of Medicare programs.
− financing of OASDI and Medicare programs.
− unemployment insurance programs.

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Overview
 The chapter begins by discussing the origins of
Social Security and introducing the programs.
− Old-Age, Survivor, and Disability Insurance
(OASDI) is covered.
− Next, the chapter discusses Medicare.
 Financing of OASDI and Medicare programs
follows.
 The chapter ends with a discussion of
unemployment insurance.

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Social Security Programs
The government established Social Security and
workers’ compensation insurance programs for the:
Social good
Refers to a booming economy, low
levels of unemployment, progressive
wages and benefits, and safe and
healthful working conditions

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Origins of Social Security
 Early programs minimized income
discontinuity caused by the Great Depression.
− Protected families from financial devastation
during long unemployment spells.
− Ensured the financial solvency of employees
contributed to the well-being of the economy,
• allowing some companies to remain in business.
 Amendments established health-care
protection to those 65 or older.

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Introduction to the Social Security
Programs
 The Social Security Act of 1935 set up two programs:
− A federal system of income for retired workers, and
− A system of unemployment insurance administered by the
federal government and state governments
 Amendments include:
− Old-Age, Survivor, and Disability Insurance (OASDI)
provides retirement income, income to the survivors of
deceased workers, or disabled workers and their families.
− Medicare provides insurance covering hospitalization,
convalescent care, and major doctor bills for those 65 and
older, and disabled Social Security beneficiaries.

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Employers Required to Participate
OASDI and Medicare
 Three exempt groups:
− Federal government and
railroad workers exempt from
OASDI but not Medicare.
− State and local employees
already covered under other
plans.
− Children under 21, except
those 18 and older working in
their parents’ business.
Unemployment
 State unemployment
programs provide benefits to
millions of individuals.
 Workers file an initial claim
with their state’s office.
 Requirements for eligibility
varies by state.

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Administration of Social Security
Programs
Two federal agencies oversee OASDI and
Medicare administration:
The Social
Security
Administration
(SSA)
The Centers for
Medicare &
Medicaid
Services

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Programs
 Unemployment Insurance Administration.
− The Federal Unemployment Tax Act:
• authorized the collection of payroll taxes, and
• specified how they were to be used.
• Federal share of taxes used for administration, state
taxes pay benefits.
• Each state oversees administration of the program.
− The Employment and Training Administration
oversees unemployment at the federal level.

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Programs
 Social Security numbers.
− The Social Security Act authorized a system to
track employees’ wages for determining benefits.
− Led to the creation of the nine-digit Social
Security number in the late 1930s.
− The SS Administration issues numbers to U.S.
citizens, foreign students, and resident aliens.

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Old-Age, Survivor, and Disability
Insurance – OASDI
OASDI contains two additional benefits established by
amendments to the Social Security Act, providing:
Survivors’
Insurance,
1939
Disability
Insurance,
1965

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Qualifying for OASDI Benefits
 Social Security credits determine eligibility
for OASDI and Medicare benefits.
− Employees accumulate credits based on their
payment of Social Security taxes.
• Earning one credit, or quarter of coverage, for a
specified amount earned in a calendar quarter.
• In 2016, one credit for each $1,260 of earnings, up to
four credits per year.
− Employees must earn 40 credits to be eligible.

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Determining Benefit Amounts
 The SSA pays set monthly benefits to OASDI
recipients who are retired and/or disabled.
 Survivor benefit amounts depends on:
− average indexed monthly earnings (AIME)
determines primary insurance amount (PIA).
− Automatic cost-of-living adjustments (COLAs)
guard against inflation.
− Formulas used to determine benefits are complex.

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Determining Benefit Amounts
 The average indexed monthly earnings:
− represents earnings before 62, disability, or death.
− Using AIME to determine the PIA ensures OASDI
benefits replace the same proportion of income.
 Automatic cost-of-living adjustments.
− Each December, the SSA considers increases based
on the Consumer Price Index.

