Principles of risk management and insurance 12th by rejde mcnamara chapter 18

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

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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

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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

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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 selfsupporting

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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

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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

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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

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Exhibit 18.1 Social Security Full Retirement
Age and Reduction in Benefits by Age

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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

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Exhibit 18.2 Estimated Annual Retirement Benefits1 for Retired
Workers with Various Pre-Retirement Earnings (2008–2030)

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Exhibit 18.2 Estimated Annual Retirement Benefits1 for Retired
Workers with Various Pre-Retirement Earnings (2008–2030) (cont.)

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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

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Insight 18.1 Taking Social Security: Sooner Might
Not Be Better

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OASDI: Survivor Benefits
• Survivor benefits can be paid to dependents of a deceased worker
who is either fully or currently insured
• Survivors include:

–
–
–
–
–
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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

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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

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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

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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

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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

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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)

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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

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Medicare
• 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

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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

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–
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–
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Medicare
Medicare
Medicare
Medicare
Medicare

PPOs
HMOs
Private Fee-for-service plans
Medical Savings Account Plans
Special Needs plans

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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

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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

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