Chapter 18 Social Insurance Social Insurance Basics Old-Age, - - PDF document

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Chapter 18

Social Insurance

• Social Insurance Basics
• Old-Age, Survivors, and Disability Insurance (OASDI)
• Medicare
• Unemployment Insurance
• Workers Compensation

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• 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

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• 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 low-income

persons, large families, and retirees

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• Benefits are loosely related to the workers’ earnings
• Programs, benefits, and benefit formulas are prescribed by law
• A formal means test is not 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

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• 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 $1800/year or more (in

2013)

• Miscellaneous other groups, including ministers, US military personnel, and

railroad workers

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• A worker becomes eligible for benefits by attaining an

insured status:

• To attain a fully insured status, a worker must have 40 credits
• In 2013 a credit is earned for each $1160 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

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• Social security retirement benefits are an important

source of income for most retired workers

• Full retirement age for unreduced benefits is age 65, but will

gradually increase to 67

• Workers and their spouses can retire at age 62 with

actuarially reduced benefits

• More than half of the OASDI beneficiaries apply for retirement

benefits before the full retirement age

• Monthly retirement benefits can be paid to retired workers

and their dependents

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• The monthly retirement benefit is based on the

worker’s primary insurance amount (PIA)

• The PIA is based on the worker’s average indexed monthly

earnings (AIME)

• Indexing adjusts for changes in wage level over time
• $7.25 in 1963 not the same as $7.25 today
• Indexing results in a relatively constant replacement rate so that

workers retiring today and in the future will have about the same proportion of their work earnings replaced by OASDI benefits

• The AIME is based on a weighted benefit formula which weights the

benefits heavily in favor of low-income groups

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• PIA equals
• 90% of first 791 of AIME
• 32% of AIME between 792 and 4768
• 15% of AIME above 4768
• For person retiring in 2013
• “Bend points” adjusted annually

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• Average Monthly Benefit 2013 =
• $1261 (all retired workers)
• $2048 (aged couple, both receiving benefits)

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• A delayed retirement credit is available if you delay

receiving retirement benefits beyond the full retirement age

• Cash benefits are automatically adjusted each year for

changes in the cost of living

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• Some people continue to work
• There is an earnings test that can result in a reduction
• r loss of monthly benefits for workers with earned

incomes above certain annual limits (2013 amounts)

• 50% reduction, < full retirement age, > $15120/yr
• 33% reduction, = full retirement age, > $40,080/yr
• 0% , > full retirement age
• To encourage private savings and investments to supplement the benefits,

the earnings test does not apply to investment income, dividends, interest, rents or annuity payments

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• Survivor benefits can be paid to the dependents of a

deceased worker who is either fully or currently insured

• The benefits provide a substantial amount of financial

protection to families

• For the average family, the benefits are equal to a $354,000 life

insurance policy

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• Disability benefits can be paid to disabled workers who

meet certain eligibility requirements

• The benefits provide protection against the loss of income during

a long-term disability

• For the average family, disability payments are equivalent to a private

disability insurance policy worth over $233,000

• The worker must meet a five-month waiting period, and satisfy

the definition of disability

• The worker must have a physical or mental condition that prevents him or

her from doing any substantial gainful activity and is expected to last at least 12 months or is expected to result in death

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• Major groups eligible to receive OASDI disability

benefits include:

• A disabled worker under the full retirement age
• The spouse of a disabled worker
• Unmarried children of the disabled worker, if under age 18
• Unmarried children age 18 or older who become severely

disabled before age 22

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• Some beneficiaries who receive monthly cash benefits

must pay an income tax on part of the benefits

• The amount depends on the level of your combined income,

which is the sum of your adjusted gross income, tax-free interest, and ½ of your Social Security benefits

• Social Security benefits are financed by a payroll tax

paid by employees, employers, and the self-employed

• Workers pay a payroll tax of 6.2% on covered earnings up

to a maximum of $113,700 (2013)

• Employers pay the same amount (12.4% total payroll tax)

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• The present program is running an annual surplus, but the

OASDI trust funds will experience serious financial problems in the future

• Projected OASDI tax income will begin to fall short of outlays in 2017
• The program can be actuarially balanced over the next 75 years in various

ways, including:

• An immediate increase of 16% in payroll tax revenues
• An immediate reduction in benefits of 13%
• Using general revenues of the federal government to pay benefits
• Or, some combination of these options
• One proposal would create voluntary personal retirement accounts, allowing

workers to divert two full percentage points from the OASDI payroll tax into voluntary personal retirement accounts

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• The program is running an annual surplus, but the OASDI trust funds will soon

experience serious financial problems

• Projected OASDI tax income will begin to fall short of outlays in 2017
• The program can be actuarially balanced over the next 75 years in various ways,

including:

