SOCIAL SECURITY: OBTAINING BENEFIT INFORMATION

In 1995, the Social Security Administration began sending an annual Earnings and Benefit Estimate Statement to each worker aged 60 and older. This statement, renamed the Social Security Statement, is now provided annually to all persons aged 25 or older who have employment covered under Social Security and are not currently entitled to monthly benefits. The statement enables an employee to verify his or her contributions to the Social Security and Medicare programs. It also contains an estimate of benefits that are available upon retirement, disability, or death.

The statement will help employees understand their total benefit package as well as enable any errors in earnings records to be corrected while information is readily available. As a general rule, requests for corrections must be made within 3 years, 3 months, and 15 days following the year in which wages were paid or self-employment income was earned. However, clerical or fraudulent errors can be corrected after that time.

SOCIAL SECURITY: TYPES OF BENEFITS

As its name implies, the Social Security program provides three principal types of benefits:

- Retirement (old-age) benefits

- Survivors' benefits

- Disability benefits

Retirement Benefits
A worker who is fully insured under Social Security is eligible to receive monthly retirement benefits as early as age 62. However, the election to receive benefits prior to the normal retirement age of 65 years results in a permanently reduced benefit.

In addition to the retired worker, the following dependents of persons receiving retirement benefits are also eligible for monthly benefits:

A spouse aged 62 or older. However, benefits are permanently reduced if this benefit is elected prior to the spouse's reaching age 65. This benefit is also available to a divorced spouse under certain circumstances if the marriage lasted at least 10 years.

A spouse of any age if the spouse is caring for at least one child of the retired worker who is (1) under age 16 or (2) disabled and entitled to a child's benefit as described below. This benefit is commonly referred to as a mother's or father's benefit.

Dependent, unmarried children under age 18. This child's benefit will continue until age 19 as long as a child is a full-time student in elementary or secondary school. In addition, disabled children of any age are eligible for benefits as long as they were disabled before reaching age 22.

It is important to note that retirement benefits as well as all other benefits under Social Security and Medicare are not automatically paid on eligibility but must be applied for.

Beginning in 2003, the normal retirement age for nonreduced benefits for workers and spouses will gradually increase until it reaches age 67 in 2027.

Survivors Benefits
All categories of survivors benefits are payable if a worker is fully insured at the time of death. However, three types of benefits are also payable if a worker is only currently insured. The first is a lump-sum death benefit of $255, payable in the following order of priority:

To a surviving spouse who was living with the deceased worker at the time of death

To a surviving spouse (other than a divorced spouse) who was not living with the deceased worker at the time of death if the surviving spouse is eligible for or entitled to benefits based on the deceased wage earner's record for the month of death

To children who are eligible for or entitled to benefits based on the deceased wage earner's record for the month of death

If none of these categories of survivors exists, the benefit is not paid

There are two categories of persons who are eligible for income benefits as survivors if a deceased worker was either fully or currently insured at the time of death:

Dependent, unmarried children under the same conditions as previously described for retirement benefits

A spouse (including a divorced spouse) caring for a child or children under the same conditions as previously described for retirement benefits

The following categories of persons are also eligible for benefits, but only if the deceased worker was fully insured:

A widow or widower aged 60 or older. However, benefits are reduced if taken prior to age 65. This benefit is also payable to a divorced spouse if the marriage lasted at least 10 years. In addition, the widow's or widower's benefit is payable to a disabled spouse at age 50 as long as the disability commenced no more than 7 years after (1) the worker's death or (2) the end of the year in which entitlement to a mother's or father's benefit ceased.

A parent aged 62 or over who was a dependent of the deceased worker at the time of death.

