10. Social Insurance

Question 1

Explain why social insurance programs are deemed necessary in the US (3 reasons & detail)

Answer 1

1. Programs are enacted to solve complex social problems. It affects most/all of society, and is so serious that direct gov’t intervention is necessary. E.g., the SS program came into existence bc of the Great Depression of the 1930s, when massive unemployment req’d a direct gov’t attack on economic insecurity.
2. Programs are necessary bc certain risks are difficult to insure privately. E.g., unemployment, bc it doesn’t completely meet the reqs of an insurance risk. However, the risk of unemployment can be insured by state UI programs.
3. They provide a base of economic security to the pop’n. They’re a layer of financial protection to most persons against the long-term financial consequences of: premature death, old age, non/occupational disability, and unemployment.

Question 2

List 8 characteristics of SI programs that distinguish them from other gov’t ins programs:

Answer 2

1. Compulsory programs
2. Floor of income
3. Emphasis on social adequacy rather than individual equity
4. Bens loosely related to earnings
5. Bens prescribed by law
6. No means test
7. Full funding unnecessary
8. Financially self-supporting

Question 3

Provide 3 specific advantages compulsory programs have over non compulsory programs

Answer 3

1. The goal of providing a floor of income to the pop’n can be achieved more easily
2. Adverse selection is reduced, bc both un/healthy lives are covered
3. In a large program that is compulsory, fewer random or accidental fluctuations in loss experience are likely to occur, and the necessity of providing margins in contingency reserves is reduced

Question 4

Define the concept of a floor of income

Answer 4

It is difficult to define!

Extreme view: Floor should be so low as to be virtually nonexistent. Or, that the SI benefit itself should be high enough to provide a comfortable standard of living, so that private insurance benefits would be unnecessary.

Realistic view: SI benefits, when combined w other income & fin assets, should be sufficient for most persons to maintain a reasonable standard of living. Any group whose basic needs are still unmet would be provided for by supplemental public assistance (welfare) bens.

Question 5

Contrast the concepts of social adequacy and individual equity

Answer 5

Short answer:
Social adequacy: Benefits received by these recipients exceeds the AV of their contribs

Individual equity: AV of benefit closely related to AV of contribs.

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Social adequacy means that the benefits paid should provide a certain standard of living to all contributors. This means that the benefits paid are heavily weighted in favor of certain groups, such as low-income persons, large families, and the presently retired-aged. In technical terms, the actuarial value of the bens received by these groups exceeds the actuarial value of their contribs.

In contrast, the individual equity principle is followed in private insurance. Individual equity means that the contributors receive bens directly related to contributions; the actuarial value of the bens is closely related to the actuarial value of the contribs.

Question 6

Explain how benefits are related to earnings in social insurance programs

Answer 6

SI benefits are loosely related to worker earnings.

The higher a worker’s covered earnings, the greater the benefits. The relationship bt higher earnings and higher benefits is loose and disproportionate, but does exist. This, some consideration is given to individual equity.

Question 7

Define a means test, and indicate where it is used

Answer 7

A means test requires applicants to show that their income and financial assets are below certain levels as a condition of benefit eligibility. A means test is used in public assistance. By contrast, applicants for SI benefits have a statutory right to bens if they fulfill certain elig reqs.

Question 8

What 4 reasons make it unnecessary to fully fund a SS program?

Answer 8

1. Bc the program will operate indefinitely and not terminate in the predictable future, full funding is unnecessary
2. Bc the SS program is compulsory new workers will always enter the program & pay taxes to support it
3. The fed gov’t can use its taxing & borrowing powers to raise additional revenues if the program has fin probs
4. From an economic viewpoint, full funding would req substantially higher SS taxes, which would be deflationary and cause substantial unemployment. In contrast, private pension plans must emphasize full funding bc private pension plans can, and do, terminate.

Question 9

Explain how financially self-supporting SI programs are financed

Answer 9

Almost completely from earmarked contribs of covered EEs, ERs, and the self-employed, and from interest on the trust fund investments.

Question 10

Which occupations are covered by SS? Explain?

Answer 10

Virtually all private sector EEs.

Federal civilian EEs hired after 1983 are also covered on a compulsory basis. In addition, state and local gov’t EEs can be covered by a vol agrmt bt the state & fed gov’t. The majority of state & local gov’t EEs are covered - more than 9/10 workers are working in occupations covered by SS.

Question 11

Explain SS quarters of coverage & how they’re earned

Answer 11

To receive SS quarters of coverage (aka credits), a person must have a certain amount of work in covered employment. Credits can be earned any time during the year, and a max of 4 credits can be earned each year. A person receives 1 credit for each $1,510 (2022*) of covered earnings.

*Amount increases annually as average wages in economy increase

Question 12

Distinguish bt “fully insured” vs “currently insured,” and why is this distinction important?

