Employee Benefits 5th Edition Martocchio Solutions Manual Download

Chapter 07 - Government-Mandated Social Security Programs
Solution Manual for Employee Benefits 5th

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Chapter 07 Government-Mandated Social Security Programs
I. Learning Objectives (use PP 7.2)

1. Basic Social Security programs affecting employment: OASDI, Medicare, and
unemployment insurance
2. Administration and funding of Social Security programs
3. Structure of the OASDI and Medicare programs
4. Financial viability of the OASDI and Medicare programs
5. Structure of the unemployment insurance program
II. Origins of Social Security

A. Government’s Role to Promote Social Good
1. US government established Social Security and workers’ compensation insurance
programs because of social problems associated with chronic unemployment
resulting from severely depressed economic conditions and devastating financial
consequences for families whose primary wage earners could no longer work due to
a serious work-related illness or injury
2. Government recognized that most employees did not earn enough money to pay for
medical services or to save enough money from wages for retirement
3. Various Social Security programs implemented to promote social good and in
employment setting it refers to
a. A booming economy
b. Low levels of unemployment
c. Progressive wages and benefits
d. Safe and healthful working conditions
B. Origins of Social Security
1. To protect families from financial devastation in the event of unemployment
2. To help stimulate the economy
3. To provide retirement income
4. To help protect the health and welfare of employees and their families
5. Great Depression of the 1930s
a. Caused income discontinuity
b. Led to massive unemployment and under-employment
6. People needed income to participate in the economy
III. Introduction to Social Security Programs

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A. Overview (use PP 7.3)

1. Social Security Act of 1935 and subsequent amendments established 4 public social
insurance programs
a. Old-Age, Survivor, and Disability Insurance (OASDI)
b. Medicare
c. Unemployment Insurance
d. Supplemental Security Income benefits
2. Passage of the Social Security act set up two programs:
a. A federal system of income benefits for retired workers
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b. A system of unemployment insurance administered by the federal and state

governments
B. Employers Required to Participate in Social Security Programs
1. OASDI and Medicare (use PP 7.4)
a. Virtually all US workers are eligible for protections under OASDI and Medicare
programs
b. Three exempt classes
i. Civilian employees of the federal government and railroad employees with at
least 10 years of service are exempt from retirement program but not Medicare
ii. Employees of state and local governments who are already covered under
other retirement plans are exempt from Social Security retirement
contributions unless the organization chooses to participate in the program
iii. Children under the age of 21 who work for a parent, except children 18 and
older who work in the parents’ businesses
c. Millions of Americans receive Social Security OASDI and Medicare benefits.
d. In 2011, more than 55 million Americans received over $55 billion in Social
Security benefits
2. Unemployment Insurance (use PP 7.5 & 7.6)
a. The number of monthly claims exceeds more than one million
b. Worker files an initial claim at the beginning of a period of unemployment
c. Wide variation in number of monthly claims has occurred, increasing with major
economic recessions such as during the Great Recession that began in 2007 and
included large-scale layoffs by major employers, particularly automobile
manufacturers (Ford, GM, and Chrysler)
d. In 2011, gross job gains from new and expanding private sector companies was
6.9 million and gross job losses from closing and contracting companies were 6.3
million. There was a net increase of approximately 600,000 jobs (refer to Exhibit
7.1)
e. Although net job gains have been in evidence since the years 2007 through 2009,
the magnitude of these gains do not offset the substantial net job losses during the
recession
f. The number of individuals who rely on unemployment insurance benefits is
staggering
g. Benefits are usually collected for several weeks
h. Since 1972, unemployed workers received benefits for an average of 12 to 18
weeks
i. Due to the deep economic recession, Congress approved the Emergency
Unemployment Insurance (EUC) program in June 2008 to provide 13 additional
weeks of federally funded unemployment insurance benefits
j. Congress enacted the Unemployment Compensation Act of 2008 to expand the
EUC benefits to 20 weeks nationwide (13 weeks more to States with high
unemployment rates)
k. State unemployment rates have not fallen dramatically since then, as a result,
emergency unemployment insurance benefits have been renewed on multiple
occasions since the passage of this act
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l. The most recent extension is set to expire at the end of the 2012 calendar year
C. Administration of Social Security Programs
1. OASDI and Medicare Administration
a. Social Security Administration (SSA)
“… administers the Federal retirement, survivors, and disability insurance programs,
as well as the program of supplemental security income (SSI) for the aged, blind
and disabled, and performs certain functions with respect to the black lung
benefits program. SSA also directs the aid to the aged, blind, and disabled in
Guam, Puerto Rice, and the Virgin Islands”
2. Unemployment Insurance Administration (use PP 7.7)
a. Titles III & IX of SSA authorized the federal government to grant money to states
to administer unemployment compensation, and it also established a federal
unemployment insurance trust fund
b. FUTA
i. Authorized the collection of federal and state payroll taxes and
ii. Specified how they were to be used
c. Federal taxes used for administration costs, state taxes for benefits costs
d. Each state sets own rules and oversees program administration
e. State laws vary regarding benefits eligibility, amount, and duration
f. Employment and Training Administration (Department of Labor) oversees
unemployment insurance programs
i. Strives to “contribute to the more efficient and effective functioning of the US
labor market by providing high quality training, employment, labor market
information, and income maintenance services primarily through state and local
workforce development systems”
g. Employment security agencies in state labor departments or independent agencies
or commissions oversee administration of unemployment insurance programs at
state level
h. Each state maintains records, collects taxes, determines eligibility of individuals
for benefits, processes claims, and disburses unemployment benefits
3. Social Security numbers
a. Nine digit numbers
b. Created in 1930s
c. Available to U.S. citizens, foreign students, and resident aliens
d. Use of Social Security number regulated by federal government
IV. Old-Age Survivor, and Disability Insurance (OASDI)

