Chapter 18 Social Insurance Agenda Social Insurance OldAge

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 -supporting Copyright © 2014 Pearson Education, Inc. All rights reserved. self 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 9 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 6 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

Exhibit 18. 2 Estimated Annual Retirement Benefits 1 for Retired Workers with Various Pre-Retirement Earnings (2008– 2030) Copyright © 2014 Pearson Education, Inc. All rights reserved. 18 -11

Exhibit 18. 2 Estimated Annual Retirement Benefits 1 for Retired Workers with Various Pre-Retirement Earnings (2008– 2030) (cont. ) Copyright © 2014 Pearson Education, Inc. All rights reserved. 18 -12

OASDI: Retirement Benefits • Each additional year of work adds another year of earnings to your Social Security earnings record • 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 • The program has an earnings test that can result in a reduction or loss of monthly benefits for workers with earned incomes above certain annual limits Copyright © 2014 Pearson Education, Inc. All rights reserved. 18 -13

Insight 18. 1 Taking Social Security: Sooner Might Not Be Better Copyright © 2014 Pearson Education, Inc. All rights reserved. 18 -14

OASDI: Survivor Benefits • Survivor benefits can be paid to dependents of a deceased worker who is either fully or currently insured • Survivors include: – – – Unmarried children younger than age 18 Unmarried disabled children Surviving spouse with children younger than age 16 Surviving spouse age 60 or older Disabled widow or widower, ages 50 -59 Dependent parents • The benefits provide a substantial amount of financial protection to families Copyright © 2014 Pearson Education, Inc. All rights reserved. 18 -15

OASDI: Disability Benefits • Disability income 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 – 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 Copyright © 2014 Pearson Education, Inc. All rights reserved. 18 -16

OASDI: Disability Benefits • Major groups eligible to receive OASDI disability income 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 Copyright © 2014 Pearson Education, Inc. All rights reserved. 18 -17

Taxation and Financing of OASDI Benefits • 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 – OASDI and Medicare benefits are financed by a payroll tax paid by employees, employers, and the self-employed – In 2012, the Social Security portion is 6. 2% on covered earnings up to a maximum of $110, 100; it was reduced to 4. 2% for 2011 and 2012. – The Medicare portion is 1. 45 % on all earned income Copyright © 2014 Pearson Education, Inc. All rights reserved. 18 -18

Medicare • Medicare covers the medical expenses of most persons age 65 and older • Beneficiaries can select among an array of plans including prescription drug plans and health care plans of private insurers • Under the original Medicare plan, – Beneficiaries can elect any provider that accepts Medicare patients – Medicare pays its share of the bill, and the beneficiary pays the balance Copyright © 2014 Pearson Education, Inc. All rights reserved. 18 -19

Medicare • Hospital Insurance (Part A) provides coverage for inpatient hospital stays and other services including skilled nursing facility care, home health care, hospice care, and blood transfusions – Inpatient care is covered for up to 90 days for each benefit period – Inpatient care in a skilled nursing facility is covered up to a maximum of 100 days in a benefit period – Hospitals are reimbursed for inpatient services under a prospective payment system – A flat amount is paid for each service based on its diagnosis-related group (DRG) Copyright © 2014 Pearson Education, Inc. All rights reserved. 18 -20

Medicare • Medical Insurance (Part B) is a voluntary program that covers physicians’ fees and related medical services – Covered services include physician services, clinical laboratory services, home health care, outpatient hospital services, and blood – Beneficiaries must pay a monthly premium for the benefits – The beneficiary must meet an annual deductible – The program pays 80% of the Medicareapproved amount for most services Copyright © 2014 Pearson Education, Inc. All rights reserved. 18 -21

Medicare • Medicare hospital insurance (Part A) is financed by a payroll tax paid by covered employees, employers, and the selfemployed – Payroll tax is 1. 45 percent on all covered earnings – The program is subsidized by a small amount of general revenues • Medical insurance (Part B) is financed by monthly premiums and the general revenues of the federal government Copyright © 2014 Pearson Education, Inc. All rights reserved. 18 -22

Medicare • Medicare Advantage Plans (Part C) are private health plans that are part of the Medicare program – Medicare pays a set monthly amount to the plan – Most plans provide extra benefits and have lower co-payments than the original Medicare plan • Part C Plans include – Medicare – Medicare PPOs HMOs Private Fee-for-service plans Medical Savings Account Plans Special Needs plans Copyright © 2014 Pearson Education, Inc. All rights reserved. 18 -23

Medicare • A Medicare Health Maintenance Organization (HMO) is a managed care plan operated by a private insurer – The plan may require members to choose a primary care physician and get a referral to see a specialist – If the plan covers prescription drugs, members must pay a co-payment or coinsurance charge for each covered prescription • Beneficiaries in a Medicare Preferred Provider Organization (PPO) can generally see any doctor or provider that accepts Medicare patients Copyright © 2014 Pearson Education, Inc. All rights reserved. 18 -24

