Principles of Risk Management and Insurance - Social Insurance
Principles of Risk Management and Insurance
Chapter 18: Social Insurance
Learning Objectives (1 of 4)
18.1 Explain the reasons for and basic characteristics of social insurance programs.
18.2 Explain the three types of insured status under the Social Security program.
18.3 Describe the following benefits under the Social Security program:
Retirement benefits
Disability benefits
Survivor benefits
Learning Objectives (2 of 4)
18.4 Describe the Social Security earnings test that can result in a reduction of monthly benefits.
18.5 Explain how the Social Security program is financed.
18.6 Describe the benefits under the Medicare program, including:
The Original Medicare Plan
Medicare Advantage Plans
Medicare Prescription Drug Plans
Learning Objectives (3 of 4)
18.7 Explain the following financial problems and issues in the OASDI and Medicare programs:
Long-range OASDI actuarial deficit
Depletion of the disability income trust fund
Medicare financial crisis
18.8 Explain the following characteristics of regular state unemployment insurance programs:
Objectives of unemployment insurance programs
Eligibility requirements for unemployment benefits
Unemployment insurance benefits provided
Financing of unemployment insurance programs
Current problems and issues
Learning Objectives (4 of 4)
18.9 Explain the following characteristics of state workers’ compensation programs:
Objectives of workers’ compensation
Eligibility requirements
Workers’ compensation benefits
Current problems and issues
Social Insurance Programs (1 of 2)
Social insurance programs are necessary for several reasons:
To help solve complex social problems.
To provide coverage for risks that are difficult to insure privately.
To provide a base of economic security to the population.
Social Insurance Programs (2 of 2)
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.
Benefits are loosely related to earnings.
Benefits are prescribed by law.
A formal means test is not required.
Full funding of benefits is unnecessary.
Old-Age, Survivors, and Disability Insurance (OASDI) (1 of 2)
Commonly known as Social Security, OASDI is the most important social insurance program in the United States:
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.
Old-Age, Survivors, and Disability Insurance (OASDI) (2 of 2)
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.
Types of Benefits (1 of 8)
Social Security retirement benefits are an important source of income for most retired workers:
For persons born in 1937 or earlier, full retirement age for unreduced benefits is age 65.
For persons born in 1960 or later, the full retirement age is 67.
Workers and their spouses can retire at age 62 with actuarially reduced benefits.
Types of Benefits (2 of 8)
Monthly retirement benefits can be paid to the following eligible persons:
Retired worker
Spouse of a retired worker
Unmarried children younger than age 18
Unmarried disabled children
Spouse with dependent children younger than age 16.
Exhibit 18.1: Age to Receive Full Social Security Benefits
Note: People born on January 1 of any year, refer to the previous year.
Year of Birth: Full Retirement Age
1943–1954: 66
1955: 66 and 2 months
1956: 66 and 4 months
1957: 66 and 6 months
1958: 66 and 8 months
1959: 66 and 10 months
1960 and later: 67.
Types of Benefits (3 of 8)
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.
Exhibit 18.2: Examples of Social Security Retirement Benefits and Replacement Rates
Source: Michael Clingman, Kyle Burkhalter, and Chris Chaplain, Social Security Administration, Actuarial Note Number 2017.9.
Career-Average Earnings | Payable Benefits | Percent of Career-Average Earnings Replaced
Very low earnings: $12,341 | $9,034 | 73.6%
Low earnings: $22,215 | $11,832 | 53.5%
Medium earnings: $49,366 | $19,504 | 39.7%
High earnings: $78,985 | $25,837 | 32.9%
Maximum taxable earnings: $120,418 | $31,556 | 26.2%
Types of Benefits (4 of 8)
Each additional year of work adds another year of earnings to your Social Security earnings record.
A delayed retirement credit is available if you work beyond the full retirement age or 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.
Types of Benefits (5 of 8)
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.
Types of Benefits (6 of 8)
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 5 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.
Types of Benefits (7 of 8)
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.
Types of Benefits (8 of 8)
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 2018, the Social Security portion is 6.2 percent on covered earnings up to a maximum of $128,400.
The Medicare portion is 1.45 percent on all earned income.
Medicare (1 of 12)
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.
Medicare (2 of 12)
Medicare Part A (Hospital Insurance) provides coverage for inpatient hospital stays and other services:
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.
Some healthcare services provided in the patient’s home are covered.
Hospice care is available for beneficiaries with a terminal illness.
Blood transfusions are covered during a covered stay in a hospital or skilled nursing facility.
Medicare (3 of 12)
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).
The DRG system was designed to encourage hospitals to operate more efficiently.
Medicare (4 of 12)
Medicare Part B (Medical Insurance) is a voluntary program that covers:
Medically necessary physician services and supplies
Outpatient care
Home health services
Durable medical equipment
Other medical services.
Beneficiaries must pay a monthly premium for the benefits.
The beneficiary must meet an annual deductible.
The program pays 80 percent of the Medicare-approved amount for most services.
Medicare (5 of 12)
Medicare hospital insurance (Part A) is financed by:
A payroll tax paid by covered employees, employers, and the self-employed.
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.
