Chapter 07 – Government-Mandated Social Security Programs
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Chapter 07 Government-Mandated Social Security Programs
I. Learning Objectives (use PP 7.2)
1. Basic Social Security programs affecting employment: OASDI, Medicare, and
unemployment insurance
3. Structure of the OASDI and Medicare programs
5. Structure of the unemployment insurance program
II. Origins of Social Security
A. Government’s Role to Promote Social Good
1. US government established Social Security and workers’ compensation insurance
programs because of social problems associated with chronic unemployment
3. Various Social Security programs implemented to promote social good and in
employment setting it refers to
B. Origins of Social Security
2. To help stimulate the economy
4. To help protect the health and welfare of employees and their families
5. Great Depression of the 1930s
6. People needed income to participate in the economy
III. Introduction to Social Security Programs
A. Overview (use PP 7.3)
1. Social Security Act of 1935 and subsequent amendments established 4 public social
insurance programs
a. Old-Age, Survivor, and Disability Insurance (OASDI)
2. Passage of the Social Security act set up two programs:
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B. Employers Required to Participate in Social Security Programs
1. OASDI and Medicare (use PP 7.4)
a. Virtually all US workers are eligible for protections under OASDI and Medicare
programs
b. Three exempt classes
2. Unemployment Insurance (use PP 7.5 & 7.6)
a. The number of monthly claims exceeds more than one million
6.9 million and gross job losses from closing and contracting companies were 6.3
million. There was a net increase of approximately 600,000 jobs (refer to Exhibit
7.1)
e. Although net job gains have been in evidence since the years 2007 through 2009,
the magnitude of these gains do not offset the substantial net job losses during the
recession
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l. The most recent extension is set to expire at the end of the 2012 calendar year
C. Administration of Social Security Programs
1. OASDI and Medicare Administration
a. Social Security Administration (SSA)
2. Unemployment Insurance Administration (use PP 7.7)
a. Titles III & IX of SSA authorized the federal government to grant money to states
to administer unemployment compensation, and it also established a federal
unemployment insurance trust fund
b. FUTA
i. Authorized the collection of federal and state payroll taxes and
ii. Specified how they were to be used
c. Federal taxes used for administration costs, state taxes for benefits costs
g. Employment security agencies in state labor departments or independent agencies
or commissions oversee administration of unemployment insurance programs at
IV. Old-Age Survivor, and Disability Insurance (OASDI)
A. Amendments to SSA
2. Disability Insurance, 1965
B. Qualifying for OASDI Benefits (use PP 7.8)
1. Social Security credits determine eligibility
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2. The number of credits required to qualify depends on
a. A person’s age
b. The particular Social Security benefit
C. Determining Benefit Amounts (use PP 7.9)
1. A person’s average indexed monthly earnings (AIME) determines initial primary
insurance amount (PIA)
2. COLAs (cost of living adjustments)
a. Are applied to guard against inflation
3. The Bureau of Labor Statistics
a. CPI reflects spending patterns for all urban consumers and urban wage earners and
D. Old-Age Benefits
1. Eligibility Criteria
a. Credits needed to qualify varies by birth date
i. 35 credits if born in 1924
ii. 36 credits if born in 1925
b. Retirement age and benefits (use PP 7.10)
i. Early retirement at 62, benefits less than full
ii. The year of birth determines the full retirement age
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c. Example: Mary, born 1941, could have earned full retirement benefits when she
turns 65 years- 8 months-old, retired at age 62, will receive reduced Social
2. Social Security Programs has incentives to delay retirement (use PP 7.11)
a. Retirement benefits increases percentage wise for each month worked until age 70
b. The increase has a maximum percentage limit
c. Example: John, born 1937, turned age 65 in 2002, annual Social Security benefit
of $13,200 at full retirement, John will retire in 2005 at age 68 instead, increase
3. Retirement benefit amount determination
a. Person’s retirement benefit equals the entire primary insurance amount (PIA)
b. Family benefits usually equal 50% of the PIA
c. In 2012, the annual monthly benefit for all retired workers was $1,229
E. Survivor Benefits
1. Eligibility
a. Nondisabled widow(er) who is at least the full retirement age
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2. Survivor benefit amount determination
a. Benefits usually less than a worker’s PIA