A. Amendments to SSA
1. Survivors’ Insurance, 1939
2. Disability Insurance, 1965
B. Qualifying for OASDI Benefits (use PP 7.8)
1. Social Security credits determine eligibility
a. Adjusted yearly, based on average earnings in U.S.
b. In 2012, an employee earned 1 credit for each $1,130 earnings, up to 4 credits a
calendar year
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c. Employees must earn 40 credits to be eligible to receive retirement benefits

d. Disabled individuals can earn less than 40 to qualify
e. Individuals do NOT forfeit credits when they change jobs or become unemployed
2. The number of credits required to qualify depends on
a. A person’s age
b. The particular Social Security benefit
C. Determining Benefit Amounts (use PP 7.9)
1. A person’s average indexed monthly earnings (AIME) determines initial primary
insurance amount (PIA)
a. AIME used to ensure that the proportion of benefits to past earnings for all
OASDI recipients are about the same
b. AIME represents a person’s earnings
i. Prior to age 62, disability, or death
ii. Changes in average wages over the same period
2. COLAs (cost of living adjustments)
a. Are applied to guard against inflation
b. Based on the Consumer Price Index (CPI)
c. Effective in January of 2012, the annual increase in Social Security benefits was
3.6%
3. The Bureau of Labor Statistics
a. CPI reflects spending patterns for all urban consumers and urban wage earners and
clerical workers
b. CPI does not include the spending patterns of persons living in rural
nonmetropolitan areas, form families, and persons in the Armed Forces
D. Old-Age Benefits
1. Eligibility Criteria
a. Credits needed to qualify varies by birth date
i. 35 credits if born in 1924
ii. 36 credits if born in 1925
iii. 37 credits if born in 1926
iv. 38 credits if born in 1927
v. 39 credits if born in 1928
vi. 40 credits if born in 1929 or later
b. Retirement age and benefits (use PP 7.10)
i. Early retirement at 62, benefits less than full
ii. The year of birth determines the full retirement age
iii. Fully insured individuals born before 1938 meet the full retirement age
criterion at age 65
iv. The age for collecting full social security retirement benefits is gradually
increasing from 65 to 67 over a 22-year period ending in 2022
v. Delayed retirement credits are increases in benefits amount if retirement is
delayed beyond full retirement age
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c. Example: Mary, born 1941, could have earned full retirement benefits when she
turns 65 years- 8 months-old, retired at age 62, will receive reduced Social
Security benefits, full benefit at age 65 would have been $15,000, benefit will be
reduced by 22.5% based on total % reduction for those born in 1940, if she was
65 when she retired she would have received benefits of $55,005 for those 3 3/4
years (between 62 and 65 years 8 months), since that amount has to be reduced
by 22.5%, she is eligible for only $42, 680 [$55.005 – ($55,005 X .225)] app
$11,350 annually
2. Social Security Programs has incentives to delay retirement (use PP 7.11)
a. Retirement benefits increases percentage wise for each month worked until age 70
b. The increase has a maximum percentage limit
c. Example: John, born 1937, turned age 65 in 2002, annual Social Security benefit
of $13,200 at full retirement, John will retire in 2005 at age 68 instead, increase
is set at 6.5% (refer to Exhibit 7.3), John would receive $15,945 instead
($13,200 +9 ([$13,200 X 6.5%] + [$14,058 X 6.5%] + [$14,972 X 6.5%]))
d. Family members eligible to receive benefits
i. Wife or husband age 62 or older
ii. Spouse under 62 who is taking care of disabled or children under 16
iii. Former spouse age 62 or older
iv. Children up to age 18, full-time students age 18-19 through grade 12, disabled
children of any age
e. SSA was based on the common model of the single-earner family
f. OASDI benefits program was designed to compensate spouses who stayed at
home to raise a family and who were financially dependent on the working spouse
g. Today, both spouses typically work, with both earning their own Social Security
retirement
benefit as well as additional income from employer-sponsored retirement plans
h. The offset provision was established to ensure that a working spouse did not
receive two Social Security retirement payments
i. The amount of Social Security income a surviving spouse receives is reduced
dollar for dollar by the amount of his or her own Social Security retirement
benefit
3. Retirement benefit amount determination
a. Person’s retirement benefit equals the entire primary insurance amount (PIA)
b. Family benefits usually equal 50% of the PIA
c. In 2012, the annual monthly benefit for all retired workers was $1,229
E. Survivor Benefits
1. Eligibility
a. Nondisabled widow(er) who is at least the full retirement age
b. Disability widow(er) as early as age 50
c. Nondisabled widow(er)at any age if he or she takes care of worker’s children
