Assignment
Chelsea29440
Ch07_Martocchio_6e.pptxPart Two: Retirement, Health Care, and Life Insurance
Chapter Seven: Government-Mandated Social Security Programs
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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
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The government established Social Security and workers’ compensation insurance programs for the:
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Social good
Refers to a booming economy, low levels of unemployment, progressive wages and benefits, and safe and healthful working conditions
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
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Two federal agencies oversee OASDI and Medicare administration:
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The Social Security Administration (SSA)
The Centers for Medicare & Medicaid Services
Administration of Social Security 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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Administration of Social Security 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
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OASDI contains two additional benefits established by amendments to the Social Security Act, providing:
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Survivors’ Insurance, 1939
Disability Insurance, 1965
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
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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.
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
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In 2016, the average monthly survivor benefit was:
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$2,680
$1,285
For a widowed mother and two children.
For a widow or widower alone.
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
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Worker’s disability equals the full PIA and family members usually equal half of PIA. In 2016, the average monthly disability benefit was:
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$1,166
$1,983
For all disabled workers.
For a disabled worker, spouse, and one or more children.
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
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Federal Insurance Contributions Act (FICA)
Employers pay a tax based on its payroll.
Employees pay a tax based on earnings.
The Self-Employment Contributions Act (SECA)
Self-employed individuals make all the contribution,
but at a different rate, 15.3%
7.6% each for employers and employees.
Financing OASDI and Medicare Programs
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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Financing OASDI and Medicare Programs
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
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Three factors hastened the deterioration of the Social Security programs.
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Individuals are living longer, and receiving more benefits.
Immigration workers means lower wages, and less FIXA tax amounts.
Unemployment remains quite high.
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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Eligibility Criteria for Unemployment 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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Eligibility Criteria for Unemployment Insurance Benefits
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Multiple of High-Quarter Wages
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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.
Eligibility Criteria for Unemployment 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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Eligibility Criteria for Unemployment 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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Financing Unemployment Insurance 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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Financing Unemployment Insurance 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.
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