b. SSA pays monthly survivor benefits ranging from 71.5 – 75% of PIA
F. Disability Benefits (use PP 7.12)
2. SSA pays only for total disability
3. Social Security program rules assume that working families have access to other
4. Eligibility
a. Disabled workers who are unable to work as a result of a serious medical or
mental impairment that lasts at least 12 months
b. Seriously disabled workers that meet 2 criteria
5. Disability benefit amount determination
a. Worker’s benefits equal the full primary insurance amount
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V. Medicare
A. Main plans (use PP 7.13)
1. Serves nearly all U.S. citizens age 65 or older by providing insurance coverage for
2. Social Security Act was amended to create this program
4. Medicare Part B coverage – medical insurance
6. Medicare Part C: Medicare Advantage- choices in health care providers such as
through HMOs and PPOs (see Chapter 5)
8. Individuals eligible to receive protection under Medicare may choose to receive
9. The original Medicare Plan is a fee-for-service plan
10. Medicare Advantage Plan includes a variety of insurance options
a. HMOs
12. Restrictions pertain to the pricing of plans
B. Eligibility Criteria for Medicare Benefits
2. Automatically extends to spouses of eligible workers
4. Younger individuals that are seriously disabled for at least 24 months of suffering
from permanent kidney failure requiring dialysis or transplant
6. Having fewer than 40 credits requires an individual to pay a monthly premium to
receive coverage
8. Part A coverage automatically qualifies an individual to enroll in Part B coverage for
a monthly premium
10. In 2012, monthly Part B premiums ranged from $99.90 to $319.70 depending on
income
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C. Medicare Part A Coverage
1. Compulsory hospitalization insurance covers both inpatient and outpatient hospital
care and services (use PP 7.14)
a. Inpatient hospital care in a semiprivate room, meals, general nursing, and other
hospital supplies and services
D. Medicare Part B Coverage (use PP 7.15)
1. Helps pay for medical services not covered by Part A
a. Doctors’ services
3. Structured similarly to indemnity medical insurance
4. Covers 80% of medical services and supplies after enrolled individual pays an annual
deductible for services furnished under the plan
E. Medigap Insurance (use PP 7.16)
2. Help cover the costs of coinsurance, copayments, and deductibles
4. Some policies cover costs not covered in the original Medicare plan
5. Some insurers offer Medicare Select Plans
6. Massachusetts, Minnesota, and Wisconsin do not offer Medigap insurance
F. Medicare Part C – Medicare Advantage (use PP 7.17)
1. The Balanced Budget Act of 1997 established Medicare+Choice which was renamed
Medicare Advantage in 2004, also referred to as Part C
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3. Fee-for-service plans provide protection against expenses in the form of cash benefits
4. Managed care plans often pay higher levels of benefits if health care is received from
approved provider
6. Allows beneficiaries to switch health plans during annual open enrollment period
G. Medicare Part D – Medicare Prescription Drug Benefit (use PP 7.18)
2. Commonly referred to as Part D
4. A participant pays the deductible, $320 in 2012, before Medicare begins to provide
coverage
6. For expenses above $2,930 through $4,700, the participant pays
7. This coverage gap known as the “donut hole” because Medicare contributes to the
8. These dollar amounts were valid in 2012 and are subject to change from year to year
10. The Medicare Modernization Act provides federal tax-exempt subsidy to employers
that sponsor drug benefits that are at least as generous as the Part D benefits
H. Medicare as the Primary or Secondary Payer (refer to Exhibit 7.6)
1. Individuals who have Medicare coverage may also simultaneously receive health
insurance benefits from other sources
VI. Financing OASDI & Medicare Programs (use PP 7.19)
A. Overview
1. Requires equal employer and employee contributions under FICA
3. Employees pay a tax based on earnings
5. Tax rate is subject to increase each year in order to fund OASDI programs
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B. OASDI Programs
1. The largest share of the FICA tax funds OASDI programs
3. Self-employed individuals contributed 12.40%
5. Subject to taxable wage base
6. Annual wages, payroll costs per employee, and self-employed earning above this
level were not taxed
C. Medicare Programs
1. Medicare tax, or hospital insurance tax, supports Part A programs
3. Self-employed individuals have contributed 2.9%
5. All payroll amounts and wages taxed
D. Financial Status of the OASDI and Medicare Programs (use PP 7.20)
1. The viability of the OASDI and Medicare programs relies on sufficient funding to
3. Social Security system represents a pay-as-you-go benefit system
