3/27/2015 Chapter 18 Social Insurance • Social Insurance Basics • Old-Age, Survivors, and Disability Insurance (OASDI) • Medicare • Unemployment Insurance • Workers Compensation 2 • 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 1
3/27/2015 • 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 4 • 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 5 • 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 6 2
3/27/2015 • 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 7 • 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 8 9 3
3/27/2015 • 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 10 • 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 11 • Average Monthly Benefit 2013 = • $1261 (all retired workers) • $2048 (aged couple, both receiving benefits) 12 4
3/27/2015 13 15 5
3/27/2015 16 • 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 17 • Some people continue to work • There is an earnings test that can result in a reduction or 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 18 6
3/27/2015 • 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 20 • 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 21 7
3/27/2015 • 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 22 • 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) 23 • 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 24 8
3/27/2015 • 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 25 The general revenues of the federal government could be used to fund part • of the program Reliance on general revenue financing to reduce the long-range deficit is • unlikely 26 27 9
Recommend
More recommend