• An immediate increase of 14% in payroll tax revenues
• An immediate reduction in benefits of 12%
• Recent proposed changes include:
• Using progressive indexing to determine benefits
• Move up scheduled increases in the full retirement age
• Reduce benefits for future retirees across the board
• Increase the OASDI taxable wage earnings base
• Invest part of the trust fund assets in private investments

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• The general revenues of the federal government could be used to fund part
• f the program
• Reliance on general revenue financing to reduce the long-range deficit is

unlikely

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• Medicare covers the medical expenses of most persons

age 65 and older

• The program also includes prescription drug plans and

health care plans of private insurers

• Beneficiaries can select among an array of plans

including:

• The original Medicare plan
• Medicare Advantage plans
• Other Medicare health plans
• Medicare prescription drug plans

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• Under the original Medicare plan:
• Beneficiaries can elect any provider that accepts Medicare patients
• Medicare pays its share of the bill, and the beneficiary pays the balance
• The original program provides benefits in two parts:
• Hospital Insurance (Part A) provides coverage for inpatient hospital stays

and other services including skilled nursing facility care, home health care, hospice care, and blood transfusions

• Hospitals are reimbursed for inpatient services under a prospective payment

system

• A flat amount is paid for each service based on its diagnosis-related group (DRG)

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• Medical Insurance (Part B) is a voluntary program that

covers physicians’ fees and related medical services

• Covered services include physician services, clinical laboratory services, home health

care, outpatient hospital services, and blood

• Beneficiaries must pay a monthly premium for the benefits
• Currently beneficiaries with annual incomes under certain levels pay 25% of the cost of the

program, and the federal government pays the rest

• A means test has been applied since 2007
• Higher premium if > $85K (single) or $170K (couple)
• The beneficiary must meet an annual Part B deductible
• The program pays 80% of the Medicare-approved amount for most physician

services, outpatient therapy, preventive services and durable medical equipment

• Payments to physicians are made on an assigned or nonassigned basis

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• Medicare hospital insurance (Part A) is financed by a

payroll tax paid by covered employees, employers, and the self-employed

• The program is subsidized by a small amount of

general revenues

• Medical insurance (Part B) is financed by monthly

premiums and the general revenues of the federal government

• Medicare Part A has serious financial problems
• The projected 75-year actuarial deficit in the Hospital Insurance Trust

Fund is 3.51% of taxable payroll

• The fund is expected to be exhausted by 2018

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• 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
• riginal Medicare plan
• Plans include:
• Medicare HMOs
• Medicare PPOs
• Medicare Special Needs plans
• Medicare Private Fee-for-service plans

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• Medicare HMOs are managed care plans operated by

private insurers

• The plan may require members to choose a primary care physician and get a

referral to see a specialist

• If the plan covers prescription drugs, members must pay a co-payment or

coinsurance charge for each covered prescription

• Under a Medicare PPO, beneficiaries can generally see

any doctor or provider that accepts Medicare patients

• Members do not need a referral from a primary care

doctor to see a specialist

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• A Medicare Special Needs plan provides more focused

care for specific groups of people, such as those with chronic illnesses

• Under a Medicare Private Fee-for-service plan, the

private company, rather than Medicare, decides how much it will pay and the amounts members must pay for the services provided

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• Medicare beneficiaries have other choices for

coverage besides the Advantage Plans

• Under a Medicare Cost plan, members receive care from

primary care doctors and hospitals that are part of the network

• Services obtained outside the network are covered under the original

Medicare plan, but members must pay the Part A and Part B coinsurance and deductibles

• A PACE program combines medical, social, and long-term

care services for the frail elderly

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• Medicare prescription drug coverage (Part D) is a

relatively new benefit, available to all beneficiaries

• Beneficiaries in the original Medicare plan can add

prescription drug coverage by joining a stand-alone plan

• Monthly premiums depend on the specific plan chosen
• Plans must provide at least standard coverage
• Beneficiaries pay part of the cost of prescription drugs, and

Medicare pays part of the cost

• The cost sharing provisions are complex
• Costs are reduced for low-income beneficiaries
• “Donut hole” phased out under PPACA

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• The new law contains several other provisions:
• The potential for importing drugs from foreign countries is

under consideration

• The federal government is prohibited from using its

purchasing power to negotiate lower prices with pharmaceutical companies

• Private firms will administer the program on a regional basis
• Under a demonstration project, the original Medicare plan

will face competition from private plans beginning in 2010

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• Medicare beneficiaries can purchase a Medigap

policy to cover part or all of medical expenses not paid by Medicare

• The policies are sold by private insurers, and are strictly

regulated by federal law

• There are 12 plans (A-L) which offer different sets of benefits

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• Some provisions of the Affordable Care Act will have significant

impact on the Medicare program:

• Rebates for the Part D coverage gap (donut hole)
• Cracking down on health-care fraud
• Providing free preventive care to seniors
• Reducing overpayments to Medicare Advantage Plans

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• Improving health-care quality and efficiency
• Reducing unnecessary hospital readmissions
• New innovations to hold down Medicare costs
• Linking payments to quality outcomes
• Bundling of payments

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• Medicare Part A has serious financial problems
• The projected 75-year deficit in the Hospital Insurance Trust Fund (HI) is

13.35% of taxable payroll

• The fund is projected to be exhausted by 2024
• Efforts to hold down costs include:
• Reducing payments to hospitals and physicians
• Limiting spending on specified services
• Implementing a diagnosis-related group method for reimbursing hospitals

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• The federal and state governments provide

unemployment insurance

• Programs pay weekly cash benefits to workers who are

involuntarily unemployed

• Cash benefits are paid during periods of short-term

involuntary unemployment

• Applicants are encouraged through local employment offices

to seek employment

• Unemployment benefits help stabilize the economy during

recessionary periods

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• Most private firms, state and local governments, and

nonprofit organizations are covered for unemployment benefits

• Private firms are subject to the federal unemployment tax
• To be eligible, an unemployed worker must:
• Have qualifying wages and employment during the base year
• Be able and available for work
• Be actively seeking work
• Be free from disqualification
• Serve a one-week waiting period

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• Benefits paid depend on the worker’s past wages, within

certain limits

• Most states use a formula and pay a fraction of the worker’s high quarter

wages

• The maximum duration of regular benefits is limited to 26 weeks in most states
• Under the extended-benefits program, an additional 13 weeks of benefits is paid

during periods of high unemployment

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• Programs are financed largely by payroll taxes paid by

employers on the covered wages of employees

• For 2013, covered employers paid a federal payroll tax of 6.0% on the first

$7000 of annual wages ($42/worker)

• States that have not repaid borrowings pay higher rate (up to 12%, or $84/worker)
• Experience rating is also used, by which firms with favorable employment

records pay reduced tax rates

• NV state unemployment tax:
• Initial rate: 2.95% on first $26,900 (2013)
• Experience rating

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• State unemployment insurance programs face

numerous problems:

• Only a small proportion of the total unemployed receive

benefits

• Reasons include tighter eligibility requirements
• Many states have low trust fund balances for paying benefits
• A high percentage of claimants exhaust their benefits during

business recessions

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• In response to the recent financial crisis, the Emergency

Unemployment Compensation program was created in 2008

• The program provides up to 20 weeks of federally-funded benefits to

eligible unemployed workers who have exhausted their regular state unemployment benefits

• Other important problems include:
• State unemployment compensation programs do not cover all unemployed

persons

• State fund balances are inadequate
• A high percentage of claimants are exhausting their regular state

unemployment benefits

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• Workers compensation is a social insurance program that

provides medical care, cash benefits, and rehabilitation services to workers who are disabled from job-related accidents or disease

• Under the common law of industrial accidents (1837),

workers injured on the job had to sue their employers and prove negligence before they could collect damages

• Under the contributory negligence doctrine, injured workers could not collect

damages if they contributed in any way to the injury

• Under the fellow-servant doctrine, the injured worker could not collect damages

if the injury resulted from the negligence of a fellow worker

• Under the assumption-of-risk doctrine, the injured worker could not collect if he
• r she had advanced knowledge of the dangers of the occupation

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• The enactment of employer liability laws between

1885 and 1910 improved the legal position of injured workers

• But, workers still had to sue their employers to collect for their injuries
• Most states passed workers compensation laws by

1920

• Workers compensation is based on the fundamental principle of liability

without fault; the employer is held absolutely liable for job-related injuries

• r diseases suffered by the workers, regardless of who is at fault
• Employees do not have to sue their employers

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• Objectives of state workers compensation laws include:
• To provide broad coverage of employees for job-related

accidents and disease

• To provide substantial protection against the loss of income
• To provide sufficient medical care and rehabilitation services

to injured workers

• To encourage firms to reduce job-related accidents
• To reduce litigation

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• Workers compensation laws provide four benefits:
• Medical care generally is covered in full with no limitations
• Disability-income benefits can be paid after the disabled

worker satisfies a waiting period

• Death benefits can be paid to eligible survivors if the worker

dies as a result of a job-related accident or disease

• All states provide rehabilitation services to restore disabled

workers to productive employment

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• State workers compensation programs face numerous

problems:

• Insurers face the continued risk of terrorist attacks
• Claim costs continue to increase due to the rising cost of medical

care

• Attorney involvement in workers compensation claims increases

claims costs by 12-15 percent

• Court decisions have eroded the exclusive remedy doctrine, which states

that workers compensation benefits should be the sole and exclusive remedy for injured workers

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