Answer 12

A person is “fully insured” by SS if they have 40 credits.

They are “currently insured” if they earned 6+ credits during the last 13 calendar quarters, ending with the quarter of death, disability, or eligibility for retirement bens.

To be eligible for retirement bens, a person must be fully insured. (For folks born before 1929, fewer credits req’d.) Survivor bens require either a fully insured or currently insured status, although certain survivor bens require fully.

Question 13

What must a person do to achieve disability insured status?

Answer 13

2 work tests:
1. A recent work test
2. A duration of work test.

The latter test doesn’t require work within a certain period of time.
More liberal rules apply to the blind.

Question 14

What is the full retirement age for SS ret bens? Explain?

Answer 14

For persons born 1960+: age 67
For persons born before 1960: 65 to 67

Question 15

What is the early ret age for SS bens?

Answer 15

Workers and their spouses can retire as early as age 62 with actuarial reduced bens. A person may start receiving bens as early as age 62 regardless of their full ret age.

Question 16

Identify 5 categories of persons who are entitled to monthly SS ret bens.

Answer 16

1. Retired workers: Bens can be paid at full ret age to a fully insured worker; reduced bens can be paid as early as age 62
2. Spouses of retired workers: if they are at least 62 and have been married to the ret worker for 1y+. A divorced spouse is also eligible for benefits based on the ret worker’s earnings if they are at least 62 and the marriage lasted 10y.
3. Unmarried children age <18 or 19, if full-time elementary/high school students
4. Unmarried disabled children age 18+ based on the retired worker’s earnings if they were severely disabled before age 22, and continue to be disabled
5. Spouses with dependent children age <16: A spouse at any age can receive a monthly benefit if the spouse is caring for an eligible child age <16 (or, is caring for a child of any age who was disabled before age 22), who is receiving a benefit based on the retired worker’s earnings. The mother’s or father’s benefit terminates when the youngest child attains age 16 (unless: disability case).

Question 17

Outline the steps involved in calculating a person’s SS ret benefit

Answer 17

The monthly ret Ben is based on the worker’s primary insurance amount (PIA), which is the monthly amount paid to a ret worker @ full ret age, or to a disabled worker. The PIA, in turn, is based on the worker’s avg indexed monthly earnings (AIME), which is a method that updates the worker’s past earnings based on increases in the average wage in the nat’l economy.

A worker’s past earnings are adjusted by changes in the avg wage index, which brings them up to their approx equivalent value at the time of ret or eligibility for other bens. The indexing of covered wages results in a relatively constant replacement rate, so that workers retiring today and int he future will have about the same proportion of their work earnings replaced by OASDI bens.

For persons born 1928+, the highest 35y of indexed earnings are used to calculate the worker’s AIME for ret bens. The AIME is then used to determine the worker’s PIA. A weighted Ben formula is then used that weights the bens heavily in favor of low-income groups.

Question 18

Explain how the SS retirement benefit calculation supports the adequacy principle and the floor-of-income principle

Answer 18

The calc of the monthly benefit supports the adequacy principle bc low-income workers have a much higher % of their career-average earnings replaced by SS than workers @ higher income levels. This is a result of the weighted Ben formula that weights the Ben heavily in favor of low-income groups.

The floor-of-income principle is also evident bc SS bens provide only a floor, or a base of income, rather than a full replacement of earnings.

Question 19

How do workers increase their future SS bens by working longer?

2 ways:

Answer 19

1. Each additional year of work adds another year of earnings to their SS earnings record. Higher lifetime earnings may result in higher bens when the person retires.
2. A delayed retirement credit is available if a person delays receiving retirement bens beyond full ret age. The PIA will be increased by a certain % from the time they reach full ret age until the start of benefits, or until age 70. The delayed credit doesn’t extend past age 70. The % increase varies by year of birth. For workers born 1943+, the PIA is increased 8% per year (prorated monthly) for each year of delay beyond full ret age.

Question 20

List 5 factors a person should consider when determining when to start SS bens

Answer 20

1. Present need for income
2. Individual’s state of health
3. Life expectancy
4. Labor force involvement
5. Whether or not there are other assets that yield income

Question 21

How does inflation affect SS bens?

Answer 21

SS cash bens are automatically adjusted each year for changes in cost of living, which maintains the real purchasing power of the monthly bens during periods of inflation.

Whenever the CPI for all urban wage earners and clerical workers on a qtly basis increases from Q3 of the prior year to Q3 of present year, the bens are automatically increased by the same % for the Dec benefit (payable Jan).

Question 22

How does the OASDI program’s earnings test work?

Answer 22

The test can result in a reduction/loss of monthly bens for workers with earned incomes above certain annual limits.

The test does not apply to investment income, dividend, interest, rents, or annuity pmts, which is to encourage private savings & investments to supplement OASDI.

