# 18.2: Definition, Eligibility, Benefits, and Financing of Social Security

• Anonymous
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Learning Objectives

In this section we elaborate on Social Security, one of the three social insurance programs in the United States:

• Who is eligible to receive benefits under Social Security
• The old age, survivors’, and disability benefits provided by Social Security
• How benefit amounts are computed
• How the Social Security system is funded

## Definition of Social Insurance

Many governmental programs are designed to provide economic security for individuals and families. Both public assistance (also referred to as welfare programs) and social insurance programs are organized and undertaken by the government and have the broad social purpose of reducing want and destitution. However, social insurance is different from public assistance: social insurance is an insurance program that is compulsory for nearly all Americans, eligibility criteria and benefits are specified by law, and financing is wholly or partially covered by the employer. Unlike public assistance, employers and employees pay into the social insurance system to earn their rights to benefits. Some examples of social insurance programs include workers’ compensation and unemployment compensation, which were covered in "16: Risks Related to the Job - Workers’ Compensation and Unemployment Compensation", as well as Social Security.

Welfare benefits are financed through general revenues that come from both federal and state funds. Benefits received from welfare are not based on contributions made by or on behalf of the recipients. Medicaid is an example of a welfare benefit based solely on need. While public assistance programs have a role in providing economic security, they are not insurance programs. The insurance principles of assessing and pooling risk do not apply to welfare programs.

The types of benefits available from Social Security are apparent from the acronym OASDHI: old age (or retirement), survivors’, disability, and health (or Medicare) benefits, which include hospital insurance and supplemental medical insurance. The program can be separated into two broad parts. The first part of OASDHI is the old-age, survivors’, and disability (OASD) insurance program known as Social Security. The second part of the OASDHI program is Medicare (HI).

We will begin the discussion about Social Security and Medicare with a description of each social program, its benefits, and its eligibility requirements. Following the general discussion is an explanation of how the programs are financed. We will introduce the two programs separately because there are many differences between Social Security and Medicare. We begin with the eligibility requirements and then discuss the benefits available to eligible employees.

## Coverage and Eligibility Requirements

Today, nearly all employees in private industry, most self-employed persons, and members of the armed forces are covered by Social Security. Coverage is compulsory for more than 90 percent of all workers in the United States, meaning that Social Security taxes must be paid on their wages. The major exceptions are railroad workers, who are covered by the Railroad Retirement Act, and federal government employees, who were covered by other programs before 1984. Prior to 1984, state and local government bodies could elect not to cover certain employees under Social Security. With few exceptions, this option is no longer allowed. Municipal governments that elected out prior to 1984 do have the option to join the Social Security program voluntarily. Ministers are covered automatically unless they request a waiver on religious grounds. Members of religious sects whose beliefs prohibit acceptance of benefits are exempt.

## Eligibility

To be eligible to receive benefits, a worker must achieve insured status. There are three levels of insured status: fully insured, currently insured, or disability insured. If the worker’s status is fully insured, most types of Social Security benefits are payable. If the worker does not have enough work tenure to be fully insured, he or she may be currently insured or disability insured, which still allows eligibility for some survivor benefits or disability benefits.

### Disability Benefits

A fully insured worker who has a medically determinable physical or mental condition that prevents any substantial gainful work is entitled to monthly disability benefits after a waiting period of five full months if he or she is under age sixty-five and has been disabled for twelve months, is expected to be disabled for at least twelve months, or has a disability that is expected to result in death. A spouse or child of a disabled worker is entitled to a monthly benefit upon meeting the same qualifications as those previously listed in connection with retirement benefits. Table 18.5 shows who gets monthly benefits if a fully insured worker is disabled. Note that, to receive benefits, the worker must be eligible by being fully insured or meeting the disability insured status. A nonblind person earning more than $980 in 2009 is considered to be engaging in substantial gainful activities and is not eligible for Social Security benefits. The amount of earnings allowable if the person is blind is$1,640 in 2009. These amounts are indexed annually to increases in the national wage index.Social Security Administration, “If You Are Blind or Have Low Vision—How We Can Help,” SSA Publication No. 05-10052, January 2009, ICN 462554, http://www.ssa.gov/pubs/10052.html (accessed April 4, 2009). It is extremely difficult to qualify to receive Social Security disability benefits.