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Old-Age Benefits
 Eligibility criteria.
− 40 credits make the individual fully insured.
− Once fully insured, there are age criterion.
• Early retirement at 62, means permanently reduced
benefits prior to full retirement age.
− If born before 1938, full retirement age is 65 but,
− the age is gradually increasing to age 67.
• There are incentives for delaying retirement.
− Benefits increase if working from age 65 to age 70.
− Percentage increase depends on birth year, up to a maximum.

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Old-Age Benefits
 When the Social Security Act was passed, it
was based on the single-earner family model.
 OASDI was designed to compensate stay-at-
home spouses.
 Today, both spouses typically work.
 Same-sex married couples should be eligible
for benefits.

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Retirement Benefit Amount
Determination
Retirement
benefits equal the
primary insurance
amount (PIA).
Family benefits
usually equal 50%
of the PIA.
In 2015, the annual
monthly benefit for
retired workers
was $1,335.

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Survivor Benefits
 A worker with 40
credits qualifies family
members, who include:
− Widow(er) at full
retirement age, or
• 50 if disabled.
− Widow(er) at any age if
• children under age 16, or
• disabled children of any
age.
− Divorced spouse as early
as age 60.
− Unmarried children
under 18.
− Disabled children at any
age if disabled before
age 22 and unmarried.
− Stepchildren
grandchildren, or
adopted children.
− Dependent parents at age
62 or older.

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Survivor Benefits
 Survivor Benefit Amount Determination.
− Benefits are usually less than a worker’s PIA.
− SSA pays monthly benefits ranging from 71.5 –
100% of PIA.
− SSA pays a lump-sum to surviving spouse, if:
• the worker earned at least 6 credits of the last 13
quarters just before death, and
• the surviving spouse lived with the worker at the time of
death.

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Survivor Benefits
In 2016, the average monthly survivor benefit was:
$2,680 $1,285
For a widowed
mother and
two children.
For a widow
or widower
alone.

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Disability Benefits
 The SSA pays totally disabled workers.
− Disability is an inability to engage in any
substantial gainful activity (SGA) due to a medical
or mental impairment.
• Work is ‘substantial’ if it involves significant physical
or mental activities or both.
• Does not have to be full-time employment.
• ‘Gainful’ work activity is:
− performed for pay or profit, or generally performed for pay or
profit, or intended for profit, whether or not one is made.

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Disability Benefits
 Individuals who meet the definition must then
meet two criteria:
− The recent work test
• considers the age at which disability occurred.
− The duration of work test
• considers if an individual has worked long enough, and
has contributed to Social Security.

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Disability Benefit Amount
Determination
Worker’s disability equals the full PIA and family
members usually equal half of PIA. In 2016, the
average monthly disability benefit was:
$1,166 $1,983
For all disabled
workers.
For a disabled
worker, spouse,
and one or more
children.

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Disability Benefits
 Workers’ compensation differs from Social
Security disability and survivor insurance in
important ways.
− Workers’ compensation pays medical care for
work-related injuries.
− Also permanent partial and permanent total
disability.
− Pays rehabilitation and training benefits.
− Pays benefits to survivors of workers who die of
work-related causes.

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Disability Benefits
 In comparison, Social Security:
− Pays workers with long-term permanent
disabilities from any cause, if unable to work.
− Pays for rehabilitation services and survivor
benefits to families of deceased workers.
− Benefits begin after a five-month waiting period.

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Medicare
 The Medicare program serves citizens age 65
or older by providing insurance coverage for:
− hospitalization, convalescent care, and major
doctor bills.
 A 1965 amendment to the Social Security Act
created this program.

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Medicare
 Includes five features:
− Medicare Part A –
hospital insurance
− Medicare Part B –
medical insurance
− Medigap – voluntary
insurance pays for
services not covered
under Part A and B.
− Medicare Part C:
Medicare Advantage –
choices in providers,
• such as HMOs and PPOs.
− Medicare Part D:
Medicare Prescription
Drug Benefit –
prescription drug
coverage.

