General Nature of the OASDHI Program

1. Old age benefits

2. Survivors benefits

3. Disability benefits

4. Medicare benefits

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 Eligibility and Qualification

1. Quarter of coverage

2. Fully insured status

3. Currently insured status

31-2
 Financing

1. FICA tax: originally 1%, 7.65% by 1995 (payable

by employer and employee).

2. The tax base: originally $3,000, $62,700 by 1996.

3. Self-employment tax: originally about 1.5 times

employee tax. Now equals combined tax for
employees, but self-employed persons may
deduct one-half self-employment tax paid.

31-3
 Amount of Benefits

1. All benefits are based on Primary Insurance

Amount (PIA).

2. PIA is amount to which worker would be entitled

for retirement at age 65.

3. PIA is based on worker’s average earnings

during period of employment, subject to certain
adjustments.

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 Computing the PIA

1. Computation period:
year worker reaches age 22 until year before
worker reaches age 62, dies, or is disabled.

2. Up to 5 years may be dropped. Minimum 2

years in computation.

31-5
 Computing the PIA

3. Recorded earnings are indexed to determine

Average Indexed Monthly Earnings (AIME).

4. Primary Insurance Amount is computed from

AIME by formula.

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 Retirement Benefits

1. Worker at age 65 (reduced benefit at age 62)

2. Spouse of a retired worker
3. Children’s benefit (child of retired worker)
under age 18
under age 19 if a student
over 18 if disabled prior to age 18
4. Mother’s or father’s benefit with child under 16
in care

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 Survivor Benefits

1. Lump sum benefit $255

2. Children’s benefit

3. Mother’s or father’s benefit

4. Widow’s or widower’s benefit

5. Parent’s benefit

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 Disability Benefits

1. Disabled worker

2. Child of a disabled worker

3. Mother’s or father’s benefit

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 Summary of Qualification Requirements

Benefit Insured Status

Survivor Benefits
Children’s benefit Fully or currently
Mother’s/father’s benefit Fully or currently
Dependent parent Fully insured
Widow or widower Fully insured
Lump-sum death benefit Fully or currently
Retirement Benefits
Retired worker’s benefit Fully insured
Spouse of worker’s benefit Fully insured
Child’s benefit Fully insured
Mother’s or father’s benefit Fully insured
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 Summary of Qualification Requirements

Disability Benefits Insured Status Required

Disabled worker 20 of last 40 quarters fully

insured or 6 of last 12
Spouse of disabled worker quarters if under age 24
Child of disabled worker 1 of every 2 quarters since
Mother’s/father’s benefit age 21 if between ages 23
and 31

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 Benefits as Percent of Worker’s PIA

Retired worker at age 65 100.0%

Disabled worker under 65 100.0%
Retired worker at age 62 80.0%
Spouse of retired worker age 65 50.0%
Spouse of retired worker age 62 37.5%
Child of retired/disabled worker 50.0%
Spouse under 65 with 1 child 50.0%
Widow or widower at age 62 80.0%
Widow or widower at age 60 71.5%
Disabled widow or widower age 50 71.5%
One surviving child 75.0%
Widow or widower with 1 child 150.0%

31-12
 Loss of Benefits - General

1. Divorce from person receiving benefits

2. Attainment of age 18 by a child

3. Marriage

4. Adoption

5. Disqualifying income

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 Loss of Benefits - Disqualifying Income

1. Different amounts of exempt earnings apply to

beneficiaries of different ages:

Under age 65 $8,280 in 1996

Over 65 but under 70 $11,520 in 1996

Over age 70 No limit

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 Loss of Benefits - Disqualifying Income

2. If earnings exceed exempt amounts, a part of the

social security benefit will be lost

4. Amount of benefits lost depends on the age of

the beneficiary:

Age of Benefits Lost for Earnings

BeneficiaryAbove Exempt Amounts

Under age 65 $1 for each $2 in earnings

Age 65 to 70 $1 for each $3 in earnings
Over age 70 No loss of benefits
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 Taxation of Social Security Benefits

1. Amount of benefits subject to tax depends on

combined income and filing status.

