Employee Benefits Chapter 3

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Major Social Insurance Programs
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Social Insurance Programs include: Social Security (including Medicare) Unemployment Insurance Workers’ Compensation Insurance State-mandated temporary disability insurance
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Purpose of Social Insurance Programs
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Social insurance programs are designed to solve major social problems such as: Unemployment Work-related injuries & illnesses Disability Income & health care needs in retirement
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Reasons for Social Insurance
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– Need to solve major social problems – Difficulties in relying on private insurance for certain types of losses/expenses. – Public expectations -Some believe SS forces workers to \”save\” something to fund their retirement needs.
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Characteristics of Social Insurance
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Compulsory employment-related coverage Partial or total employer/employee financing Benefits prescribed by law Benefits as matter or right based on law & forced participation. Emphasis on social adequacy -Provide minimum floor of income/benefits -Not individual equity – they involve some income redistribution
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Significance of Social Insurance
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Almost 25% of employer benefit dollars go for social insurance. They are the most significant insurance expense for most individuals. They are the foundation on which employee benefit plans are built. For most individuals, social insurance constitutes a major portion of their retirement benefits -For 21% of retired persons, it is the only source of income. -For 65% of retired persons, it is more than ½ of their income. Medicare is typically the major source of health insurance for most retirees.
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What are Social Security benefits?
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Social Security benefits include: Retirement benefits Disability benefits Family benefits Survivors’ benefits Medicare
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How is Social Security Funded?
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The Federal Insurance Contributions Act (FICA) is the law allowing Social Security taxes to be deducted from paychecks Both employers and employees pay the taxes for Social Security and Medicare Operates on a \”pay as you go\” basis Social security taxes are collected and divided among several trust funds
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Social Security Trusts
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Four Different Social Security Trusts: A)Old Age and Survivors Insurance (\”OASI\”) -pays retirement and survivors’ benefits B) Disability Insurance (\”DI\”) Trust Fund -pays benefits to workers with disabilities and their families Two Medicare Trusts: A) Hospital Insurance (\”HI\”) Trust Fund -pays for services covered under Medicare Part A B) Supplementary Medical Insurance (\”SMI\”) -Pays for services covered under Medicare Part B and Part D
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Future of Social Insurance
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A) Social security is under significant financial stress and at some point will be unable to pay all promised benefits unless financing and/or benefits are changed. B) OASDI benefits are predicted to exceed revenues beginning in 2021; assets (loans to the government) will be exhausted by 2033. C) SS disability trust fund will be depleted by 2016; OASI trust fund will be depleted by 2035. B) Currently, there are 2.9 workers for each SS beneficiary. This this will drop to 2.1 workers by 2035. D) Projected actuarial deficit over next 75 years is $9.6 trillion or 2.72% of taxable payroll
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Extent of Coverage
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Percentage of workers covered -95% under social security -98% under Medicare To be covered, must have wages (or self employment income) on which social security and medicare taxes must be paid
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Extent of Coverage
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Major Categories of Persons not Covered Civilian government employees employed before 1984 under civil service retirement programs. However, all federal employees are now covered under Medicare. Railroad workers Some state/local government employees Some Americans working abroad. Ministers who elect out of coverage because of conscience or religious principles. Certain other workers, e.g., students working for their school, workers whose annual earnings fall below certain levels, etc.
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Who Is Covered under Social Security Benefits
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Social Security Beneficiaries Include: Participant Worker Participant’s Spouse Participant’s Children Dependent Parents Workers Divorced Spouse (10+ years of marriage)
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Fully Insured vs. Currently Insured
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Fully Insured= once have 40 credits, fully insured for life even if covered employment under SS ceases Currently Insured= certain survivors benefits are still available even if not fully insured – worker must have credit for at least six quarters of coverage out of the 13- -quarter period ending with the quarter in which death occurs -no retirement benefits for currently insured workers – currently insured only matters if not fully insur
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Retirement Benefits
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A) You must apply (not automatically paid) B)You may begin to receive benefits: -Normal Retirement Age (NRA)= age 65-67 (based on date of birth) -Worker age 62, but benefits reduced if taken before normal or full retirement age -Spouse age 62 or older -Spouse caring for child under 16 or disabled child -Dependent, unmarried children under 18 B) Monthly benefit increased if worker delays retirement up to age 70.
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Delayed Retirement Benefits
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Begin taking retirement distributions after normal retirement age Permanent increased benefit – Increases the benefit by 3%-8% for each year of delayed retirement – Calculation based on normal retirement age Must start receiving retirement benefits at age 70
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Disability Benefits
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A) Definition of Disability – Impairment so severe that it prevents a worker from engaging in any substantial gainful employment. – Must have lasted (or be expected to last) at least 12 months or be expected to result in death. B) Benefits begin after 5 full months of disability.
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Effect of Marriage or Divorce on Benefits
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A) Worker receiving benefits based on his/her own earnings – benefits continue regardless B) Individual’s receiving benefits based on spouse’s earnings benefits cease at divorce, unless -individual is 62 or older and was married longer than 10 years C) Widows and Widower benefits -Benefits cease at remarriage unless 60 or older
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Social Security Statements
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Social Security Statement automatically sent to covered workers aged 25 or older.

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