The earnings test applies to:
1. Beneficiary under full ret age? - if the Ben is under full ret age for the entire year, $1 in benefits is deducted for each $2 of earnings in excess of the annual limit
2. Calendar year in which the beneficiary attains full ret age? - the earnings test is liberalized for this age group; in the cal year in which the Ben attains full ret age, $1 in bens is deducted for each $3 of earnings above the annual limit. However, only earnings before the month in which the beneficiary attains full ret age are counted.
3. Earnings test eliminated after attainment of full ret age? - The test does not apply in, and after, the month the beneficiary attains full ret age. Bens who have reached full ret age, or beyond, can earn any amount and receive full OASDI bens.

Question 23

Identify the 7 categories of family members who are entitled to SS survivor benefits:

Answer 23

1. Unmarried children, age <18 (or <19 if full-time elementary/HS students)
2. Unmarried disabled children, age 18+ who became severely disabled before age 22; benefit based on deceased parent’s earnings
3. Surviving spouse with children age <16: Widow/er, or surviving divorced spouse is entitled to a monthly Ben if they are caring for an eligible child age <16 (or disabled case) and is receiving a Ben based on the deceased worker’s earnings. Benefits terminate for the survivor spouse when the youngest child turns 16/disabled child dies, married, or is no longer disabled
4. Surviving spouse age 60+: deceased worker must be fully insured; surviving divorced spouse age 60+ also eligible if the marriage lasted 10y+
5. Disabled widow/er age 50-59: Under certain conditions. Ben can be paid as early as age 50 if widow/er is disabled and disability started before or within 7y of spouse’s death. Deceased must be fully insured
6. Dependent parents age 62+ can also receive survivor bens based on deceased’s earnings. Deceased worker must be fully insured
7. A lump-sum death benefit of $255 can be paid when a worker dies, only if there is an eligible surviving widow/er or entitled child

Question 24

Describe the 3 eligibility reqs a disabled worker must meet to receive SS disability bens

Answer 24

1. Be disability insured
2. Meet 5mo waiting period
3. Satisfy the definition of disability

Question 25

What is the strict definition of disability that individuals must meet to receive SS disability bens?

Answer 25

The worker must have a physical or mental condition that prevents them from doing any substantial gainful activity, and that is expected to last (or has lasted) at least 12mos, or is expected to result in death.

The impairment must be so severe, that the worker is prevented from doing any substantial gainful work in the national economy.

In determining whether a person can do substantial gainful work, their age, education, training, and work xp can be taken into consideration. If the disabled person cannot work at their own occ but can engage in other substantial gainful work, the disability claim will NOT be allowed.

Question 26

Identify the 4 major groups of individuals who are entitled to SS DI benefits

Answer 26

1. Disabled worker: Under full ret age receives a Ben equal to 100% of the PIA. Worker must meet definition of disability, be disability insured, and satisfy a full 5mo waiting period
2. Spouse of a disabled worker at any age if they are caring for a child age <16, or a child who became disabled before age 22 and is receiving bens based on disabled worker’s earnings. If no eligible children are present, spouse must be at least age 62 to receive bens.
3. Unmarried children age <18 ,or 19 if a full-time elementary/HS student
4. Unmarried children age 18+ who became severely disabled before age 22, based on disabled worker’s earnings

Question 27

Explain how beneficiaries are taxed on OASDI benefits

Answer 27

Some beneficiaries who receive monthly cash benefits must pay an income tax on part of the benefits. The amount subject to taxation depends on the amount of combined income. Combined income is the sum of AGI + tax-free interest + (1/2 of the worker’s SS benefits). If the combined income exceeds certain $ thresholds, some benefits are taxable.

The threshold amounts depend on the person’s filing status (individual, married jointly, married filing separately) and the amount of income.

E.g., a married person filing jointly will pay no tax on SS bens if the combined income is less than $x, but will pay tax on up to 50% of the bens if income is in a higher bracket, and on up to 85% of the bens if income is in an even higher bracket.

Question 28

How are SS bens financed?

Answer 28

By a payroll tax paid by EE, ER and the self-employed; interest income on the trust fund investments; and revenues derived from the taxation of part of the monthly cash bens.

The combined payroll tax rate for both OASDI + Medicare is 7.65%, which is paid both by EE & ER. OASDI’s portion is 6.2% on covered earnings up to the max taxable earnings base. The base automatically increases if wages in the nat’l economy increase.