Disability benefits may be stopped if the disabled worker refuses to participate in rehabilitation. They may be reduced if disability benefits are received from workers’ compensation or under a federal, state, or local law. As reported in the 2008 Trustees Report, “On December 31, 2007, about 850,000 persons were receiving monthly benefits from the OASI Trust Fund because of their disabilities or the disabilities of children. This total includes 25,000 mothers and fathers (wives or husbands under age sixty-five of retired-worker beneficiaries and widows or widowers of deceased insured workers) who met all other qualifying requirements and were receiving unreduced benefits solely because they had disabled-child beneficiaries (or disabled children aged sixteen or seventeen) in their care. Benefits paid from this trust fund to the persons described above totaled $7,293 million in calendar year 2007.”Social Security Administration, The 2008 OASDI Trustees Report, Section VI(G): Analysis of Benefit Disbursements from the OASI Trust Fund with Respect to Disabled Beneficiaries, June 11, 2008, Accessed April 4, 2009, http://ssa.gov/OACT/TR/TR08/VI_OASIforDI.html#97986.  Disabled worker who had been working recently in covered employment prior to disability Spouse of disabled worker who either (1) has a child under age sixteen or a disabled child in his or her care or (2) is at least sixty-two years old; applies also to divorced spouse if the marriage lasted at least ten years Dependent child of disabled worker ## Primary Insurance Amount The primary insurance amount (PIA) is the basic unit used to determine the amount of monthly Social Security benefits. PIA is computed from a person’s average indexed monthly earnings. In the calculation of average indexed monthly earnings (AIME), workers’ earnings for prior years, up to the maximum Social Security wage base (see Table 18.12 for the OASDI annual wage base), are adjusted to what they would have been if wage levels in earlier years had been the same as they are now. This is the indexed amount. The Social Security Administration provides an illustration of retirement benefits using examples. Table 18.6 shows the examples of two workers retiring in 2009—one at age sixty-two, the earliest age possible, and the other at age sixty-five, the normal retirement age. It is important to note the differences in the application of the PIA formula to the worker retiring at age sixty-two. If a worker retires at normal retirement age, the PIA benefits are calculated as if the person retired at age sixty-two and are modified with cost of living adjustments. Table 18.6 Benefit Calculation Examples for Workers Retiring in 2009 Earnings before and after indexing Year Case A, Born in 1947 Case B, Born in 1943 Nominal Earnings Indexing Factor Indexed Earnings Nominal Earnings Indexing Factor Indexed Earnings 1969$5,511 6.8556 $37,781$4,803 5.7798 $27,761 1970 5,802 6.5315 37,896 5,434 5.5066 29,923 1971 6,113 6.2190 38,017 6,023 5.2431 31,579 1972 6,733 5.6639 38,135 6,906 4.7751 32,977 1973 7,177 5.3304 38,256 7,612 4.4940 34,208 1974 7,627 5.0313 38,374 8,327 4.2418 35,322 1975 8,223 4.6815 38,496 9,208 3.9469 36,343 1976 8,817 4.3793 38,612 10,102 3.6921 37,297 1977 9,374 4.1317 38,730 10,964 3.4833 38,191 1978 10,150 3.8277 38,851 12,097 3.2271 39,038 1979 11,072 3.5198 38,971 13,426 2.9675 39,841 1980 12,106 3.2290 39,090 14,918 2.7223 40,611 1981 13,365 2.9337 39,208 16,718 2.4733 41,349 1982 14,144 2.7806 39,328 17,941 2.3442 42,058 1983 14,878 2.6514 39,448 19,121 2.2353 42,742 1984 15,800 2.5042 39,566 20,559 2.1112 43,405 1985 16,523 2.4019 39,686 21,752 2.0250 44,047 1986 17,064 2.3326 39,804 22,715 1.9666 44,671 1987 18,207 2.1928 39,924 24,491 1.8487 45,276 1988 19,161 2.0899 40,044 26,033 1.7619 45,868 1989 19,978 2.0103 40,161 27,403 1.6948 46,443 1990 20,963 1.9215 40,281 29,016 1.6200 47,005 1991 21,809 1.8525 40,401 30,449 1.5618 47,555 1992 23,000 1.7617 40,519 32,380 1.4853 48,093 1993 23,266 1.7467 40,638 33,016 1.4726 48,619 1994 