under age 16 or disabled children at any age
d. Divorced spouse as early as age 60
e. Unmarried children under 18, or up to age 19 if attending secondary school or a
full time basis
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f. Disabled children at any age if disability began before age 22 and unmarried at
the time
g. Stepchildren, grandchildren, or adopted children (in most cases)
h. Dependent parents at age 62 or older
2. Survivor benefit amount determination
a. Benefits usually less than a worker’s PIA
b. SSA pays monthly survivor benefits ranging from 71.5 – 75% of PIA
c. SSA pays a lump-sum benefit to the surviving spouse, subject to 2 criteria
i. Worker must have earned at least 6 credits of the last 13 quarters just before
death
ii. Surviving spouse must have lived with worker at the time of death
iii. Surviving children receive benefit if no eligible spouse
d. In 2012, the average monthly survivor benefit was
i. $2,543 for a widowed mother and two children
ii. $1,184 for a widow or widower alone
F. Disability Benefits (use PP 7.12)
1. SSA pays benefits to seriously disabled workers and family members
2. SSA pays only for total disability
a. Disability based on individual’s inability to perform work done before becoming
disabled and inability to adjust to work because of medical condition
b. Disability must last or be expected to last for at least one year or to result in death
3. Social Security program rules assume that working families have access to other
resources to provide support during periods of short-term disabilities, including
workers’ compensation, short-term disability insurance, and savings and
investments
4. Eligibility
a. Disabled workers who are unable to work as a result of a serious medical or
mental impairment that lasts at least 12 months
b. Seriously disabled workers that meet 2 criteria
i. Worker must have accumulated at least 40 quarters of coverage
ii. Worker earned at least 20 quarters of coverage of the last 40 quarters prior to
becoming disabled
c. Benefits subject to waiting period up to 6 months
d. Blind workers need only 40 credits
e. Workers 23 and under qualify with 6 credits in the 3-year period ending when
becoming disabled
f. Workers age 24 – 31 qualify by working half the time between age 21 and
becoming disabled
g. Family members are also eligible to receive disability payments
5. Disability benefit amount determination
a. Worker’s benefits equal the full primary insurance amount
b. Eligible family members usually get half of PIA
c. In 2012, the average monthly disability benefit was
i. $1,111 for all disabled workers
ii. $1,892 for a disabled worker with a spouse and one or more children
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V. Medicare
A. Main plans (use PP 7.13)
1. Serves nearly all U.S. citizens age 65 or older by providing insurance coverage for
a. Hospitalization
b. Convalescent care
c. Major doctor bills
2. Social Security Act was amended to create this program
3. Medicare Part A coverage – hospital insurance
4. Medicare Part B coverage – medical insurance
5. Medigap – voluntary supplementary insurance to pay for services not covered by
Part A and Part B
6. Medicare Part C: Medicare Advantage- choices in health care providers such as
through HMOs and PPOs (see Chapter 5)
7. Medicare Part D: Medicare Prescription Drug Benefit – prescription drug coverage
8. Individuals eligible to receive protection under Medicare may choose to receive
coverage in one of two ways
a. Original Medicare Plan
b. Medicare Advantage Plan
9. The original Medicare Plan is a fee-for-service plan
10. Medicare Advantage Plan includes a variety of insurance options
a. HMOs
b. PPOs
c. Medicare special needs plans
d. Medicare medical savings accounts plans (MSAs)
11. Medicare Advantage Plans are run by private companies subject to strict regulations
specified in the Medicare program
12. Restrictions pertain to the pricing of plans
B. Eligibility Criteria for Medicare Benefits
1. Individuals age 65 or older with 40 credit quarters
2. Automatically extends to spouses of eligible workers
3. Family members with disabilities
4. Younger individuals that are seriously disabled for at least 24 months of suffering
from permanent kidney failure requiring dialysis or transplant
5. Meeting any of these criteria provides Part A coverage without paying a premium
6. Having fewer than 40 credits requires an individual to pay a monthly premium to
receive coverage
7. In 2012, the monthly Part A premium was $451
8. Part A coverage automatically qualifies an individual to enroll in Part B coverage for
a monthly premium
9. Starting in 2009, monthly premium is based on annual income and the premium
amounts will be revised annually
10. In 2012, monthly Part B premiums ranged from $99.90 to $319.70 depending on
income
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C. Medicare Part A Coverage

