Chapter 22: Social Security

1
Chapter 22 Social Security
2
Introduction to Social Security

• Chapter Structure
• History of Social Security
• Types of benefits
• Eligibility for benefits
• Problems of the current Social Security system

3
Historical Background

• Severe economic and social problems caused by the
  Industrial Revolution
• The U.S. Social Security system was introduced in
  1935 by President Franklin D. Roosevelt, as a
  response to our Great Depression
• The Social Security program is a foundation upon
  which individuals are to build

4
Origins Of A Social Security System

• One political reaction to problems such as this
  is "socialism"
• Otto Von Bismarck introduced a social insurance
  program in 1880 (Prussia)
• The introduction was designed to destroy
  Prussia's socialist party by "stealing" their
  great issue

5
The Current Social Security System

• The current program has elements similar to
  private insurance (individual equity)
• There are also elements that are based on need
  (social adequacy)

6
Characteristics of The Current System

• Not a public assistance program
• Recipients of social security benefits pay for
  the benefits
• Not a private insurance program
• It is compulsory
• Benefits are predetermined by law
• Congress has taxing power
• Congress can change benefits.
• Social Security is a social insurance system

7
Operation of the Program

• Compulsory for all workers except full-time
  federal civilian employees, and the employees of
  a few states (in those states, newly hired
  employees pay the Medicare portion of the tax)
• Tax on wages is the main source of income
• Benefits are not fully funded (and never were)

8
Insured Status

• A fully insured person has 40 quarters (10 years)
  of covered employment and is entitled to all
  appropriate benefits regardless of need
• A currently insured person has worked 6 of the 13
  quarters prior to death and is entitled only to
  survivor (not retirement) benefits

9
Benefit Determination

• Only "covered earnings" count. Earnings below a
  specified maximum are covered and subject to
  Social Security tax
• The Average Indexed Monthly Wage determines the
  amount of benefits received after it is
  translated into a PIA (primary insurance amount)
  using a transformation table that is regularly
  updated

10
Retirement Benefits

• Payable to a retired worker and spouse at age 65,
  and dependent children or parents.
• Early retirement at age 62 means benefits are
  reduced delayed retirement - increased
• Earnings from employment reduces Social Security
  benefits 1 for every 2 earned after the
  threshold is reached for a beneficiary under 65

11
Survivor Benefits

• Payable to surviving spouse caring for an
  unmarried child under age 16. Also payable to
  unmarried dependent children under 18 (under 19
  if in school). If child is disabled, benefit ages
  change
• Benefits subject to a family maximum, and reduced
  when wage income is earned in a result similar to
  retirement test

12
Survivor Benefits and the Blackout Period

• The possible period between
• Youngest child's 18th birthday
• Widow's 62nd birthday

13
Disability Benefits

• Payable to fully insured workers employed for 20
  of the 40 quarters prior to disability
• Meet the definition of disability - disability
  must be permanent (expected to last more than 12
  months). The definition used for disability is
  quite strict

14
Medicare

• Separated into three parts
• Part A provides hospitalization coverage
• Part B provides coverage for doctors benefits
• Part D provides prescription drug coverage
• Deductibles, participation, and maximum limits
  apply
• Medigap policies are designed to fill the "gaps"
  in Medicare

15
Coverage A Basic Hospital

• Inpatient hospital benefits
• Room and board in a semi-private room
• Nursing services
• Drugs furnished in the hospital
• Operating room costs
• Skilled nursing Care
• Home health care benefits
• Hospice Benefits

16
Coverage B Voluntary Supplemental Medical
Benefits

• Doctors Bills
• Hospital diagnostic studies
• Dental surgery
• Outpatient care
• Home health care
• Blood
• Excluded routine physical exams, dental care,
  eyeglasses and hearing aids

17
Coverage B Premium Means Tested

• Surcharge for 2007 based on 2005 AGI
• Phased in over 2007, 2008 for full implementation
  in 2009
• Brackets modified each year to adjust for
  inflation
• Standard premium set each year to cover 25 of
  programs expected cost 2006 premium is 88.50
  per month
• Below are the single AGI ranges double for
  married ranges

18
Part D Prescription Drug

• Passed 2003 Begins January 2006
• Anyone with Medicare coverage is eligible
• Must join a Medicare prescription drug plan or a
  health plan that provides the coverage
• Subject to deductibles, and co-pays

19
Part D Prescription Drug Plan

• For a 35 Monthly cost

20
Financial Operation of the System

• Payroll tax paid half by the employer and half by
  the employee
• Current tax is 7.65 of covered earnings for a
  total of around 15 percent (no wage limit on HI
  tax)
• Pay-as-you-go basis
• Does not keep large reserves like private
  insurance companies do

21
Medicare Supplemental coverage (Medigap)

• Purchased to cover the deductibles and
  co-payments
• Purchased to cover other portions of the Medicare
  program that causes cash outlays of the insured

22
Managed Care and Medicare

• Is an available option for Medicare recipients
  where HMOs exist
• Allows coverage without being billed for much of
  the co-payments and deductibles usually paid by
  the insured

23
Medicare Choice

• Established by the Balanced Budget Act of 1997
• Designed to expand choice by encouraging HMOs
• HMOs paid fixed monthly capitation payment
• Problem inadequate capitation payments and
  excessive administration has caused a decline in
  availability

24
Current Concerns About the Operation of Social
Security

• Demographic trends show too few workers relative
  to retired people to continue to operate the
  system on the pay-as-you-go basis
• The current system has been accumulating large
  surpluses, however future projections show large
  deficits

25
Proposed Solutions

• Revenues will have to be increased higher tax
  rates higher covered earnings general tax
  revenues will have to be used
• Benefits will have to be lowered retirement age
  will have to be increased indexing for inflation
  will have to be less generous benefits reduced
  or eliminated

26
Proposed Solutions

• Taxation of Social Security benefits may have to
  be changed to increase revenue
• If additional benefits are to be provided, a
  "fair" funding mechanism must be determined
• Privatization of some parts of the social
  security system is being discussed