2. “Combined income” is the sum of adjusted

gross income, tax exempt interest, and one-half
the social security benefit.

3. If combined income is between $25,000 and

$34,000, up to 50% of social security benefits
may be taxed.

31-16
 Taxation of Social Security Benefits

4. If combined income is over $34,000, up to 85% of

the benefits may be taxed.

5. For those filing joint returns, break points are

$32,000 and $44,000.

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 Soundness of the Program

1. FICA tax has increased from a maximum of $30

each for employer and employee in 1936 to
$4,797 each by employer and employee in 1996.

2. Periodic crises have required legislated

increases in contribution rates to “save” the
system.

3. Increasing tax and anticipated financial

difficulties result from:
increasing number of beneficiaries
increasing level of benefits.
31-18
 Soundness of the Program

Future Projections

1. Trust funds have increased from about $45

billion in 1982 to $436.4 in December 1994.

2. Based on intermediate assumptions, trust funds

will reach $1.273 trillion in 2004 and will peak in
about 2020.

3. After 2020, deficits will deplete the trust funds

over the next 10 to 15 years.

31-19
 Soundness of the Program

Trust fund investment in government bonds

• The government is borrowing from trust funds

to cover current operations.

• Bonds will have to be redeemed when trust

funds are depleted.

• The question is “where will the money come

from?”

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 Proposals for Change

1. Return to a “Floor of Protection” concept.

2. Original retirement age was 65.

It is scheduled to increase to 67 by 2022
Some have recommended further increase.

3. Another proposal would allow workers to avail

themselves of private alternatives to social
security through increased contribution limits
for IRAs.

31-21
 Proposals for Change In Financing

• In the official report of the U.S. Advisory Council

on Social Security which was released in 1996, a
minority of the council members recommended
that the U.S. Social Security System be privatized.

• Under this proposal, tax funds collected by the

Social Security Administration would be invested
not in U.S. treasury instruments, as is now the
case, but in private stocks and bonds.

31-22
 Privatization Proposals

• Whether privatization is the solution to the OASDI

funding problems depends on one’s point of
view, but there is a strong case for the proposal.
• According to Professor Martin Feldstein (former
chairman of the President’s Council of Economic
Advisers and professor of economics at Harvard
University), the fundamental problem with the
Social Security system is the pay-as-you-go
financing system.

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 Privatization Proposals

• Thus far, Social Security has paid beneficiaries

far more in benefits than they have paid in
contributions.
• This has been achieved by a 600% increase in the
tax rate and significant growth in the labor force.
• Now, the demographics have changed, and
increasing tax rates as a means of paying out
more to beneficiaries than they paid in isn’t going
to work in the future.

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 Privatization Proposals

Professor Feldstein estimates that if contributions

were invested in a funded account earning a real
return of 9%—roughly the rate that has been
earned on funds invested in stocks and bonds in
the private sector—the cost of financing Social
Security benefits would be cut by about 80%.

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 Unemployment Insurance

• In addition to the perils of death and

disability, the individual faces loss of
income from another source:
unemployment.

• Commercial insurance companies cannot

deal with the peril of unemployment; the
government has therefore undertaken a
system of unemployment compensation to
protect members of the society against loss
from this ever-present threat.

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 State-Federal Program

• The unemployment insurance program of

the United States is subject to control by
both the federal and state governments.

• This division of control resulted from the

reluctance, historically, of the states to
enact unemployment insurance programs
and the manner in which states were
encouraged to establish unemployment
insurance programs by the federal
government.

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 Origin of the Program

• The Social Security Act of 1935 imposed a

payroll tax of 1% on the total wages of all
employers who had eight or more
employees in each of 20 weeks during the
year and who were not exempted because of
occupational classification.
• After imposing the tax, the law went on to
provide that employers would be permitted
to offset 90% of the tax through credit for
taxespaid to a state unemployment program
that meets federal standards.
31-28
 Changes

• Participation has been extended to include

employers of one or more employees in 20
separate weeks or firms that have a
quarterly payroll of $1500 or more.
• The tax rate has been increased several
times and was 6.2% in 1994.
• The wage base has been reduced from total
wages and applied to the first $7.000 of each
worker’s wages in 1994.