1. Compulsory hospitalization insurance covers both inpatient and outpatient hospital
care and services (use PP 7.14)
a. Inpatient hospital care in a semiprivate room, meals, general nursing, and other
hospital supplies and services
b. Home health services limited to reasonable and essential part-time or intermittent
skilled nursing care and home health aide services, and physical therapy,
occupational therapy, and speech-language pathology ordered by a doctor
c. Hospice care for people with terminal illness (that is, illness that is expected to
lead to death within six months), including pharmaceutical products for symptom
control and pain relief, medical and support services from a Medicare-approved
hospice provider, and other services not otherwise covered by Medicare (for
example, grief counseling)
d. Skilled nursing facility care, including semiprivate room, meals, skilled nursing
and rehabilitative services, and supplies for up to 100 days per year. Examples of
skilled nursing care include physical therapy after a stroke or serious accident.
e. Pints of blood administered during a Medicare approved stay in a hospital or
skilled nursing facility.
D. Medicare Part B Coverage (use PP 7.15)
1. Helps pay for medical services not covered by Part A
a. Doctors’ services
b. Outpatient care
c. Clinical laboratory services (blood tests, uninalysis)
d. Preventive health services (cardiovascular screenings, bone mass measurement)
2. Provides ambulance services to a hospital or skilled nursing facility when
transportation in another vehicle would endanger health
3. Structured similarly to indemnity medical insurance
4. Covers 80% of medical services and supplies after enrolled individual pays an annual
deductible for services furnished under the plan
E. Medigap Insurance (use PP 7.16)
1. Supplements Parts A & B and it is available to Medicare recipients in most states
from private insurance companies for an extra fee
2. Help cover the costs of coinsurance, copayments, and deductibles
3. Federal and state laws limit the sale of these plans to up to 10 different standardized
choices, which vary in terms of the level of protection
4. Some policies cover costs not covered in the original Medicare plan
5. Some insurers offer Medicare Select Plans
a. Medigap plans that offer lower premiums in exchange for limiting the choice of
health care providers
6. Massachusetts, Minnesota, and Wisconsin do not offer Medigap insurance
F. Medicare Part C - Medicare Advantage (use PP 7.17)
1. The Balanced Budget Act of 1997 established Medicare+Choice which was renamed
Medicare Advantage in 2004, also referred to as Part C
2. Provides beneficiaries opportunity to receive health care from a variety of options
including
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a. Fee-for-service plans
b. Managed care plans
c. Medical savings accounts
3. Fee-for-service plans provide protection against expenses in the form of cash benefits
paid to insured or directly to health care provider and pay benefits on reimbursement
basis
4. Managed care plans often pay higher levels of benefits if health care is received from
approved provider
5. Beginning in 2006, participant gained access to wider variety of providers
6. Allows beneficiaries to switch health plans during annual open enrollment period
G. Medicare Part D - Medicare Prescription Drug Benefit (use PP 7.18)