Medicare (6 of 12)
Medicare Advantage Plans (Part C) are private health plans that are part of the total Medicare program:
Medicare pays a set monthly amount to the plan.
Most plans provide extra benefits and have lower copayments than the original Medicare plan.
Most plans include Medicare prescription drug coverage.
Medicare (7 of 12)
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 copayment 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.
Medicare (8 of 12)
Under a Medicare Private Fee-for-Service Plan, the private company, rather than Medicare, decides:
How much it will pay.
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 healthcare costs.
Medicare (9 of 12)
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
Medicare Innovation Projects
PACE programs.
Medicare (10 of 12)
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.
Beneficiaries pay part of the cost of prescription drugs, and Medicare pays part of the cost.
Plans must provide at least standard coverage.
Medicare (11 of 12)
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 2015, once a beneficiary spends $4700 out-of-pocket for the year, the coverage gap ends, and catastrophic coverage, with a lower deductible, applies.
Medicare (12 of 12)
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 no longer available.
Problems and Issues (1 of 6)
Social Security and Medicare are faced with serious financial problems:
The combined OASDI trust funds will be exhausted in 2034.
In 2034, noninterest income will be sufficient to pay only about 75 percent of scheduled benefits.
The Disability Income trust fund is projected to be exhausted in 2028:
Tax income is projected to cover only 93 percent of scheduled benefits.
Problems and Issues (2 of 6)
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.
Reducing benefits for future retirees.
Problems and Issues (3 of 6)
Further proposals to address deficits include:
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.
Problems and Issues (4 of 6)
The shortfall in the Disability Income trust fund is due to:
Growth in the labor force.
Aging of the population and baby boomers.
Increased number of women in the labor force.
Higher recipiency rates for women.
Higher full retirement age.
Problems and Issues (5 of 6)
Medicare Part A also has financial problems:
The fund is projected to be exhausted by 2029.
At that time, dedicated revenues will be sufficient to pay only 88 percent of Hospital Insurance costs.
The poor financial condition is affected by:
Higher prices for medical services.
Increased volume and complexity of medical services.
Aging of the population and increased enrollments.
Increased expenditures from prescription drugs.
Problems and Issues (6 of 6)
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.
Unemployment Insurance (1 of 6)
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.
Unemployment Insurance (2 of 6)
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 1 week waiting period.
Unemployment Insurance (3 of 6)
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 who exhaust their regular benefits in states with high unemployment.
Unemployment Insurance (4 of 6)
Emergency unemployment compensation programs provide additional weeks of benefits to eligible claimants who have exhausted their regular state benefits during recessions:
The Emergency Unemployment Compensation program was enacted by Congress in 2008 and extended several times.
Unemployment Insurance (5 of 6)
Programs are financed largely by payroll taxes paid by employers on the covered wages of employees:
For 2018, covered employers paid a federal payroll tax of 6.0 percent on the first $7,000 of annual wages.
To strengthen reserves and maintain fund solvency, most states have a taxable wage base that exceeds $7,000.
Experience rating is also used, where firms with favorable employment records pay reduced tax rates.
Unemployment Insurance (6 of 6)
Problems with state unemployment compensation programs include:
Programs do not cover all unemployed persons.
Benefits are inadequate.
A high percentage of claimants are exhausting their regular state unemployment benefits.
Workers Compensation (1 of 9)
Workers compensation is a social insurance program that provides:
Medical care, cash benefits, and rehabilitation services to workers who are injured or sick from job-related accidents or disease.
The benefits are important in reducing economic uncertainty that may result from a job-related disability.
Workers Compensation (2 of 9)
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 dangers of the occupation.
Workers Compensation (3 of 9)
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.
Workers Compensation (4 of 9)
Objectives of state workers compensation laws include:
Provide broad coverage of employees for job-related accidents and diseases.
Provide substantial protection against the loss of income.
Provide sufficient medical care and rehabilitation services.
Encourage firms to reduce job-related accidents and develop effective safety programs.
Reduce litigation.
Workers Compensation (5 of 9)
Employers can comply with state law by:
Purchasing a workers compensation policy.
Self-insuring.
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.
Workers Compensation (6 of 9)
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.
Workers Compensation (7 of 9)
Workers compensation laws provide four benefits:
Medical care generally covered in full with no limitations.
Disability-income benefits paid after the disabled worker satisfies a waiting period.
Death benefits paid to eligible survivors if the worker dies due to a job-related accident or disease.
All states provide rehabilitation services to restore disabled workers to productive employment.
Workers Compensation (8 of 9)
The increasing use of medical marijuana and its impact on workers compensation is a growing problem for employers:
It is unclear whether a work-related injury is compensable for a claimant prescribed medical marijuana and tests positive on a drug screen.
It is also unclear if workers compensation payers must cover medical marijuana prescribed for claimants.
A lack of standard billing practices complicates drug utilization review.
Workers Compensation (9 of 9)
Another problem is the overuse of opioid prescription drugs such as Percocet, Oxycontin, and Morphine:
Opioid usage by injured workers has increased over time.
Many physicians prescribe opioids for back pain.
Long-term use of opioids can lead to addiction.
Most states have prescription drug monitoring laws or statewide electronic databases to deal with the problem of opiate overuse.