5. Social Security Board of Trustees annual report of 2011
a. The program had a $49 billion deficit in 2010 for the OASDI program
b. The projected deficit for 2011 was projected to be $46 billion
6. Medicare trust fund faces a more immediate shortfall that does the OASDI trust
funds
8. In Fall 2011, the projected date is 2019. It is difficult to interpret the change in
projected time frame based on a single year
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b. Immigration is accounting for some growth in the labor force and immigrant
VII. Unemployment Insurance
A. Overview
1. Provides weekly income for workers unemployed through no fault of own
2. States
3. Federal government
B. Eligibility Criteria for Unemployment Insurance Benefits (use PP 7.21 & PP 7.22)
1. Criteria includes
a. Limited voluntary and involuntary unemployment except for disqualifying causes
2. Limited voluntary employment and involuntary unemployment
a. Voluntary termination usually disqualifies workers from receiving benefits,
unless they chose to quit for reasonable causes
b. Reasonable cause refers to the creation of working conditions that cannot be
3. Minimum earnings and employment requirements
a. Must have been employed for a minimum period of time
4. A waiting period
a. Usually one week following claim
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© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
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a. Mentally & physically able (ability)
b. Willing and ready (motivation)
6. Actively seeking suitable work
a. Jobs that require skills, knowledge, ability similar to individual’s customary work
b. Job offers employment terms and conditions that don’t violate relevant laws
C. Unemployment Insurance Benefit Amounts (use PP 7.23)
1. Benefits are paid weekly
3. Varies by state
4. Generally:
a. A specified fraction of earnings during highest base period quarter
5. Supplemental Unemployment Benefit (SUB)
7. Benefits generally provide income that is 50% to 67% of previous earnings
8. States use one of three methods to calculate weekly benefit amounts
a. A fraction of the highest wages for a calendar quarter earned during the base
period
b. A percentage of the average weekly wage earned during the base period
c. A percentage of annual wages
d. Excludes
D. Financing Unemployment Insurance Benefits
2. FUTA
a. Employers contribution 6.2% of the first $7,000 earned by each employee
e. 5.4% of the taxes levied on employers to the Federal Unemployment Trust Fund,
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© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
iii. 0.8% covers administrative costs and maintains a reserve to bail out states
with very low balances in their accounts
3. Employers’ tax burdens vary according to an experience rating system
a. The tax rate depends on the employer’s prior experience with unemployment
1. Discuss the basic concept of social insurance as provided by Social Security programs.
Main Points
• Various Social Security insurance programs were established by the U.S. government to
contribute to the attainment of the social good. In the employment context, the social
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2. Describe the differences between FICA and FUTA.
Main Points
FICA
• Funding for OASDI and Medicare programs requires equal employer and employee
contributions under the Federal Insurance Contributions Act (FICA).
3. Would you modify any of the eligibility criteria currently used to qualify unemployed persons
for unemployment insurance benefits? Explain why or why not.
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4. Under what circumstances should employees be ineligible for public or private disability and
life benefits? Discuss the rationale for your answer. Are the expenses associated with providing
public and private programs serving the best interests of society?
Main Points
Cases
Understanding Your Benefits
Qualifying for Unemployment Benefits
1. Are you eligible to receive unemployment if you resign?
2. In this case, should you resign or wait to see if you are laid off?
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Student Responses
1. Are you eligible to receive unemployment if you resign?
2. In this case, should you resign or wait to see if you are laid off?
Social Security and Retirement Planning at Taylor Foods
1. How does the instability of the Social Security system affect retirement benefit planning
at Taylor Foods?
2. Should Gavin consider the possibility of employees delaying retirement in the company
human resource planning process?
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Student Responses
1. How does the instability of the Social Security system affect retirement benefit planning
at Taylor Foods?
2. Should Gavin consider possible later retirement ages in the company human resource
planning process?