1. Medicare Prescription Drug Improvement and Modernization Act of 2003 instituted
a prescription drug benefit for Medicare program participants
2. Commonly referred to as Part D
3. First offered in 2006
4. A participant pays the deductible, $320 in 2012, before Medicare begins to provide
coverage
5. For expenses above $320 through $2,930, the participant pays small copayment for
each prescription
6. For expenses above $2,930 through $4,700, the participant pays
a. 50% of the cost of brand name drugs
b. 86% for generic drugs
7. This coverage gap known as the “donut hole” because Medicare contributes to the
payment of approved prescription medications for amounts outside the $2,930 to
$4,700 range less the annual deductible
8. These dollar amounts were valid in 2012 and are subject to change from year to year
9. Passage of this act has relevance for employers that offer a group health insurance
plan that covers retirees who are eligible for Medicare
10. The Medicare Modernization Act provides federal tax-exempt subsidy to employers
that sponsor drug benefits that are at least as generous as the Part D benefits
H. Medicare as the Primary or Secondary Payer (refer to Exhibit 7.6)
1. Individuals who have Medicare coverage may also simultaneously receive health
insurance benefits from other sources
VI. Financing OASDI & Medicare Programs (use PP 7.19)

A. Overview
1. Requires equal employer and employee contributions under FICA
2. Employers pay a tax based on its payroll
3. Employees pay a tax based on earnings
4. SECA (Self-Employment Contributions Act) requires self employed individuals to
make all the contribution but at different tax rate
5. Tax rate is subject to increase each year in order to fund OASDI programs
6. Since 1990, tax rate for employers and employees was 7.6% each; it was 15.3% for
self-employed individuals
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B. OASDI Programs
1. The largest share of the FICA tax funds OASDI programs
2. In 2009, 6.2% of the contributions of employers and employees were set aside
3. Self-employed individuals contributed 12.40%
4. The employee and self-employed tax rates were each temporarily reduced by 2% for
the 2012 calendar year to 4.25 and 10.40 respectively
5. Subject to taxable wage base
a. Limits the amount of annual wages or payroll cost per employee subject to
taxation
b. In 2012, the amount was $110,100 for everyone
6. Annual wages, payroll costs per employee, and self-employed earning above this
level were not taxed
C. Medicare Programs
1. Medicare tax, or hospital insurance tax, supports Part A programs
2. Employers, employees have contributed 1.45%
3. Self-employed individuals have contributed 2.9%
4. Not subject to taxable wage base
5. All payroll amounts and wages taxed
D. Financial Status of the OASDI and Medicare Programs (use PP 7.20)
1. The viability of the OASDI and Medicare programs relies on sufficient funding to
cover current and future beneficiaries. In order to ensure viability:
a. Increase the FICA tax rates for these programs
b. Substantially reduce the level of benefits
2. The viability of these programs is the subject of ongoing political debate over the
methods for ensuring long-term success
3. Social Security system represents a pay-as-you-go benefit system
4. There is no guarantee that benefits will be available in the future as employees
become disabled, reach retirement age, and require medical insurance at age 65
5. Social Security Board of Trustees annual report of 2011
a. The program had a $49 billion deficit in 2010 for the OASDI program
b. The projected deficit for 2011 was projected to be $46 billion
c. After 2014, deficits are expected to grow rapidly as the number of individuals
receiving social security benefits exceeds the number of employees who are
contributing to the social security program
d. By the year 2033, resources in the security trust funds are expected to depleted,
which is three years sooner than projected in the Social Security Board of
Trustee’s estimate in 2011
6. Medicare trust fund faces a more immediate shortfall that does the OASDI trust
funds
7. Based on the 2012 report, the projected date of the Medicare trust fund exhaustion is
2024
8. In Fall 2011, the projected date is 2019. It is difficult to interpret the change in
projected time frame based on a single year
9. Three factors for the deterioration of the trust funds:
a. Individuals are living longer than before
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b. Immigration is accounting for some growth in the labor force and immigrant
workers’ income tends to be quite low, thus FICA tax amounts are less
c. Unemployment remains quite high
VII. Unemployment Insurance

