CHAPTER 3 SOCIAL SECURITY BENEFITS

Categories of Social Insurance Programs u Social security u Unemployment insurance u Temporary disability insurance u Workers' compensation insurance

Significance of Social Insurance u They are the most significant insurance expense for most people. u One-fourth of benefit dollars go for social insurance. u They are the foundation on which private insurance plans and employee benefit plans are built.

Characteristics of Social Insurance u Compulsory employment-related coverage u Benefits prescribed by law –Amounts –Eligibility u Benefits as a matter of right. There is a presumption of need.

Characteristics of Social Insurance (cont.) u Emphasis on social adequacy –Benefits provide a floor of protection. –Above floor, persons are expected to provide resources from own savings, employment, or private insurance. –Within limits, benefits are a function of a person's covered earnings. u Partial or total financing

Social Security (OASDHI) u Four programs –Old-age insurance –Unemployment insurance –Federal grants to needy, elderly, blind, and disabled –Federal grants for maternal and child welfare, public health work, and vocation rehabilitation. –1 and 2 are social insurance; 3 and 4 are public assistance.

Extent of coverage –Over 90 percent of workers are covered. –Major categories of persons not covered. t Civilian federal government employees employed before 1984 who are covered under the Civil Service retirement system. However, all federal employees are now covered under medicare. t Railroad workers t Some employees of state and local government t Some Americans working abroad t Ministers who elect out of coverage because of conscience or religious principles t Children under 18 working for parent t Low-income domestic and agricultural workers

Financing –Part B of medicare by monthly premiums +contrib from federal government. –Other OASDHI programs financed by payroll taxes on employees and employers –Tax rate : 7.65 percent of wages up to maximum wages base (1.45 percent medicare tax levied on wages in excess of wage base) –Tax rate for self-employed: 15.3 percent –Wage base increases annually.

Financing (cont.) –Payroll taxes and premiums go into trust funds from which benefits are paid. –Old-age and survivors' fund –Disability fund –Medicare funds –Long-term deficit is predicted.

Financing (cont.) –Medicare funds will soon be unable to pay benefits. –Solutions to financing problems. –Increase taxes and/or –Decrease benefits

Eligibility –Based on quarters of coverage –One credit for each $870 of earnings (in 2002) –Categories t Fully –40 quarters, or –one quarter for each year after 1950 (or age 21, if later) and before the year of death, disability, or reaching age 62. Minimum of 6 quarters needed. –Currently--6 of previous 13 quarters t Disability Must be fully insured, and Have credit for 20 out of last 40 quarters (reduced for persons under age 31)

Retirement benefits –Worker age 62, but benefits reduced if taken before age 65 –Spouse age 62 or older –Spouse caring for child under 16 or disabled child –Dependent, unmarried children under 18

Retirement Ages

Survivors' benefits –Dependent, unmarried children under 18 –Spouse caring for young or disabled child –Widow or widower at age 60 –Dependent parent age 62 or older

Disability benefits –Definition of disability t Impairment that prevents a worker from engaging in any substantial gainful employment t Must have lasted (or be expected to last) at least 12 months or be expected to result in death

Dual benefits--get amount equal to highest benefit u Termination –For retired or disabled worker: upon death, but family benefits continue as survivors' benefits –For disabled worker: at age 65, but retirement benefits start –Children: generally at 18 –Surviving spouse: at remarriage unless age 60 or older

Amounts –Based on PIA which is a function of AIME t Maximum earnings $84,900 (2002) –Worker gets PIA. t PIA =.9($531) +.32(next $2671) +.15(xs), if you were born in 1937 or later –There is a family maximum ($3,219 [2001] per month for retired or survivor benefits) t % of PIA is the target t Benefits of family members (but not worker) reduced proportionately if maximum exceeded

Amounts (cont.) –There is a special minimum benefit for persons with low wages. –Max retiree benefit = $1660 (2002) –Early benefits t Worker: benefits reduced 5/9 of one percent for each month of retirement prior to 65 t Spouse: benefit reduced 25/36 of one percent for each month of retirement prior to 65 t Still eligible at 62, even when retirement age is 67

2002 Average monthly benefit amounts

Delayed retirement 3 percent or more for each year after age 65 u Born in the 30s will increase delayed retirement by % per year u Born after 1942 will increase by 8% per year u Must begin benefits by age 70

Earnings test u Reduction of $1 for each $3 of excess earnings ($30,000) for persons attaining 65 u Reduction of $1 for each $2 of excess earnings ($11,280) for persons u No reduction over NRA t Year 2002 figures

Cost-of-living adjustments-- generally equal to CPI u 2.6% for 2002

Requesting Benefit Information u Statement will automatically be sent to most workers by the year 2000.

Medicare u Eligibility –Part A t Anyone over 65 who is eligible for income benefits t Dependents and survivors age 65 or older t Disabled persons after 2 years of disability benefits t Workers and dependents at any age who require renal dialysis or kidney transplants t Anyone else age 65 or older who pays monthly premium ($301 in 2000)

Medicare u Eligibility –Part B t Anyone eligible for part A t Must pay monthly premium –$50 in 2001 –75% subsidy

Medicare Part A benefits –Hospital: 60 days/yr at no cost, 30 additional days with coinsurance charge, 60-day lifetime reserve –Skilled nursing facility benefits –Home health care benefits, No limit in duration, Most benefits paid in full –Hospice benefits

Medicare Part A (cont.) –Exclusions (ex) Services outside U.S.,Elective luxury services, Custodial care, Services in federal facilities –Medicare secondary t When employee elects employer coverage as primary t When benefits provided under any liability policy t First 30 months of end-stage renal disease

MedicarePart B benefits –Types (ex) Physicians' and surgeons' fees, Diagnostic tests, Drugs that cannot be self- administered, Radiation therapy, Medical supplies, Prosthetic devices, Mammograms –Exclusions (ex) Drugs that can be self- administered, Routine physical, eye, and hearing examinations; Cosmetic surgery; Most dental care; Custodial care; Eye glasses, hearing aids, or orthopedic shoes –Amounts: $100 annual deductible, 20 % coinsurance for most services

Taxation of Benefits and Contributions u Contributions deductible by employer u No deduction for contributions by employee u Income benefits taxable only for higher paid employees

Questions?