Disability Benefits
A disabled worker under age 65 is eligible to receive benefits under Social Security as long as he or she is disability insured and meets the definition of disability under the law. The definition of disability is very rigid and requires a mental or physical impairment that prevents the worker from engaging in any substantial gainful employment. The disability must also have lasted (or be expected to last) at least 12 months or be expected to result in death. A more liberal definition of disability applies to blind workers who are aged 55 or older. They are considered disabled if they are unable to perform work that requires skills or abilities comparable to those required by the work they regularly performed before reaching age 55 or becoming blind, if later.

Disability benefits are subject to a waiting period and are payable beginning with the sixth full calendar month of disability. In addition to the benefit paid to a disabled worker, the other categories of benefits available are the same as those described under retirement benefits.

As previously mentioned, certain family members not otherwise eligible for Social Security benefits may be eligible if they are disabled. Disabled children are subject to the same definition of disability as workers. Disabled widows or widowers must be unable to engage in any gainful (rather than substantial gainful) employment.

Eligibility for Dual Benefits
In many cases, a person is eligible for more than one type of Social Security benefit. Probably the most common situation occurs when a person is eligible for both a spouse's benefit and a worker's retirement or disability benefit based on his or her own Social Security record. In this case and in any other case when a person is eligible for dual benefits, only an amount equal to the higher benefit is paid.

Termination of Benefits
Monthly benefits to any Social Security recipient cease on death of the recipient. When a retired or disabled worker dies, the family members' benefits that are based on the worker's retirement or disability benefits also cease, but the family members are then eligible for survivors benefits.

Disability benefits for a worker technically terminate at age 65 but are then replaced by comparable retirement benefits. In addition, any benefits payable because of disability cease if the definition of disability is no longer satisfied. However, the disability benefits will continue during a readjustment period that consists of the month of recovery and two additional months.

As long as children are not disabled, benefits usually terminate at age 18 but may continue until age 19 if the child is a full-time student in elementary or secondary school.

The benefits of a surviving spouse terminate on remarriage unless remarriage takes place at age 60 or later.

SOCIAL SECURITY: ELIGIBILITY

To be eligible for benefits under Social Security, an individual must have credit for a minimum amount of work under the program. This credit is based on quarters of coverage. For 2001, a worker receives credit for one quarter of coverage for each $830 in annual earnings on which Social Security taxes are paid, up to a maximum of four quarters in any one calendar year, even if all wages are earned within one calendar quarter. Consequently, a worker paying Social Security taxes on as little as $3,320 (that is, $830 × 4) during the year will receive credit for the maximum four quarters. As in the case of the wage base, the amount of earnings necessary for a quarter of coverage is adjusted annually for changes in the national level of wages.

Quarters of coverage are the basis for establishing an insured status under Social Security. The three types of insured status are fully insured, currently insured, and disability insured.

Fully Insured
A person is fully insured under Social Security if either of two tests is met. The first test requires credit for 40 quarters of coverage. Once a person acquires such credit, he or she is fully insured for life even if employment covered under Social Security ceases.

Under the second test, a person who has credit for a minimum of six quarters of coverage is fully insured if he or she has credit for at least as many quarters of coverage as there are years elapsing after 1950 (or after the year in which age 21 is reached, if later) and before the year in which he or she dies, becomes disabled, or reaches age 62, whichever occurs first. Therefore, a worker who reached age 21 in 1988 and who died in 2000 would need credit for only 11 quarters of coverage for his or her family to be eligible for survivors' benefits.

Currently Insured
If a worker is fully insured under Social Security, there is no additional significance to being currently insured. However, if a worker is not fully insured, certain survivors benefits are still available if a currently insured status exists. To be currently insured, it is only necessary that a worker have credit for at least 6 quarters of coverage out of the 13-quarter period ending with the quarter in which death occurs.

Disability Insured
To receive disability benefits under Social Security, it is necessary to be disability insured. At a minimum, a disability insured status requires that a worker (1) be fully insured and (2) have a minimum amount of work under Social Security within a recent time period. In connection with the latter requirement, workers aged 31 or older must have credit for at least 20 of the past 40 quarters ending with the quarter in which disability occurs; workers between the ages of 24 and 30, inclusively, must have credit for at least half the quarters of coverage from the time they turned 21 to the quarter in which disability begins; and workers under age 24 must have credit for 6 out of the past 12 quarters, ending with the quarter in which disability begins.

