RISK MANAGEMENT FOR ENTERPRISES
AND INDIVIDUALS
Chapter 18
Social Security
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
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
1 18
- 2- 2
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.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
1 18
- 3- 3
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.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
1 18
- 4- 4
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: oldage (or retirement), survivors’, disability, and
Medicare.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
1 18
- 5- 5
Table 18.2 - Who Gets Monthly Benefits if a
Fully Insured Worker Retires?
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
1 18
- 6- 6
Coverage and Eligibility Requirements
Retirement Benefits
Full retirement benefits
Early retirement
Late retirement
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
1 18
- 7- 7
Table 18.4 - Who Gets Monthly Benefits if a
Fully Insured Worker Dies?
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
1 18
- 8- 8
Table 18.5 - Who Gets Monthly Benefits if a
Fully Insured Worker Is Disabled?
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
1 18
- 9- 9
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.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
- 10
1 18
- 10
Coverage and Eligibility Requirements
Replacement ratios: Expression of Social
Security benefit levels weighted in favor of lowerincome 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.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
- 11
1 18
- 11
Table 18.9 - The PIA Formula for
Maximum Family Benefit, 2009
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
- 12
1 18
- 12
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.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
- 13
1 18
- 13
Table 18.11 - Annual Retirement Earnings Test Exempt
Amounts for Persons Under the Normal Retirement Age
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
- 14
1 18
- 14
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 selfemployed.
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.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
- 15
1 18
- 15
Table 18.13 - Tax Rates Paid on Wages and
Earnings
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
- 16
1 18
- 16
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
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
- 17
1 18
- 17
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.
Income to 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
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
- 18
1 18
- 18
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.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
- 19
1 18
- 19
Table 18.15 - All Medicare Parts (A to
D)
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
- 20
1 18
- 20
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.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
- 21
1 18
- 21
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.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
- 22
1 18
- 22
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.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
- 23
1 18
- 23
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.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
- 24
1 18
- 24
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.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
- 25
1 18
- 25
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.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
- 26
1 18
- 26
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.
2010 Flat
Knowledge,
Inc. Inc.
©©2010
FlatWorld
World
Knowledge,
- 27
1 18
- 27