23,961 1.7010 40,758 34,262 1.4341 49,135 1995 24,994 1.6355 40,877 36,003 1.3788 49,642 1996 26,293 1.5592 40,997 38,142 1.3145 50,139 1997 27,908 1.4733 41,116 40,761 1.2421 50,628 1998 29,453 1.4000 41,234 43,301 1.1803 51,108 1999 31,185 1.3261 41,354 46,136 1.1180 51,580 2000 33,004 1.2566 41,473 49,126 1.0594 52,044 2001 33,888 1.2273 41,591 50,740 1.0347 52,502 2002 34,326 1.2151 41,710 51,689 1.0244 52,953 2003 35,266 1.1861 41,830 53,396 1.0000 53,396 2004 37,011 1.1334 41,950 56,336 1.0000 56,336 2005 38,474 1.0934 42,069 58,866 1.0000 58,866 2006 40,356 1.0454 42,187 62,054 1.0000 62,054 2007 42,307 1.0000 42,307 65,369 1.0000 65,369 2008 44,051 1.0000 44,051 68,383 1.0000 68,383 Highest—35 total 1,415,637 Highest—35 total 1,677,907 AIME 3,370 AIME 3,995 Source: Social Security Administration, October 16, 2008, Accessed April 4, 2009, http://www.ssa.gov/OACT/ProgData/retirebenefit1.html. We will use the examples provided by the Social Security Administration as a learning tool here. First, we focus on the calculation of the AIME. For each case, we see the columns labeled “nominal earnings.” Indexing brings nominal earnings up to near-current wage levels. For each case, the table shows columns of earnings before and after Indexing. The highest thirty-five years of indexed earnings and the corresponding average monthly amounts of such earnings are used for the benefit computation. The result is the AIME. The indexing requires some special computation. Consequently, there is no easy way to make an estimate of one’s PIA. It is not as simple as finding average wages and consulting a table. The Social Security Administration has computerized wage histories for all workers, and the PIA calculation is made when an application for benefits is processed. The Social Security Administration furnishes annually the calculation of each insured’s PIA. If a person has not received the statement, the Social Security Administration will furnish a record of the historical Social Security earnings and PIA upon request. The Social Security Administration Web site also has an online calculator. After the AIME is determined, an individual’s PIA in 2009 would be determined by the formula in Table 18.7. The formula shows that Social Security benefit levels, expressed as replacement ratios, are weighted in favor of lower-income workers. Here, a replacement ratio is defined as the Social Security benefit divided by the AIME.  For an individual who first becomes eligible for old-age insurance benefits or disability insurance benefits in 2009, or who dies in 2009 before becoming eligible for benefits, his or her PIA is the sum of (a) 90 percent of the first$744 of his or her average indexed monthly earnings, plus (b) 32 percent of his or her average indexed monthly earnings over $744 and through$4,483, plus (c) 15 percent of his or her average indexed monthly earnings over $4,483. Round this amount to the next lower multiple of$0.10 if it is not already a multiple of $0.10. Source: Social Security Administration, October 16, 2008, Accessed April 4, 2009, http://www.ssa.gov/OACT/COLA/piaformula.html for 2009. The three AIME ranges represented in the formula are known as bend points. The bend points represent the dollar amounts at which the primary insurance amount formula for Social Security benefits changes. The bend points increase as average wages in the economy increase. This is shown in Table 18.8. The bend points in 2009 are$744 and $4,483, as you can see in Table 18.7. These bend points apply to workers who become eligible for benefits (at age sixty-two) in 2009. A table of bend points for past years is available at http://www.ssa.gov. Table 18.8 Examples of PIA Calculations for the 2009 Retirement Cases Illustrated in Table 18.5 Case A—Retirement at Age Sixty-Two and Case B—Retirement at Age 65 Formula Bend Points Case AIME First Second Formula Applied to AIME A$3,370 $744$4,483 .9(744) + .32(3370 − 744) = $1,509.92 B 3,995 627 3,779 .9(627) + .32(3779 − 627) + .15(3995 − 3779) =$1,605.34