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Medicare
Original Medicare Plan
 A government run fee-for-
service plan includes:
− health-care services,
− medical supplies, and
− certain prescription drugs.
 Participants choose to
receive care from any
licensed health-care
provider or facility.
Medicare Advantage Plan
 Includes options such as:
− HMOs,
− PPOs,
− Medicare special needs plans,
− Medicare medical savings
accounts plans (MSAs).
 Run by private companies
subject to Medicare
regulations.

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Eligibility Criteria for Medicare
Benefits
 Age 65 or older with 40
credits.
 Automatically extends
to spouses.
 Disabled family
members are eligible.
 Younger individuals
with serious disabilities.
− Eligible - Part A.
 Fewer than 40 credits
requires a premium.
− Part A - $226 with 30-39
credits, and
− $411 with fewer than 30.
 Part A coverage
automatically qualifies
individuals for Part B.
− Premiums were $104.90
and higher.

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Medicare
 Medicare Part A covers both inpatient and
outpatient hospital care and services.
 Medicare Part B is a voluntary supplemental to
help pay for services not covered under Part A.
− Doctors’ services,
− Outpatient care,
− Clinical laboratory services, and
− Some preventative health services.

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Medicare
 Medicare Part B
− provides ambulance services.
− is similar to indemnity medical insurance.
− covers 80% after an annual deductible.
 Medigap supplements Parts A and B.
− From private insurance companies for a fee.
− Most plans cover coinsurance, copayments, and
deductibles.

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Medicare
 Medigap insurance.
− Federal and state laws these plans to up to 10
standardized choices with varying protection.
− Some insurers offer Medicare Select Plans which
• offer lower premiums in exchange for limiting the
choice of health-care providers.
− Three states do not offer Medigap insurance,
• separate rules apply in Massachusetts, Minnesota, and
Wisconsin.

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Medicare
 Medicare Part C: Medicare Advantage.
− Established in 1997 with The Balanced Budget Act.
− Provides the opportunity to receive health care
from a variety of options including:
• private fee-for-service plans,
• managed care plans, and
• medical savings accounts.

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Medicare
 Medicare Prescription Drug Benefit.
− First offered in 2006, referred to as Part D.
− Participants pay a deductible. ($360 in 2016)
− Expenses $360 to $3,310, participants co-pay.
− Expenses above $3,310 to $4,850, participants pay
• 45% of the cost for brand-name drugs, and
• 58% for generic drugs.
− The expense range ($3,310 to $4.850) is known as
the coverage gap.

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Medicare
 Medicare as the primary or secondary payer.
− Individuals with Medicare may also have:
• an employer’s group health plan,
• a retiree health insurance plan, or
• an employed spouse’s group health plan.
− Questions arise regarding which plan pays first.
• Guidelines provide the answer.

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Financing OASDI and Medicare Programs
Federal Insurance
Contributions Act
(FICA)
• Employers pay a tax
based on its payroll.
• Employees pay a tax
based on earnings.
• 7.6% each for
employers and
employees.
The Self-Employment
Contributions Act
(SECA)
• Self-employed
individuals make all the
contribution,
• but at a different rate,
15.3%

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 OASDI programs.
− The largest share of FICA tax funds OASDI.
• In 2017, 6.2% of employer/employee contributions, and
• 12.4% from self-employed individuals.
− OASDI taxes are subject to a taxable wage base.
• Limits the amount of annual wages per employee.
• In 2017, the amount was $127,200 for everyone.

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 Medicare programs.
− The Medicare tax, or hospital insurance tax,
• supports Part A programs.
− Employers and employees contributed 1.45%, and
− Self-employed individuals contributed 2.9%.
− Not subject to taxable wage base
− All payroll amounts and wages are taxed.

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Financial Status of the OASDI and
Medicare Programs
 To ensure viability:
− Increase the FICA tax rates for these programs.
− Reduce the level of benefits.
 The Social Security system is a pay-as-you-go
benefit system.
− No guarantee that benefits will be available in the
future with a $46 billion deficit in 2015.
 Medicare funds are less and the program expects
to pay more than it receives in all future years.