A. Overview
1. Provides weekly income for workers unemployed through no fault of own
2. States
a. Develop guidelines and administer programs
b. Pay into central unemployment federal fund
3. Federal government
a. Invests the payments
b. Disburses funds to states, as needed
B. Eligibility Criteria for Unemployment Insurance Benefits (use PP 7.21 & PP 7.22)
1. Criteria includes
a. Limited voluntary and involuntary unemployment except for disqualifying causes
b. Minimum earnings and employment requirements
c. A waiting period
d. A capacity to work and availability for work
e. An actively seeking of suitable work
2. Limited voluntary employment and involuntary unemployment
a. Voluntary termination usually disqualifies workers from receiving benefits,
unless they chose to quit for reasonable causes
b. Reasonable cause refers to the creation of working conditions that cannot be
tolerated by any sensible person
c. Involuntary termination disqualifying events include:
i. Refusal of suitable work
ii. Misconduct
iii. Participation in a labor dispute
iv. Regular breaks between school terms for educators
v. Deliberate misrepresentation to receive benefits
c. Some states will pay benefits to those involved in labor disputes that
i. Result in a lockout, or
ii. If the employer violates either the terms or a contract or labor laws
3. Minimum earnings and employment requirements
a. Must have been employed for a minimum period of time
i. Called the Base Period
ii. Generally the first 4 of the last 5 calendar quarters preceding a claim
b. Sufficient previous earnings (most states), typically $1,130
4. A waiting period
a. Usually one week following claim
b. Possible reasons
i. Need for processing time
ii. To limit costs
5. Capacity to work and availability for work
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a. Mentally & physically able (ability)