Source: Social Security Administration, October 16, 2008, Accessed April 5, 2009, http://www.ssa.gov/OACT/ProgData/retirebenefit2.html.

Table 18.8 illustrates the straightforward calculation for the worker in Case A who retires at age sixty-two. For the worker who retires in 2009 at age sixty-five, the bend points are the same as those in 2006 (as if he or she retired at age sixty-two). Thereafter, the benefits are adjusted to reflect the COLA of 3.3 percent, 2.3 percent, and 5.8 percent, respectively. The resulting PIA is $1,605.34. ## Other Factors Affecting Benefit Amounts As described above, the AIME determines the PIA of a retired or disabled worker; the benefit levels for other beneficiaries are a percentage of the PIA. If an individual qualifies as both a worker and as the spouse of a worker, the beneficiary will receive whichever PIA is greater, but not both. Other factors may also affect the benefit amount. The maximum family benefit is the maximum monthly amount that can be paid on a worker’s earnings record. The formula for the maximum family benefit, shown in Table 18.9, is based on the worker’s primary insurance amount (PIA). The maximum PIA for the family is computed based on the bend points shown in Table 18.9. When the family reaches its maximum family benefit, the worker’s benefit is not reduced but the benefits of the survivors or dependents are reduced proportionately. There is also a minimum PIA for very-low-wage workers who have been covered by Social Security for at least ten years. This attempts to address the broad social purpose of Social Security: reducing want and destitution by providing an adequate income to insured workers.To be eligible for “special minimum” benefits, a worker must earn at least a certain portion (25 percent in years 1990 and before, and 15 percent in years following 1990) of the “old law” contribution and benefit base.  For the family of a worker who becomes age sixty-two or dies in 2009 before attaining age sixty-two, the total amount of benefits payable is computed so that it does not exceed (a) 150 percent of the first$950 of the worker’s PIA, plus (b) 272 percent of the worker’s PIA over $950 through$1,372, plus (c) 134 percent of the worker’s PIA over $1,372 through$1,789, plus (d) 175 percent of the worker’s PIA over $1,789. This total amount is then rounded to the next lower multiple of$0.10 if it is not already a multiple of $0.10. Source: Social Security Administration, October 16, 2008, Accessed April 5, 2009, http://www.ssa.gov/OACT/COLA/familymax.html. ## Cost of Living Adjustment (COLA) Social Security benefit amounts are increased annually by automatic cost-of-living adjustments (COLAs) linked to increases in the consumer price index (CPI). In addition, workers receiving Social Security disability income may have Social Security benefits reduced to offset other disability benefits received from governmental programs, such as workers’ compensation, to reduce the moral hazard of malingering. Legislation enacted in 1973 provides for automatic cost-of-living adjustments (COLAs). The theory is to prevent inflation from eroding the value of Social Security and Supplemental Security Income (SSI) benefits. The COLA for 2008 is 5.8 percent for both Social Security benefits and SSI payments, as you can see in Table 18.10. Table 18.10 Automatic Social Security Cost of Living Adjustments (COLAs) Social Security Cost-of-Living Adjustments Year COLA Year COLA Year COLA 1975 8.0% 1990 5.4% 2005 4.1% 1976 6.4% 1991 3.7% 2006 3.3% 1977 5.9% 1992 3.0% 2007 2.3% 1978 6.5% 1993 2.6% 2008 5.8% 1979 9.9% 1994 2.8% 1980 14.3% 1995 2.6% 1981 11.2% 1996 2.9% 1982 7.4% 1997 2.1% 1983 3.5% 1998 1.3% 1984 3.5% 1999 2.5%The COLA for December 1999 was originally determined as 2.4 percent based on CPIs published by the Bureau of Labor Statistics. Pursuant to Public Law 106-554; however, this COLA is effectively now 2.5 percent. 