Question 29

List 8 changes proposed to reduce the long-range deficit in the OASDI program:

Answer 29

1. Use progressive indexing to determine benefits. For purposes of determining the worker’s avg monthly indexed earnings, a price index (rather than a wage index) would be used, resulting in substantial cost savings. However, the indexing for lower income groups would still be wage-based. As covered earnings increases, a combo of wage & price indexing would be used. For upper-income groups, the indexing method would be largely based on price index. Overall result -> substantial reduction in long-range deficit
2. Increase the SS payroll tax for both EE & ER
3. Move up scheduled increase in full ret age, or increase the age beyond 67
4. Reduce bens for future retirees across the board
5. Increase the OASDI taxable wage earnings base to cover a larger % of earnings
6. Make all OASDI bens subject to FIT (instead of a max of 85%, as is now the case)
7. Extend OASDI coverage on a compulsory basis to all new state & local govt EEs
8. Increase the # of years used in calc’ing ret bens from 35 to 38 yrs
9. Invest part of the trust fund assets in private investments, eg. Common stock

In addition, the general revenues of the fed gov’t could be used to fund part of the program. However, the fed budget is experiencing huge deficit presently, thus increased reliance on general revenue financing to reduce long-range deficit is unlikely.

Question 30

The depletion of the DI trust fund is a serious problem. Funding shortfall is largely due to the substantial increase in the # of DI bens receiving benefits. What are the (6) factors that account for most of the increase in the # of individuals receiving DI bens?

Answer 30

1. Growth in the labor force
2. Aging of pop’n and baby boomers
3. Increase of women in labor force
4. Higher recipient rates for women: women have caught up with men wrt disability rate
5. Higher ret age: increasing the full ret age means disabled workers are kept on the DI rolls for additional years
6. Downturns in business cycles lead to surges in DI apps

Question 31

What are the (4) objectives of UI programs?

Answer 31

They pay weekly cash bens to workers who are involuntarily umemployed. Each state has its own program. Their objectives are:
1. Provide cash income during involuntary unemp
2. Help unemp workers find jobs
3. Encourage ERs to stabilize emp
4. Help stabilize the economy

Question 32

Which type of ERs must provide unemp bens?

Answer 32

Most private firms, state & local gov’ts, and nonprofits.

A private firm is subject to federal unemp tax if it employed 1+ EE in each of at least 20 wks during the CY (or preceding CY), or it pays wages of $1500+ during a calendar quarter of either year.

State & local gov’ts must provide unemp coverage, although they aren’t required to pay the federal unemp tax, and instead may elect to reimburse the system for the bens paid to gov’t EEs.

Nonprofit charitable/edu/religious orgs are covered if they employ 4+ workers at least 1 day in each of 20 diff weeks during the CY or PY. A nonprofit org has the right either to pay the unemp tax, or to reimburse the states for the bens paid.

Question 33

Summarize the non/monetary elig reqs an unemp worker must meet to receive bens (4+5):

Answer 33

Monetary:
1. Earn qualifying wages & employment during the base year
2. Be able & available to work
3. Actively seek work
4. Meet waiting period

Non-monetary. Certain weeks of unemployment may be disqualified because of actions by the worker who filed the claims. Actions include:
1. Voluntarily quitting without good cause
2. Refusal of suitable work without good cause
3. Discharge for misconduct related to the job
4. Inability or unwillingness to accept full-time work
5. Unemployment bc of participation in a labor dispute

Application of these disqualification provisions varies by state

Question 34

Briefly describe the 3 categories of UI bens.

Answer 34

1. Regular state benefits: Each state has own program. Weekly cash Ben is paid for each week of total unemp. The benefit varies by worker’s past wages, within min/max amounts. Majority of states use a formula that pays based on a fraction of worker’s high-quarter wages. Several states also pay a dependent allowance. In most states, max duration is 26 wks.
2. Extended benefits (“EB”): Also available to workers who exhaust reg bens, in states with high unemp. Basic EB program adds 13 more weeks. Some states also enacted vol programs by which 7 more weeks can be paid in periods of extremely high unemp. Weekly amount is same as regular.
3. Emergency unemp comp: During recessions, millions of workers exhaust their reg bens. Many workers live in states where the rate is not high enough to trigger the “EB” program. To deal with the exhaustion of bens, Congress on numerous occasions enacted temporary emergency programs that provided add’l weeks of bens to unemp workers.

Question 35

How is UI financed?

Answer 35

State UI programs are financed largely by payroll taxes paid by ER on their EEs’ covered wages.

3 states also require minimal EE contribs.

All tax contribs are deposited in the Federal Unemp Trust Fund. Each state has a separate account, which is credited with the tax contribs and the state’s share of investment income.

Unemp benefits are paid out of each state’s account.

Experience rating is used by firms with favorable emp records to pay reduced tax rates. The major argument in support of do rating is that firms have a financial incentive to stabilize their employment.

Question 36

List 3 significant problems in state UI programs

Answer 36

1. Only a small proportion of workers receive bens
2. Inadequate financing: many states have relatively low trust fund balances, forcing them to borrow from their federal UI accounts during biz recessions
3. A relatively high % of claimants exhaust their regular state UI bens during biz recessions.