A special rule for the blind states that they are exempt from the recent-work rules and are considered disability insured as long as they are fully insured.

SOCIAL SECURITY: ELIGIBILITY

To be eligible for benefits under Social Security, an individual must have credit for a minimum amount of work under the program. This credit is based on quarters of coverage. For 2001, a worker receives credit for one quarter of coverage for each $830 in annual earnings on which Social Security taxes are paid, up to a maximum of four quarters in any one calendar year, even if all wages are earned within one calendar quarter. Consequently, a worker paying Social Security taxes on as little as $3,320 (that is, $830 × 4) during the year will receive credit for the maximum four quarters. As in the case of the wage base, the amount of earnings necessary for a quarter of coverage is adjusted annually for changes in the national level of wages.

Quarters of coverage are the basis for establishing an insured status under Social Security. The three types of insured status are fully insured, currently insured, and disability insured.

Fully Insured
A person is fully insured under Social Security if either of two tests is met. The first test requires credit for 40 quarters of coverage. Once a person acquires such credit, he or she is fully insured for life even if employment covered under Social Security ceases.

Under the second test, a person who has credit for a minimum of six quarters of coverage is fully insured if he or she has credit for at least as many quarters of coverage as there are years elapsing after 1950 (or after the year in which age 21 is reached, if later) and before the year in which he or she dies, becomes disabled, or reaches age 62, whichever occurs first. Therefore, a worker who reached age 21 in 1988 and who died in 2000 would need credit for only 11 quarters of coverage for his or her family to be eligible for survivors' benefits.

Currently Insured
If a worker is fully insured under Social Security, there is no additional significance to being currently insured. However, if a worker is not fully insured, certain survivors benefits are still available if a currently insured status exists. To be currently insured, it is only necessary that a worker have credit for at least 6 quarters of coverage out of the 13-quarter period ending with the quarter in which death occurs.

Disability Insured
To receive disability benefits under Social Security, it is necessary to be disability insured. At a minimum, a disability insured status requires that a worker (1) be fully insured and (2) have a minimum amount of work under Social Security within a recent time period. In connection with the latter requirement, workers aged 31 or older must have credit for at least 20 of the past 40 quarters ending with the quarter in which disability occurs; workers between the ages of 24 and 30, inclusively, must have credit for at least half the quarters of coverage from the time they turned 21 to the quarter in which disability begins; and workers under age 24 must have credit for 6 out of the past 12 quarters, ending with the quarter in which disability begins.

A special rule for the blind states that they are exempt from the recent-work rules and are considered disability insured as long as they are fully insured.

CHARACTERISTICS OF SOCIAL INSURANCE

Even though there are variations in social insurance programs and exceptions to the rule always exist, social insurance programs tend to have the following distinguishing characteristics:

- Compulsory employment-related coverage

- Partial or total employer financing

- Benefits prescribed by law

- Benefits as a matter of right

- Emphasis on social adequacy

Compulsory Employment-Related Coverage
Most social insurance programs are compulsory and require that the persons covered be attached—either presently or by past service—to the labor force. If a social insurance program is to meet a social need through the redistribution of income, it must have widespread participation.

Partial or Total Employer Financing
While significant variations exist in social insurance programs, most require that the cost of the program be borne fully or at least partially by the employers of the covered persons. This is the basis for including these programs under the broad definition of employee benefits. The remaining cost of most social insurance programs is paid primarily by the persons covered under the programs. With the exception of Medicare and certain unemployment benefits, the general revenues of the federal government and state governments finance only a small portion of social insurance benefits.

