Social Security and Medicare
Biggest components and Largest contributors towards future spending growth
OASDHI
Old-Age, Survivors, Disabilities and Health Insurance
Two components: OASDI and HI
Insurance Characteristics of Social Security
-intended to be self-supporting
-benefits increase with taxes paid
-benefits paid based on events, not based on means
Transfer Characteristics
-ratio of benefits to taxes paid are higher for lower income people
-benefits are not pre-funded (But are "pay as you go")
Eligibility for OASDI Benefit
-workers and their dependents are eligible
-Amount of benefits depends on:
---Wages earned
---Amount of time working
----Unit of measurement
------------earn a "quarter of coverage" for each $870 in annual earnings (in 2002) up to 4 years
Eligibility for OASDI benefits
Fully insured: 40 quarters or 1 per year from age 21 to 62
Currently insured: 6 quarters
Disability insured: 20 quarters during 40 quarters ending with onset of disability
Types of OASDI Benefits
Retirement: formula benefits
Survivor: Life insurance
Disability: disability insurance
OASDI Benefit Amounts
Benefits are based on Primary Insurance Amount (PIA)
First calculate average indexed monthly (AIME)
-index past earnings to growth in average wage rate so all earnings are comparable.
-takes highest 35 years of indexed wages
-divide number of months
Examp
Look at retirement benefit, survivor benefits, and disability table
...
Earnings Test
Retirement benefits are reduced if wages exceed certain thresholds. Strong disincentive for elderly to work full time.
Income taxation of benefits
Higher income individuals pay tax on part of their benefits
OASDI Financing
Financing from
-income taxes paid by high income beneficiaries
-interests on OASDI trust funds (accounting only)
-payroll (FICA) taxes
--FICA = Federal insurance contribution act
--largest source of funds
--Employer and worker each pay 6.2% of taxable wag
Pay-as-you-go financing
Basic Idea: Current payroll taxes pay current benefits. No pre-funding.
Exception: starting in 1983, payroll taxes were increased to help fund future benefits. Trust fund invests in government bonds ( and congress has more than spent it all!)
Factors Affecting Benefits and Taxes
Simple framework for understanding pay-as-you-go systems
--average benefit = payroll taxes / number of beneficiaries
---Payroll taxes = tax rate x average taxable wage x number of workers
---Average Benefit = tax rate x average taxable wage x ratio of wor
If average benefits are kept constant and taxable wages remain constant then
IIf the ratio of workers to beneficiaries goes down then tax rates must go up
Implicit rates of return
Compare taxes paid to benefits received to calculate an implicit rate of return. Relatively high returns for retirees until the early 1990's. Low expected returns in the future - likely negative for me - even more negative you!! - republicans have propose
Medicare
Pays medical expenses for person
-age 65 and above
-disabled people under 65
-four main parts of medicare
Medicare Part A
Hospital Insurance
Coverage for 90 days of hospitalization
-deductibles and coinsurance
-hospitals are reimbursed according to a schedule
Medicare Part B
Supplementary Medical Insurance SMI
-pays for physician, outpatient, home health car services
-pay 80% of expenses
-above $100 deductible
-monthly premium is required
-physicians reimbursed based on a fee schedule
Medicare Part C
Called Medical Advantage
-coverage is through insurance companies - option part A/B
-covers both hospital and physician
-government pays the insurance
-government pays the insurance company under a complicated reimbursement system; insured/beneficiary usu
Part D
Prescription drug coverage
-member has to sign up with a private insurer
-premiums generally required
-Feds have to approve plan of benefits
---for 2010, after deductible plan paid cost up to $2,830 of drug costs (during calendar year)
----Member then pay
Financing of Medicare HI
Financed by payroll taxes
---both worker and employer pay 1.45% of all wages
-Deficits are forecasted
Financing of Medicare SMI
-beneficiaries pay monthly premiums that cover about 25% of the costs
-remaining 75% is financed from general tax revenues