Medicare • Under a Medicare Private Fee-for-Service Plan, the private company, rather than Medicare, decides how much it will pay and the amounts members must pay for the services provided • A Medicare Special Needs Plan provides more focused care for specific groups of people, such as those with chronic illnesses • Under a Medicare Medical Savings Account Plan, Medicare deposits money that the beneficiary can use to pay health-care costs Copyright © 2014 Pearson Education, Inc. All rights reserved. 18 -25

Medicare • Medicare beneficiaries have other choices for coverage besides the Advantage Plans – These plans are still part of the overall Medicare program • Some plans provide coverage for both Part A and Part B, while most others provide only for Part B, and include: – Medicare Cost Plans – Demonstrations and pilot programs – PACE programs Copyright © 2014 Pearson Education, Inc. All rights reserved. 18 -26

Medicare Prescription Drug Plans • Medicare prescription drug coverage (Part D) is available to all beneficiaries – Beneficiaries in the original Medicare plan can add 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 – Beneficiaries pay part of the cost of prescription drugs, and Medicare pays part of the cost – For 2012, the average monthly premium for the private plans is an estimated $30. Copyright © 2014 Pearson Education, Inc. All rights reserved. 18 -27

Medicare Prescription Drug Plans • The cost sharing provisions are complex – Beneficiaries must meet an annual deductible that cannot exceed $320 in any plan – After the deductible is met, beneficiaries must meet a copayment or coinsurance charge – Most plans have a coverage gap, or “donut hole”, which refers to drug costs that must be paid completely out of pocket, after an initial amount has been covered by the plan, and until the annual out-of-pocket limit – In 2012, once a beneficiary spends $4700 out-ofpocket for the year, the coverage gap ends, and catastrophic coverage, with a lower deductible, applies Copyright © 2014 Pearson Education, Inc. All rights reserved. 18 -28

Exhibit 18. 3 Example of Cost-Sharing Provisions Under Medicare Prescription Drug Coverage Copyright © 2014 Pearson Education, Inc. All rights reserved. 18 -29

Medigap Insurance • Medicare beneficiaries can purchase a Medigap policy to cover 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 sets of benefits; some policies are not longer available • A Medicare SELECT plan requires the policyholder to use specific health-care providers to receive full coverage Copyright © 2014 Pearson Education, Inc. All rights reserved. 18 -30

Impact of the Affordable Care Act on Medicare • Some provisions of the Affordable Care Act will have significant impact on the Medicare program: – Rebates for the Part D coverage gap (donut hole) – Cracking down on health-care fraud – Providing free preventive care to seniors – Reducing overpayments to Medicare Advantage Plans Copyright © 2014 Pearson Education, Inc. All rights reserved. 18 -31

Impact of the Affordable Care Act on Medicare – Improving health-care quality and efficiency – Reducing unnecessary hospital readmissions – New innovations to hold down Medicare costs – Linking payments to quality outcomes – Bundling of payments Copyright © 2014 Pearson Education, Inc. All rights reserved. 18 -32

OASDI: Problems and Issues • The program is running an annual surplus, but the OASDI trust funds will soon experience serious financial problems – The combined OASDI trust funds will be exhausted in 2033 – In 2033, non-interest income will be sufficient to pay only about 75 percent of scheduled benefits – To pay all scheduled benefits over the next 75 years, the trust funds require an additional $8. 6 trillion in present value dollars – The Disability Income trust fund is projected to be exhausted in 2016. Copyright © 2014 Pearson Education, Inc. All rights reserved. 18 -33

OASDI: Problems and Issues • The deficit can be reduced or eliminated by: – Increasing payroll taxes – Decreasing benefits – Using general revenues to pay benefits – Some combination of these • Recent proposed changes include: – Using “progressive indexing” to determine benefits – Increasing the Social Security payroll tax for both employers and employees – Moving up scheduled increases in the full retirement age Copyright © 2014 Pearson Education, Inc. All rights reserved. 18 -34

OASDI: Problems and Issues • Recent Proposed Changes, continued – Reducing benefits for future retirees across the board – Increasing the OASDI taxable wage earnings base – Subjecting all OASDI benefits to the federal income tax – Extending OASDI coverage on a compulsory basis to all new state and local government employees – Increasing the number of years used in calculating retirement benefits from 35 to 38 – Investing part of the trust fund assets in private investments Copyright © 2014 Pearson Education, Inc. All rights reserved. 18 -35

Insight 18. 2 What Are Your Solutions for Reforming Social Security? Copyright © 2014 Pearson Education, Inc. All rights reserved. 18 -36

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 do 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 job -related 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 do 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