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Financial Status of the OASDI and
Medicare Programs
Three factors hastened the deterioration of the
Social Security programs.
Individuals are
living longer, and
receiving more
benefits.
Immigration
workers means
lower wages, and
less FIXA tax
amounts.
Unemployment
remains quite high.

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Unemployment Insurance
 The federal-state unemployment program
provides income for workers unemployed
through no fault of their own.
 Each state administers its own program.
 States pay into a central tax fund administered
by the federal government, which then
− invests these payments and disburses funds to the
states as needed.

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Eligibility Criteria for Unemployment
Insurance Benefits
 Varies by state, but general criteria includes:
− Limited voluntary and involuntary unemployment
except for disqualifying causes.
− Minimum earnings and employment requirements.
− A waiting period in most states.
− A capacity to work and availability for work.
− Actively seeking of suitable work.

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Insurance Benefits
 Voluntary termination usually disqualifies
workers unless they quit for reasonable cause.
 Involuntary termination does not guarantee
eligibility, if disqualifying events occurred:
− refusal of suitable work,
− misconduct,
− participation in some labor disputes,
− regular breaks between school terms for education,
− or deliberate misrepresentation to receive benefits.

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Insurance Benefits
Multiple of High-Quarter Wages
Under this method,
• workers must earn a
certain amount in
the quarter,
• with the highest
earnings of their
base period.
In addition,
• workers must earn
total base period
wages that
• are a multiple (1.5)
of the high-quarter
wages.

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Insurance Benefits
 Multiple of weekly benefit amount.
− First compute weekly benefit amount.
• Worker must have earned a multiple (often 40) of this
amount during the base period.
 Flat qualifying amount.
− This method requires a certain dollar amount of
total wages earned during the base period.
 Most states impose a waiting period, usually
one week, prior to paying benefits.

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Insurance Benefits
 Unemployed workers must be mentally and
physically capable of performing work.
− Availability for work is a person’s willingness and
readiness to work.
 Unemployed workers must demonstrate they
are actively seeking suitable work.
• Jobs require skills, knowledge, and ability similar to a
person’s customary work, and
• offers legal employment terms and conditions.

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Unemployment Insurance Benefit
Amounts
 States use one of three methods to calculate
weekly benefit amounts (WBAs).
− A fraction of the highest wages for a calendar
quarter earned during the base period.
− A percentage of the average weekly wage earned
during the base period.
− A percentage of annual wages.

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Duration of Unemployment Insurance
Benefits
 Congress passed the Emergency Unemployment
Insurance (EUC) program in 2008 in the
Supplemental Appropriations Act.
− The EUC provided 13 additional weeks of federal
benefits to those who exhausted state benefits.
− Congress enacted the Unemployment Compensation
Act of 2008 expanding the EUC to 20 weeks
nationwide and provided 13 more weeks of EUC
• Expired at the end of 2013.

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Financing Unemployment Insurance
Benefits
 Benefits are financed by federal, and state,
taxes levied on employers.
 Federal tax is levied under the Federal
Unemployment Tax Act (FUTA).
− Employer contributions amount to 6.2% of the first
$7000 earned by each employee.
• $7000 is the minimum taxable wage base but most
states set the base according to the average wage level.

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Benefits
 The federal government deposits 5.4% to the
Federal Unemployment Trust Fund.
− The Treasury Department invests this money.
− Retaining 0.8% to cover administrative costs.
 States impose taxes on employers to fund their
unemployment programs, permitted by:
− state unemployment tax acts (SUTA taxes).

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Benefits
 SUTA taxes.
− Rates vary according to an experience rating.
− Each state applies different tax rates to companies.
− Each company’s rate depends on its prior
experience with unemployment.
• A company with many layoffs pays a higher tax rate
than a company that does not lay off workers.
− This system implies a company can manage its
unemployment tax burden.

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Summary
 The chapter began by discussing the origins of
Social Security and introducing the programs.
− Old-Age, Survivor, and Disability Insurance
(OASDI) was covered.
− Next, the chapter discussed Medicare.
 Financing of OASDI and Medicare programs
followed.
 The chapter ended with a discussion of
unemployment insurance.

HR 205 Ch07 martocchio 6e

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