1985 3.1% 2000 3.5% 1986 1.3% 2001 2.6% 1987 4.2% 2002 1.4% 1988 4.0% 2003 2.1% 1989 4.7% 2004 2.7% Source: Social Security Administration, October 16, 2008, Accessed April 5, 2009, http://www.ssa.gov/OACT/COLA/colaseries.html. Many people retire before or after the normal retirement age, which affects the PIA for those individuals. For an individual retiring past the normal retirement age, the final benefit amount is higher than the PIA formula reveals, as illustrated in the example of Case B in Table 18.8. ## The Earnings Test The Social Security retirement benefit may be reduced for a retiree who is younger than normal retirement age and whose annual earned income exceeds the retirement earnings exempt amount; this provision is called the earnings test. Its purpose is to limit monthly cash benefits for retirees who have earned income and to reduce the cost of the Social Security program. As Table 18.11 shows, a beneficiary attaining the normal retirement age after 2002 is exempt from reduction of Social Security benefits regardless of the amount of earned income. The earning test applies only to early retirement. Table 18.11 Annual Retirement Earnings Test Exempt Amounts for Persons Under the Normal Retirement Age Annual Retirement Earnings Test Exempt Amounts Year Lower Amount Applies in years before the year of attaining NRA. Higher Amount Applies in the year of attaining NRA for months prior to such attainment. 2000$10,080 $17,000 2001 10,680 25,000 2002 11,280 30,000 2003 11,520 30,720 2004 11,640 31,080 2005 12,000 31,800 2006 12,480 33,240 2007 12,960 34,440 2008 13,560 36,120 2009 14,160 37,680 Source: Social Security Administration, October 16, 2008, Accessed April 5, 2009, http://www.ssa.gov/OACT/COLA/rtea.html In 2008, a beneficiary under the normal retirement age would lose$1 of benefits for every $2 earned above$13,560. The beneficiary would also lose $1 for every$3 above the higher exempt amount, $36,120. ## Financing of Benefits ## Taxation Social Security benefits are financed through payroll taxes paid by employers and employees and by a special tax on earnings paid by the self-employed. The tax rate for employers and employees is 6.2 percent for OASDI, up to a maximum amount of earnings called the wage base level, as shown in Table 18.12, and 1.45 percent for HI (Medicare Part A) on all earnings. The tax rates scheduled under current law are shown in Table 18.13. Those who elect Medicare Part B coverage pay monthly premiums via deductions from their Social Security benefits checks. Social Security taxes, sometimes called FICA taxes (after the Federal Insurance Contributions Act of 1939), are automatically withheld on wages up to a set amount and are adjusted annually for inflation. Any wages earned over this wage base are not taxed for Social Security, although Medicare Part A taxes are still deducted. The tax rates are intended to remain constant (the last hike was in 1990), but the taxable wage base is adjusted annually to reflect increases in average wages. As you can see in Table 18.12, the 2008 annual wage base was$102,000, and it is $106,800 in 2009, meaning employers, employees, and the self-employed paid OASDI taxes on individual wages up to the wage base. If wages increase 5 percent the following year, the tax rates would remain the same but the taxable wage base would increase by 5 percent, thus increasing total Social Security tax revenue (all else being equal). Wages beyond the threshold are not subject to the OASDI tax, but they are subject to the Medicare Part A tax. Social Security benefits are subject to income taxes. More specifically, taxes are payable on 50 percent of the Social Security benefit by single persons whose taxable incomes (including 50 percent of Social Security benefits and any interest on tax-exempt bonds) are between$25,000 and $34,000 (between$32,000 and $44,000 for married couples filing joint returns). If income exceeds$34,000 for single persons (or $44,000 for married couples filing jointly), up to 85 percent of the Social Security benefit received at retirement as income is taxable. Table 18.12 OASDI Annual Wage Base for Tax Purposes Contribution and Benefit Bases, 1937–2009 Year(s) Amount Year(s) Amount Year(s) Amount 1937–1950$3,000 1981 $29,700 1996$62,700
1951–1954 3,600 1982 32,400 1997 65,400
1955–1958 4,200 1983 35,700 1998 68,400
1959–1965 4,800 1984 37,800 1999 72,600
1966–1967 6,600 1985 39,600 2000 76,200
1968–1971 7,800 1986 42,000 2001 80,400
1972 9,000 1987 43,800 2002 84,900
1973 10,800 1988 45,000 2003 87,000
1974 13,200 1989 48,000 2004 87,900
1975 14,100 1990 51,300 2005 90,000
1976 15,300 1991 53,400 2006 94,200
1977 16,500 1992 55,500 2007 97,500
1978 17,700 1993 57,600 2008 102,000
1979 22,900 1994 60,600 2009 106,800
1980 25,900 1995 61,200
Note: Amounts for 1937–1974 and for 1979–1981 were set by statute; all other amounts were determined under automatic adjustment provisions of the Social Security Act.