Benefits Prescribed by Law
Although benefit amounts and the eligibility requirements for social insurance benefits are prescribed by law, benefits are not necessarily uniform for everyone. They may vary by such factors as wage level, length of covered employment, or family status. These factors are incorporated into the benefit formulas specified by law, and covered persons are unable to either increase or decrease their prescribed level of benefits.

Benefits as a Matter of Right
Social insurance benefits are paid as a matter of right under the presumption that a need for the benefits exists. This feature distinguishes social insurance programs from public assistance or welfare programs under which applicants, to qualify for benefits, must meet a needs test by demonstrating that their income or assets are below some specified level.

Emphasis on Social Adequacy
Benefits under social insurance programs are based more on social adequacy than on individual equity. Under the principle of social adequacy, benefits are designed to provide a minimum floor of income to all beneficiaries under the program, regardless of their economic status. Above this floor of benefits, persons are expected to provide additional resources from their own savings, employment, or private insurance programs. This emphasis on social adequacy also results in disproportionately large benefits in relation to contributions for some groups of beneficiaries. Under some programs, high-income persons, single persons or small families, and the young are subsidizing low-income persons, large families, and the retired.

If social insurance programs were based solely on individual equity, benefits would be actuarially related to contributions, just as they are under private insurance programs. While this degree of individual equity does not exist, there is some relationship between benefits and income levels (and thus contributions). Within certain maximum and minimum amounts, benefits are a function of a person's covered earnings under social insurance programs. However, the major emphasis is on social adequacy.

REASONS FOR SOCIAL INSURANCE

The existence and scope of social insurance programs are the result of several factors, probably the most significant of which is the need to solve the major social problems that affect a large portion of society. The industrialization of American society and the decreasing self-sufficiency of families resulted in a greater dependence on monetary income to provide economic security. The widespread lack of such income during the Great Depression led to the passage of the Social Security Act as an attempt to provide economic security by attacking the sources of economic insecurity, including old age and unemployment.

A second reason for the existence of social insurance programs is the difficulty of privately insuring against certain types of losses. For example, the inability to predict future unemployment rates and the potential for catastrophic losses make the peril of unemployment virtually uninsurable in the private sector. In addition, broad medical expense coverage for the aged can be marketed commercially only at a price beyond the financial means of many retirees.

Finally, many Americans have come to expect the government to provide at least a degree of economic security against the consequences of premature death, old age, disability, and unemployment. As a result, social insurance programs enjoy widespread public acceptance.

SOCIAL SECURITY AND MEDICARE

In a broad sense, the term Social Security can be used to refer to any of several programs resulting from the Social Security Act of 1935 and its frequent amendments over the years. The act established four programs aimed at providing economic security for the American society:

- Old-age insurance

- Unemployment insurance

- Federal grants for assistance to certain needy groups: the aged, the blind, and children

- Federal grants for maternal and child welfare, public health work, and vocational rehabilitation

The main focus in this post is on the old-age insurance program and the benefits that have been added to that program over the years. These additional benefits include survivors insurance (1939), disability insurance (1956), hospital insurance (1965), and supplementary medical insurance (1965). Taken together, these programs constitute the old-age, survivors, disability, and health insurance (OASDHI) program of the federal government. This program is often separated into two broad parts. The first part is the old-age, survivors and disability insurance (OASDI) program. Over the years, OASDI has become commonly referred to as Social Security. The remainder of the OASDHI program is called Medicare, with hospital insurance being called Part A and supplemental medical insurance being called Part B.

The following discussion of Social Security and Medicare begins with a description of the extent of coverage under the programs and the way the programs are financed. It then focuses on the eligibility requirements and benefits under the various parts of the programs. Because of the many differences between Social Security and Medicare, the discussion largely treats each program separately. This is followed by a discussion of the adequacy of the funding of these programs. Finally, there is a description of the tax implications of Social Security and Medicare benefits and contributions.