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 Eligibility for Benefits

• The eligibility requirements vary from state

to state, but all call for previous
employment in a covered occupation and
continued attachment to the labor force as
a prerequisite for benefits.
• In addition to the requirement of covered
employment (which means that a tax must
have been paid on behalf of the worker),
other qualifications are also mandated.

31-30
 Eligibility for Benefits

• In most states, the worker must also have

earned a certain minimum income during
the preceding year, referred to as the base
period.
• Some states require that the worker must
have been paid a stated dollar minimum
during the base period, and a few demand a
specified number of weeks of employment
with a minimum amount of earnings.

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 Continued Attachment to Labor Force

• The basic philosophy of the unemployment

compensation program is that only those
workers who are legitimate members of the
labor force are eligible for benefits.
• Therefore, unemployment must be
involuntary before the worker can collect
benefits, which means that the worker must
be willing and able to work.

31-32
 Continued Attachment to Labor Force

• This is the principal reason that benefits are

payable through the state employment
offices.

• The worker desiring to draw benefits must

present himself or herself at the
employment office to collect the money and
must be willing to accept suitable work if it
is offered.

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 Amount and Duration of Benefits

• The worker who meets the requirements of

previous employment and involuntary
unemployment is entitled to certain
benefits as a matter of right, without the
necessity of meeting a needs test.

• There is no uniformity among the states in

the amount of benefits to which the
qualified worker is entitled, and the benefits
payable in some states are far higher than
those in others.

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 Amount and Duration of Benefits

• In all states the amount of the benefits to

which the worker is entitled is related to
previous earnings.

• In most states the method of determining

benefits is to take some percentage or
fraction of the worker's wages during the
quarter of highest earnings in his or her
base year.

31-35
 Amount and Duration of Benefits

• One of the most commonly used fractions

is 1/26.
• If the worker was fully employed during the
quarter, the 1/26 benefit provides a weekly
benefit equal to approximately 50% of his
or her normal full-time earnings.

31-36
 Benefit Levels

• The amount of the benefit is subject to a

state weekly maximum and minimum.

• The maxima in effect under the various

state laws in mid-1995 varied from $133 to
$487 a week.

• Actual payments to recipients on a state-

by-state basis in 1995 averaged $173
countrywide.

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 Maximum Benefit Period

• The Maximum period for which benefits are

payable also varies somewhat from state to
state.

• In 44 states, it is 26 weeks, while in 6 states

and the District of Columbia it is longer.

• The maximum in any state is 39 weeks.

31-38
 Extended Unemployment Compensation

• In all states, benefits may be extended

during periods of high unemployment by 50
percent for up to 13 weeks under the
federal-state extended unemployment
compensation program.
• Extended benefits are triggered when the
unemployment rate in a state averages 5
percent or more over a 13-week period and
is at least 20 percent higher than the rate for
the same period in the two preceding years.

31-39
 Financing

• The federal law permits the states to

impose tax rates higher than the 6.2%
specified by the federal statute, and also to
increase the tax base.

• A number of states (35 in 1995) have

increased the tax base above the federal
$7,000, and 34 have also elected to levy
taxes at a higher rate.

31-40
 Financing

• In addition, all states except Alaska have

enacted "experience-rating" provisions in
their laws that relate the taxes paid by an
employer to the benefits that have been
paid out to its former workers who were
involuntarily terminated.
• The basic intent of the experience-rating
plans is to promote employment stability by
rewarding those employers exhibiting a low
turnover rate with a lower premium
requirement.
31-41
 Unemployment Compensation Laws
Appraised

• The unemployment insurance programs are

designed to provide additional income to
the worker who is temporarily idle--the
"between-jobs" worker.

• In addition, the programs may serve to

provide income to jobless workers during
periods of cyclical unemployment.

31-42
 Compulsory Temporary Disability
Insurance Laws

These laws require employers to provide

coverage for workers who suffer disabling
non-occupational injuries or illness.
Laws exist in six jurisdictions:
California
Hawaii
New Jersey
New York
Rhode Island
Puerto Rico

31-43