b. Willing and ready (motivation)
6. Actively seeking suitable work
a. Jobs that require skills, knowledge, ability similar to individual’s customary work
b. Job offers employment terms and conditions that don’t violate relevant laws
C. Unemployment Insurance Benefit Amounts (use PP 7.23)
1. Benefits are paid weekly
2. Maximum limit NOT mandated by federal government
3. Varies by state
4. Generally:
a. A specified fraction of earnings during highest base period quarter
b. Maximum 26 weeks
c. Extended benefits for 13 weeks
i. Paid by federal government
5. Supplemental Unemployment Benefit (SUB)
a. Offers extended benefits
b. Common in industries where employment conditions are cyclical
c. Most are part of collective bargaining agreements
6. Unemployment information can be found at U.S. Department of Labor’s website at
http://www.workforcesecurity.doleta.gov
7. Benefits generally provide income that is 50% to 67% of previous earnings
8. States use one of three methods to calculate weekly benefit amounts
a. A fraction of the highest wages for a calendar quarter earned during the base
period
b. A percentage of the average weekly wage earned during the base period
c. A percentage of annual wages
d. Excludes
i. Holiday pay
ii. Vacation pay
iii. Back pay
iv. Workers' compensation income, and
v. Retirement income
D. Financing Unemployment Insurance Benefits
1. Financed mainly by the federal government, some states also level taxes on
employers
2. FUTA
a. Employers contribution 6.2% of the first $7,000 earned by each employee
b. FUTA specifies $7,000 as the minimum allowable taxable wage base
c. States typically set the taxable wage base according to average wage level
d. In 2012, states’ taxable wage base ranged from $7,000 (Arizona and California)
to $38,800 (in Hawaii)
e. 5.4% of the taxes levied on employers to the Federal Unemployment Trust Fund,
which is administered by the Treasury Department
i. Is invested in government securities
ii. Credits the principal contributed by each state and the investment income to
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an account
iii. 0.8% covers administrative costs and maintains a reserve to bail out states
with very low balances in their accounts
3. Employers’ tax burdens vary according to an experience rating system
a. The tax rate depends on the employer’s prior experience with unemployment
b. Those with a higher number of claims will have a higher tax rate
Summary
This chapter reviews the fundamental concepts of Social Security programs. The programs
examined here interface with a variety of tax regulations and employment laws.
Discussion Questions
1. Discuss the basic concept of social insurance as provided by Social Security programs.
Main Points
 Various Social Security insurance programs were established by the U.S. government to
contribute to the attainment of the social good. In the employment context, the social
good refers to a booming economy, low levels of unemployment, progressive wages and
benefits, and safe and healthful working conditions. Progressive wages and benefits help
to promote the social good by enabling citizens to actively participate as consumers in the
economy.
 The economic devastation of the Great Depression era prompted the federal government
into action because most Americans had used up any life savings to survive, and
opportunities for gainful employment were scarce.
 The Social Security Act of 1935 and subsequent amendments to the act established four
public social insurance programs:
o Old-Age, Survivor, and Disability Insurance (OASDI)
o Medicare
o Unemployment insurance
o Supplemental Security Income benefits
 The passage of the Social Security Act set up two programs: a federal system of income
benefits for retired workers and a system of unemployment insurance administered by the
federal government and state governments.
 Amendments to the Social Security Act in 1965 established the disability insurance
program and the Medicare program.
 The term Old-Age, Survivor, and Disability Insurance (OASDI) refers to the programs
that provide retirement income, income to the survivors of deceased workers, and income
to disabled workers and their family members. The Medicare program serves nearly all
U.S. citizens of at least age 65, and disabled Social Security beneficiaries, by providing
insurance coverage for hospitalization, convalescent care, and major doctor bills.
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2. Describe the differences between FICA and FUTA.
Main Points
FICA
 Funding for OASDI and Medicare programs requires equal employer and employee
contributions under the Federal Insurance Contributions Act (FICA).
 FICA requires that an employer pay tax based on its payroll; employees contribute tax
based on earnings, which is withheld from each paycheck. The Self-Employment
Contributions Act (SECA) requires that self-employed individuals contribute to the
OASDI and Medicare programs, but at a different tax rate. In either case, the tax rate is
subject to an increase each year to sufficiently fund OASDI programs.
 Since 1990, FICA has required employers and employees to contribute 7.65 percent each;
for self-employed individuals, it is generally double that amount, or 15.3 percent.
 The largest share of the FICA tax funds OASDI programs. In 2009, 6.20 percent of the
contributions of employers and employees were set aside. Self-employed individuals
contributed 12.40 percent.
FUTA
 Unemployment insurance benefits are financed by federal and, sometimes, state taxes
levied on employers. Federal tax is levied on employers under the Federal
Unemployment Tax Act (FUTA).
 Employer contributions amount to 6.2 percent of the first $7,000 earned by each
employee (i.e., the taxable wage base).
 FUTA specifies $7,000 as the minimum allowable taxable wage base. Relatively few
states’ taxable wage bases are as low as the FUTA-specified minimum. States typically
set the taxable wage base according to the average wage level.
 In 2012, states’ taxable wage bases ranged from $7,000, in Arizona and California, to
$38,800, in Hawaii.
3. Would you modify any of the eligibility criteria currently used to qualify unemployed persons
for unemployment insurance benefits? Explain why or why not.
Main Points
 Student answers will vary.