Extent of Coverage
More than 90 percent of the workers in the United States are in covered employment under the Social Security program and more than 95 percent under the Medicare program. This means that these workers have wages (if they are employees) or self-employment income (if they are self-employed) on which Social Security and Medicare taxes must be paid. The following are the major categories of workers who are not covered under the programs or who are covered only if they have met specific conditions:

Civilian employees of the federal government who were employed by the government prior to 1984 and who are covered under the Civil Service Retirement System or certain other federal retirement programs. These workers are covered by government plans that provide benefits similar to those available under Social Security. Coverage for new civilian federal employees under the Social Security program was one of the most significant changes resulting from 1983 amendments to the Social Security Act. It should be noted, however, that all federal employees have been covered under Social Security for purposes of Medicare since 1983.

Railroad workers. Under the Railroad Retirement Act, employees of railroads have their own benefit system that is similar to Social Security. However, they are covered under Medicare. In addition, there are certain circumstances under which railroad workers receive benefits from the Social Security program even though their contributions were paid to the railroad program.

Some state and local government employees. Historically, employees covered under state and local government retirement plans have been covered under Social Security and Medicare only if a state entered into a voluntary agreement with the Social Security Administration. Under such an agreement, the state may either require that employees of local governments be covered or allow local governments to decide whether to include their employees. In addition, the state may elect to include all or only certain groups of employees. It is estimated that more than 80 percent of state and local government employees have Social Security and Medicare coverage as a result of such agreements. In addition, coverage under Medicare is compulsory for state and local employees hired after March 1986, and coverage under Social Security is compulsory for employees hired after July 1, 1991, if they do not participate in a public retirement system.

American citizens working abroad for foreign affiliates of U.S. employers, unless the U.S. employer owns at least a 10 percent interest in the foreign affiliate and has made arrangements with the secretary of the treasury for the payment of Social Security and Medicare taxes. However, Americans working abroad are covered under Social Security and Medicare if they are working directly for U.S. employers rather than for their foreign subsidiaries.

Ministers who elect out of coverage because of conscience or religious principles.

Workers in certain jobs, such as student nurses, newspaper carriers under age 18, and students working for the school at which they are regularly enrolled or doing domestic work for a local college club, fraternity, or sorority.

Certain family employment. This includes the employment of a child under age 18 by a parent. This exclusion, however, does not apply if the employment is for a corporation owned by a family member.

Certain workers who must satisfy special earnings requirements. For example, self-employed persons are not covered unless they have net annual earnings of $400 or more. In addition, certain agricultural workers must have annual cash wages of $150 or more, and domestic workers must earn $1,200 or more in cash wages in a calendar year.

Tax Rates and Wage Bases
Part B of Medicare is financed by a combination of monthly premiums paid by persons eligible for benefits and contributions from the federal government. Part A of Medicare and all the benefits of the Social Security program are financed through a system of payroll and self-employment taxes paid by all persons covered under the programs. In addition, employers of covered persons are also taxed. These taxes are often referred to as FICA taxes because they are imposed under the Federal Insurance Contributions Act.

In 2001, an employee and his or her employer each pay a tax of 7.65 percent on the first $80,400 of the employee's wages. Of this tax rate, 6.2 percent is for Social Security; 1.45 percent is for the hospital insurance portion of Medicare. The Medicare tax rate of 1.45 percent is also levied on all wages in excess of $80,400. The tax rates are currently scheduled to remain the same after 2001; however, the wage bases are adjusted annually for changes in the national level of wages. Therefore, if wage levels increase by 4 percent in a particular year, the wage base for the following year will also increase by 4 percent. The tax rate for the self-employed is 15.3 percent on the first $80,400 of self-employment income and 2.9 percent on the balance of any self-employment income. This is equal to the combined employee and employer rates.

Over the years, both the tax rates and wage bases have risen dramatically to finance increased benefit levels under Social Security and Medicare as well as new benefits that have been added to the program...