Chapter 18 Social Insurance Agenda • Social Insurance • Old-Age, Survivors, and Disability Insurance (OASDI) • Medicare • Impact of the Affordable Care Act on Medicare • Problems and Issues in OASDI and Medicare • Unemployment Insurance • Workers Compensation Copyright ©2014 Pearson Education, Inc All rights reserved 18-2 Reasons for Social Insurance • 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 Copyright ©2014 Pearson Education, Inc All rights reserved 18-3 Basic Characteristics of Social Insurance • Social insurance programs have certain characteristics that distinguish them from other government insurance programs: – Most programs are compulsory – Programs are designed to provide a floor of income – Programs pay benefits based on social adequacy rather than individual equity Copyright ©2014 Pearson Education, Inc All rights reserved 18-4 Basic Characteristics of Social Insurance – Benefits are loosely related to earnings – Programs, benefits, and benefit formulas are prescribed by law – A formal means test is not required – Full funding of benefits is unnecessary – Programs are designed to be financially selfsupporting Copyright ©2014 Pearson Education, Inc All rights reserved 18-5 Old-Age, Survivors, and Disability Insurance (OASDI) • Commonly known as Social Security, OASDI is the most important social insurance program in the US – Enacted in 1935, it covers more than out of 10 workers • Virtually all private-sector employees, and a majority of state and local government employees are covered under the Social Security Program Copyright ©2014 Pearson Education, Inc All rights reserved 18-6 Old-Age, Survivors, and Disability Insurance (OASDI) • A worker becomes eligible for benefits by attaining an insured status: – To attain a fully insured status and be eligible for retirement and survivor benefits, you must have 40 credits – You are currently insured, and eligible for survivor benefits, if you have earned at least credits in the past 13 calendar quarters – The number of credits required to receive disability benefits depends on your age when you become disabled – A duration of work test must be satisfied before receiving disability benefits Copyright ©2014 Pearson Education, Inc All rights reserved 18-7 OASDI: Retirement Benefits • Social security retirement benefits are an important source of income for most retired workers – For persons both in 1937 or earlier, full retirement age for unreduced benefits is age 65 – The full retirement age will increase gradually to 67 – Workers and their spouses can retire at age 62 with actuarially reduced benefits – Monthly retirement benefits can be paid to retired workers and their dependents Copyright ©2014 Pearson Education, Inc All rights reserved 18-8 Exhibit 18.1 Social Security Full Retirement Age and Reduction in Benefits by Age Copyright ©2014 Pearson Education, Inc All rights reserved 18-9 OASDI: Retirement Benefits • 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) – The AIME is based on a weighted benefit formula which weights the benefits heavily in favor of low-income groups – Social Security actuaries calculate each year the indexing factors that are used to determine the worker’s average indexed monthly earnings Copyright ©2014 Pearson Education, Inc All rights reserved 18-10 Medicare Financial Crisis • Medicare Part A also has financial problems – The projected 75-year deficit in the Hospital Insurance Trust Fund is 13.35% of taxable payroll – The fund is projected to be exhausted by 2024 • The poor financial condition is affected by: – Higher prices for medical service – Increased volume and complexity of medical services – Aging of the population and increased enrollments – Overpayments to private insurers – Increased expenditures from prescription drugs Copyright ©2014 Pearson Education, Inc All rights reserved 18-37 Medicare Financial Crisis • 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 – New provisions of the Affordable Care Act Copyright ©2014 Pearson Education, Inc All rights reserved 18-38 Unemployment Insurance • Unemployment insurance programs are federal-state programs that 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 find jobs • Unemployment benefits help stabilize the economy during recessionary periods Copyright ©2014 Pearson Education, Inc All rights reserved 18-39 Unemployment Insurance • Most jobs in 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 meet the following monetary eligibility requirements: – Have qualifying wages and employment during the base year – Be able and available for work – Be actively seeking work – Meet a one-week waiting period Copyright ©2014 Pearson Education, Inc All rights reserved 18-40 Unemployment Insurance • Regular state benefits depend on the worker’s past wages, within certain limits – Most states use a formula that pays weekly benefits based on 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 • Extended benefits are also available to workers to exhaust their regular benefits in states with high unemployment Copyright ©2014 Pearson Education, Inc All rights reserved 18-41 Unemployment Insurance • Programs are financed largely by payroll taxes paid by employers on the covered wages of employees – For 2012, covered employers paid a federal payroll tax of 6.0% on the first $7000 of annual wages – To strengthen reserves and maintain fund solvency, most states have a taxable wage base that exceeds $7000 – Experience rating is also used, by which firms with favorable employment records pay reduced tax rates Copyright ©2014 Pearson Education, Inc All rights reserved 18-42 Unemployment Insurance • Problems with state unemployment compensation programs include: – Programs not cover all unemployed persons – State fund balances are inadequate – A high percentage of claimants are exhausting their regular state unemployment benefits Copyright ©2014 Pearson Education, Inc All rights reserved 18-43 Workers Compensation • 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 – The benefits are important in reducing the economic uncertainty that may result from a jobrelated disability Copyright ©2014 Pearson Education, Inc All rights reserved 18-44 Workers Compensation • 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 or she had advanced knowledge of the dangers of the occupation Copyright ©2014 Pearson Education, Inc All rights reserved 18-45 Workers Compensation • Employer liability laws passed 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 – Coverage is based on the fundamental principle of liability without fault – Employees not have to sue their employers Copyright ©2014 Pearson Education, Inc All rights reserved 18-46 Workers Compensation • Objectives of state workers compensation laws include: – Broad coverage of employees for job-related accidents and disease – Substantial protection against the loss of income – Sufficient medical care and rehabilitation services – Encouragement of safety – Reduction in litigation Copyright ©2014 Pearson Education, Inc All rights reserved 18-47 Workers Compensation • Employers can comply with state law by: – Purchasing a workers compensation policy – Self-insuring, or – Obtaining insurance from a monopoly or competitive state fund • Most occupations are covered by workers compensation laws – Most states exclude or provide incomplete coverage for farm workers, domestic servants, and casual employees – Some states exempt firms with few employees Copyright ©2014 Pearson Education, Inc All rights reserved 18-48 Workers Compensation • Two eligibility requirements must be met to receive benefits: – The disabled person must work in a covered occupation – The injury or disease must arise out of and in the course of employment Copyright ©2014 Pearson Education, Inc All rights reserved 18-49 Workers Compensation • 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 Copyright ©2014 Pearson Education, Inc All rights reserved 18-50 Workers Compensation • Problems with state workers compensation programs include: – Rising share of medical costs to total benefits – Fraud and abuse – Impact of an aging workforce on workers compensation costs Copyright ©2014 Pearson Education, Inc All rights reserved 18-51 ... Social Insurance • Old-Age, Survivors, and Disability Insurance (OASDI) • Medicare • Impact of the Affordable Care Act on Medicare • Problems and Issues in OASDI and Medicare • Unemployment Insurance. .. 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 10 standard policies (A-N) which offer different... prescription drug coverage by joining a stand-alone plan – Monthly premiums depend on the plan chosen, and vary in the cost and types of drugs covered – Plans must provide at least standard coverage –