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CHAPTER 20
Social Security
I. SUGGESTED CLASSROOM TIME: 110–130 MINUTES
II. CHAPTER OVERVIEW
This is the second of three chapters describing the government’s role as provider and
regulator of insurance. The first was Chapter 10—Insurance Regulation. Social Security is,
of course, the federal government’s major insurance program. While each American is
likely to have a Social Security number, and/or be a recipient or related to a benefit
recipient, surveys show the program is not understood by many Americans. Thus, one
III. LECTURE OUTLINE
A. Introduction—This chapter discusses the history of Social Security, the types of
benefits, the eligibility for benefits, and problems of the current Social Security system.
B. Historical Background
1. Severe economic and social problems were caused by the Industrial Revolution.
2. One political reaction to these problems was called “socialism.”
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7. Social Security is not a public assistance program.
a. Recipients of Social Security benefits pay for the benefits.
b. It is compulsory—Social Security recipients make contributions for the
8. Social Security is a social insurance system because it has characteristics of both a
public assistance program and an insurance system.
C. The Operation of the Social Security Program
1. Compulsory for all workers except full-time federal civilian employees and the
employees of a few states; in those states, newly hired employees pay the Medicare
portion of the tax.
5. Benefit determination
a. Only “covered earnings” count. Earnings below a specified maximum are
covered, subject to Social Security tax.
6. Categories of benefits
a. Retirement benefits
i. Payable to a retired worker and spouse at age 65 and to dependent children
or parents.
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b. Survivor benefits
i. Payable to surviving spouse caring for an unmarried child under age 16.
Also payable to unmarried dependent children under 18 (under 19 if in
c. Disability benefits
i. Payable to fully insured workers who were employed for 20 of the 40
quarters prior to disability.
ii. Disability must be permanent (expected to last more than 12 months) and
the definition used for disability is quite strict.
d. Medicare
i. Separated into three parts: Part A provides hospitalization coverage and
7. Financial operation of the system
a. The system is financed primarily by a payroll tax paid half by the employer and
8. Medicare supplemental coverage (Medigap)
a. Purchased to cover the deductibles and co-payments
b. Purchased to cover other portions of the Medicare program that cause cash
outlays by the insured
9. Managed care and Medicare
a. Is an available option for Medicare recipients where HMOs exist
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D. Part D: Prescription drug coverage
2. Limited coverage of Medicare beneficiaries’ prescription drug bills
a. All Medicare recipients are eligible for coverage.
E. Current Concerns about the Operation of Social Security
1. Demographic trends show too few workers relative to retirees to continue to
operate the system on the pay-as-you-go basis. This problem became acute after
the year 2000.
2. The current system has been accumulating large surpluses. The current financing
arrangement will have to be changed or the system will be “bankrupt” in the future,
based on demographic and benefit trends.
a. Revenues will have to be increased: Higher tax rates, higher covered earnings,
general tax revenues will have to be used, or some combination of the above
IV. ANSWERS TO REVIEW QUESTIONS
1. What is the connection between society that moves from an agricultural to
an industrial base and the development of a social insurance system? When
a society moves from an agricultural to an industrial-based economy, various social
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2. Who was Otto von Bismarck? What role did he play in the development of
social insurance? Otto von Bismarck was the Iron Chancellor of Germany. He
3. When was the Social Security Act passed? What was the political
philosophy that determined its level of benefits, both initially and
currently? The Social Security Act passed in 1935 and became effective in 1937. The
4. What aspects of Social Security are similar to a welfare program? How is
Social Security different from public assistance? Similarities between a welfare
5. List four similarities and differences between Social Security and private
insurance. Both Social Security and private insurance systems operate by
6. What is FICA, and what role does it play in the Social Security program?
FICA stands for Federal Insurance Contributions Act. The tax that an employee pays
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7. What is the maximum taxable wage? The covered maximum wage is currently
8. Using the same factors that applied in the Shun brothers example,
calculate the Social Security tax for Larry (earned wages of $60,000)
Michael (earned salary of $2 million) and Sam (dividend income of $25
9. Describe two major categories of insured status and their requirements. In
order to receive Social Security benefits a worker must be either fully insured or
10. What role does general tax revenue pay in funding Social Security
benefits? General tax revenue only plays a minor part in funding the Social Security
11. What does “pay as you go” mean with respect to Social Security retirement
benefits? A pay-as-you-go system means that current revenue is used to support
12. Identify three different categories of insured status for Social Security
13. What is an AIME? Describe what a PIA is. AIME is the average indexed monthly
14. Who is entitled to retirement benefits under the Social Security system?
Who is entitled to survivor benefits? Disability benefits? Medicare
benefits? Retirement benefits are available only to fully insured workers and their
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15. What is meant by the blackout period for Social Security benefits? The
“blackout” period is the time between when a surviving spouse stops receiving benefits
16. Identify the different types of benefits provided by the hospital insurance
part of Medicare and by the supplementary medical insurance portion of
the program. What are the deductible and participation provisions of
these programs? Part A, Hospital Insurance, of the Medicare program is compulsory
17. What problems will a declining birth rate and increasing longevity cause
for the Social Security system? Social Security has never operated on a fully
18. Identify some solutions that have been offered to help maintain the Social
Security OASDI system’s solvency. Many solutions have been offered to help the
financial situation of the Social Security system. These suggestions include raising
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V. ANSWERS TO OBJECTIVE QUESTIONS
1. The man whose name is associated with the development of the first social insurance
program is
2. The main source of funding for the Social Security program is
3. How many quarters of coverage are required to be fully eligible for Social Security
benefits?
4. Which of the following is not one of the main categories of benefits provided by Social
Security?
5. The U.S. Social Security program has been operating for more than _______ years.
6. Which of the following statements is false regarding the Social Security program?
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7. Candy Kane has worked for 42 years in the business that she founded and owns,
Candy’s Candies. She has paid into Social Security for her entire working life. When
she retires, who will be eligible to receive retirement benefits based on Candy’s Social
Security contributions?
8. Which of the following is not a public assistance program?
VI. IDEAS FOR INSTRUCTORS AND TEACHING METHODS
1. Call your local Social Security office or contact the Social Security Administration
through its national 800 telephone number or refer to the Social Security website
2. Engage in an extended discussion of the term “social security.” Do people really want a
social safety net? What are the benefits and the costs of the mechanism? Would people
3. Given the age of the typical university student, engage in a discussion of whether they
4. Discuss who “wins” and who would “lose” if the government allowed people who could
demonstrate alternative private arrangements to opt out of the Social Security
5. Contact your local congressional representative and determine how she/he stands on
the issue of allowing individuals to opt out, fully or partially, of the Social Security
system.