Chapter 18 Social Security

1. Chapter 18 Social Security

2. Learning Objectives • In this chapter, we elaborate on the following: • Social Security • Medicare • Reasons for funding gaps in Social Security and Medicare • Current actuarial projections • International views on social insurance • The trend toward privatization

3. Definition of Social Insurance • Social insurance: An insurance program that is compulsory for nearly all Americans with eligibility criteria and benefits specified by law and financed wholly or partially through employment taxes. • OASDHI: Old age (or retirement), survivors, disability, and health insurance (or Medicare) benefits, which include hospital insurance and supplemental medical insurance.

4. Definition of Social Insurance • Social Security: Social insurance program in the United States guaranteeing old age, survivors, disability (OASD) and health insurance (HI) benefits to eligible citizens who have contributed to the program.

5. Coverage and Eligibility Requirements • Coverage is compulsory for more than 90 percent of all workers in the United States. • Major exceptions include railroad workers, federal government employees. • To be eligible to receive benefits, a worker must achieve insured status. • Three levels of insured status: fully insured, currently insured, or disability insured. • Social Security pays four types of benefits: old-age (or retirement), survivors’, disability, and Medicare.

6. Table 18.2 - Who Gets Monthly Benefits if a Fully Insured Worker Retires?

7. Coverage and Eligibility Requirements • Retirement Benefits • Full retirement benefits • Early retirement • Late retirement

8. Table 18.4 - Who Gets Monthly Benefits if a Fully Insured Worker Dies?

9. Table 18.5 - Who Gets Monthly Benefits if a Fully Insured Worker Is Disabled?

10. Coverage and Eligibility Requirements • The primary insurance amount (PIA) is the basic unit used to determine the amount of monthly Social Security benefits. • PIA is computed from a person’s average indexed monthly earnings (AIME), which adjusts workers’ earnings from prior years (up to the maximum wage base) to what they would have been if wage levels in earlier years had been the same as they are now.

11. Coverage and Eligibility Requirements • Replacement ratios: Expression of Social Security benefit levels weighted in favor of lower-income workers; calculated as the benefit divided by the AIME. • The bend points represent the dollar amounts at which the primary insurance amount formula for Social Security benefits changes.

12. Table 18.9 - The PIA Formula for Maximum Family Benefit, 2009

13. Coverage and Eligibility Requirements • Cost of Living Adjustment (COLA) • Social Security benefit amounts are increased annually by automatic cost-of-living adjustments (COLAs) linked to increases in the consumer price index (CPI). • The Earnings Test • Reduces the Social Security benefit for a retiree who is younger than normal retirement age and whose annual earned income exceeds the retirement earnings exempt amount.

14. Table 18.11 - Annual Retirement Earnings Test Exempt Amounts for Persons Under the Normal Retirement Age

15. Financing of Benefits • Social Security benefits are financed through payroll taxes paid by employers and employees and by a special tax on earnings paid by the self-employed. • The tax rate for employers and employees is 6.2 percent for OASDI, up to a maximum amount of earnings called the wage base level. • Social Security taxes, sometimes called FICA taxes, are automatically withheld on wages up to a set amount and are adjusted annually for inflation.

16. Table 18.13 - Tax Rates Paid on Wages and Earnings

17. Financing of Benefits • Social Security benefits are subject to income taxes. • The funds collected from payroll taxes are allocated among three trust funds: • Retirement and survivors’ benefits • Disability insurance • Hospital insurance or Medicare Part A

18. Financing of Benefits • Pay-as-you-go system: The nature of Social Security, in which current tax revenues are used to pay the current benefits of recipients. • Incometo the trust funds consists of the following: • Employment taxes paid by employees, their employers, and self-employed persons • Income from the taxation of benefits • Interest on investments made by the program • Other income such as donations and Treasury reimbursements

19. Administration • The Social Security program is administered by the Social Security Administration, an agency of the United States Department of Health and Human Services. • Disability determination is made by a state agency (usually the vocational rehabilitation agency) under agreements between the state and the secretary of the Department of Health and Human Services.

20. Table 18.15 - All Medicare Parts (A to D)

21. Issues in Social Security • In 2000, Social Security financing was the most heated issue, with focus on privatization and moving away from the pay-as-you-go system. • In early 2006, the issue was how to help those who could not pay the deductibles and coinsurance for the new drug program. • Social Security taxes have increased much faster than the general level of prices and even faster than the cost of health care during the past two decades.

22. Issues in Social Security • The OASDI and HI trust funds are expected to be adequately financed for only the next ten years • The deficits of the Medicare Parts B and D trust funds are expected to grow rapidly.

23. Figure 18.3 - Long-Range OASI and DI Annual Income Rates and Cost Rates (As a Percentage of Taxable Payroll), Trustees Report 2008 Source: Social Security and Medicare Board of Trustees, “A Summary of the 2008 Annual Reports,” April 22, 2008, Accessed April 5, 2009, http://www.ssa.gov/OACT/TRSUM/trsummary.html.

24. Figure 18.4 - OASDI and HI Income Shortfall to Pay Scheduled Benefits, and the 75 Percent General Fund Revenue Contribution to SMI (Percentage of GDP), Trustees Report 2008 Source: Social Security and Medicare Board of Trustees, “A Summary of the 2008 Annual Reports,” April 22, 2008, Accessed April 5, 2009, http://www.ssa.gov/OACT/TRSUM/trsummary.html.

25. Global Trends in Social Security Systems • Financing the government social security system has become increasingly difficult. • Benefit levels have increased in many nations, to the point where the tax rates necessary to support benefits are at an all-time high. • Experts anticipate a shift from public sector social insurance plans to private sector plans, especially for retirement benefits.

26. Global Trends in Social Security Systems • The trend toward privatization is worldwide, including both industrialized and developing countries. • The potential for market expansion for insurers and other financial institutions is tremendous.

27. Summary • Social Security is a compulsory social insurance program paying old age, survivors’, and disability (OASD) benefits. • The primary insurance amount (PIA is used to determine the amount of monthly benefits. • Medicare is a compulsory social insurance program paying hospital insurance (HI) benefits. • The trend toward partial privatization and prefunding is worldwide.