Source: Social Security Administration, January 15, 2009, Accessed April 5, 2009, http://www.ssa.gov/OACT/COLA/cbb.html.

Table 18.13 Tax Rates Paid on Wages and Earnings
Calendar Years Tax Rates as a Percentage of Taxable Earnings
Tax Rate for Employees and Employers, Each Tax Rate for Self-Employed Persons
OASI DI Total OASI DI Total
2000 and later 5.300 0.900 6.200 10.6000 1.8000 12.400
 Calendar Years Tax Rates as a Percentage of Taxable Earnings Rate for Employees and Employers, Each Rate for Self-Employed Persons OASDI Medicare A Total OASDI Medicare A Total 1990 and later 6.200 1.450 7.650 12.400 2.900 15.300

## Trust Funds

The funds collected from payroll taxes are allocated among three trust funds. One trust fund is for retirement and survivors’ benefits; the second is for disability insurance; and the third is for hospital insurance, or Medicare Part A. Medicare Parts B and D, supplementary medical benefits, are financed by monthly premiums from persons enrolled in the program, along with amounts appropriated from the general revenue of the federal government. These funds are deposited in a fourth trust fund, the supplementary medical insurance trust fund.

The Social Security system is primarily a pay-as-you-go system, meaning that current tax revenues are used to pay the current benefits of Social Security recipients. This is quite different from financing with traditional, private insurance, where funds are set aside in advance to accumulate over time and benefits are paid to those who contributed to the fund.

Income to the trust funds consists of the following:

• Employment taxes paid by employees, their employers, and self-employed persons
• Income from the taxation of benefits
• Interest on investments made by the program
• Other income such as donations and Treasury reimbursements

The Social Security program is administered by the Social Security Administration, an agency of the United States Department of Health and Human Services. Local service is provided by offices located in the principal cities and towns of the fifty states and Puerto Rico. Applications for Social Security numbers and the various benefits as well as enrollment for the medical insurance plan (discussed next) are processed by the district office. The administration is set up to help beneficiaries in catastrophic times, as was evident following Hurricane Katrina. Because so many people were displaced, the Social Security Administration created emergency offices and stations to continue immediate payments to the evacuees.Social Security Administration, “Social Security Responds to Hurricane Katrina, Agency Issues More Than 30,000 Emergency Checks to Date,” Social Security Press Release, September 9, 2005, Accessed April 5, 2009, www.ssa.gov/pressoffice/pr/katrina-pr.html.

Disability determination—the decision whether or not an applicant for disability benefits is disabled as defined in the law—is made by a state agency (usually the vocational rehabilitation agency) under agreements between the state and the secretary of the Department of Health and Human Services. Qualification for hospital and medical benefits is determined by the district office, but claims for such benefits are processed through private insurer intermediaries under contract with the Social Security Administration.

The first decision concerning a person’s qualification for benefits under the various parts of the program is made at the local level. Simple, effective procedures exist for appeal by any applicant for whom the decision is unsatisfactory. There is no charge for such appeals, and the agency strives to provide courteous assistance to the claimant.

## Key Takeaways

In this section you studied the features of Social Security, a compulsory social insurance program paying old age, survivors’, and disability (OASD) benefits:

• A person must be in the work force a minimum number of quarters, during which earnings must meet minimum amounts to be eligible for Social Security benefits.
• The level of benefit depends on a worker’s status as fully insured, currently insured, or disability insured.
• Fully insured workers, their aged spouses, and dependent children are eligible to receive retirement (old-age) benefits beginning at the worker’s retirement age (which depends on birth year) and disability benefits.
• Benefits are reduced in the case of early retirement and increased in the case of late retirement.
• A fully insured worker under age sixty-five with a medical condition that prevents substantial gainful work can receive disability benefits after a waiting period if he or she has been disabled for twelve months, is expected to be disabled at least twelve months, or has a disability expected to result in death.
• Survivors (aged spouses, disabled spouses, and dependents) of deceased fully, currently, or disability insured workers are also eligible to receive old-age survivors’ or disability benefits.
• The primary insurance amount (PIA), computed from average indexed monthly earnings (AIME) up to the Social Security wage base, is used to determine the amount of monthly benefits.
• The PIA formula is weighted to help lower-income workers at three different bend points—the sum of these amounts equals the monthly benefit, with COLAs made annually.
• Benefits are subject to (1) a monthly maximum that can be paid on a worker’s earnings record, at which survivors’ benefits are reduced proportionately, and (2) an earnings test, whereby benefits are reduced for retirees whose earned income exceeds the retirement earnings exempt amount.
• Social Security benefits are financed through payroll taxes on employers and employees at 6.2 percent (OASDI) and 1.45 percent (HI) up to the wage base level (adjusted annually).
• Benefits are paid through the Social Security trust fund, which is made up of employment tax revenues, benefit income tax revenues, interest on investments, and other income.
• The Social Security program is a pay-as-you-go system administered by the Social Security Administration (part of the Department of Health and Human Services), with offices to handle applications in each state.

## Discussion Questions

1. How does a worker become fully insured under Social Security? What benefits are fully insured workers entitled to?
2. Explain the concept of arriving at AIME. How do you compute the PIA?
3. How does the earnings test affect Social Security benefits?
4. Social Security benefits are financed largely through payroll taxes. The more you earn (up to the maximum earnings base), the more tax you pay. Income benefits, however, favor lower-income workers. Explain why lower-income people are favored.
5. The Baylor Crane Construction Company is a Virginia-based builder with 1,750 full-time and 300 part-time employees. The company provides all the social insurance programs required by law and most standard employee benefits plans. Last year, Baylor Crane suffered a high severity of losses when the top five floors of a high rise collapsed in Virginia Beach during strong winds. Luckily, most workers escaped injuries, except six workers who stayed to secure the building. Three of them sustained severe injuries and Johnny Kendle, the sixty-four-year-old supervisor, was killed. The injured workers are back at work except for Tom Leroy, who is still on disability. His prognosis is not good.
1. What social insurance programs are provided by the company?
2. Compare the benefits provided by each of the social programs.
6. Dan Wolf, Duncan Smith, and Jim Lavell are employees of the Happy Wood Company. Fifteen months ago, Dan Wolf was injured when a log fell on him and hurt his back. He has not been able to work since. Duncan Smith, who had fifteen years of service with the company, was killed in that accident. He left a wife and five children. About a month later, Jim Lavell injured his back at home and he, too, has been unable to work since the accident.
1. Based on the benefits of the social insurance programs you described above, compare the type of benefits Dan, Duncan, and Jim (or their families) are receiving.
2. What are the eligibility conditions that must be met to receive these benefits?

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