 Unemployed workers must meet several eligibility criteria, including
o Limited voluntary employment, and involuntary unemployment except for
disqualifying causes.
o Minimum earnings and employment requirements.
o A waiting period in most states.
o A capacity to work and an availability for work.
o An active seeking of suitable work.
7-15
 Congress enacted the Unemployment Compensation Act of 2008 to expand the EUC
benefits to 20 weeks nationwide (13 weeks more to states with high unemployment
rates). One can argue that due to economic downturn and high unemployment rates,
providing unemployment insurance for 20 weeks might not be sufficient for many
individuals who are actively seeking work. So, one modification could be extending this
time period longer than 20 weeks.
4. Under what circumstances should employees be ineligible for public or private disability and
life benefits? Discuss the rationale for your answer. Are the expenses associated with providing
public and private programs serving the best interests of society?
Main Points
 Student answers will vary.

 Employees should be eligible for public or private disability and life benefits under most
circumstances. One might argue that an employee whose family posses the financial
resources to support himself or herself might be considered ineligible for a short-term
disability.
 Expenses associated with providing public and private programs serves the best interest
of society since disabilities of any kind can be devastating to workers and their
dependence, especially when they do not have sufficient financial resources to support
themselves.
Cases
Understanding Your Benefits
Qualifying for Unemployment Benefits
1. Are you eligible to receive unemployment if you resign?

2. In this case, should you resign or wait to see if you are laid off?
Instructor Notes
Unemployment insurance benefits are available to individuals who become unemployed through
no fault of their own. Programs are administered at the state level under federal parameters.
However, eligibility guidelines to qualify for unemployment benefits are generally the same in
all states. Individuals must meet minimum earning and length of employment requirements and
must be actively seeking work. There is typically a waiting period before an individual can
apply. If an employee quits their job for reasonable cause, they may be still eligible to receive
unemployment compensation. Reasonable cause exists if working conditions are intolerable to a
reasonable person.
7-16
Student Responses
1. Are you eligible to receive unemployment if you resign?
Generally you must lose your job through no fault of your own to be eligible to receive
unemployment insurance. This usually means that you were terminated for reasons other than
misconduct. For example, if you are laid-off by your company, you are eligible. However, if you
do quit your job because of reasonable cause, than you may be eligible to collect unemployment
insurance. Reasonable cause exists when you are subjected to working conditions that a sensible
person could not tolerate. In this case, the working conditions created by your supervisor could
possibly qualify as a reasonable cause to quit.
2. In this case, should you resign or wait to see if you are laid off?
It is a risky decision to resign your position as generally this disqualifies you from receiving
unemployment insurance. However, in this case, you may be able to make the case that you had
reasonable cause to resign. The challenge would be to prove that you were subjected to
unacceptable treatment by your supervisor. You should keep in mind that generally employers do
have the opportunity to appeal unemployment claims. You may want to consider starting your
job search and waiting to see if you are laid-off in the near future.
Social Security and Retirement Planning at Taylor Foods
1. How does the instability of the Social Security system affect retirement benefit planning
at Taylor Foods?
2. Should Gavin consider the possibility of employees delaying retirement in the company
human resource planning process?
Instructor Notes
The intention of the Social Security system is to provide economic security through providing
retirement, disability and survivors insurance. Workers and employers pay into the system that
provides income continuation in retirement or when disabled. Social Security payments are the
main source of income for many older Americans, however, several factors impact the future of
the system. Americans are living longer and the “Baby Boomer” generation is retiring at the
same time that fewer workers are paying into the system. The instability of the system is
requiring individuals to plan more savings for retirement and also requiring employers to provide
better retirement benefits as workers will depend more on these plans. Further, incentives for
later retirement could cause many workers to retire at a later age. In difficult economic times in
particular, workers may delay their retirement age in order to maximize the amount of benefits
they receive.
7-17
Student Responses
1. How does the instability of the Social Security system affect retirement benefit planning
at Taylor Foods?
As confidence in the Social Security system declines, workers will rely on their own savings as
well as the retirement benefits from their employers as their main source of retirement income.
This creates a challenge for organizations as they will need to invest in comprehensive retirement
benefits. As Gavin looks at the retirement plan, as well as other benefits at Taylor Foods, he
needs to consider the employees’ needs in light of the uncertainty of the Social Security system.
Organizations should also educate workers about retirement planning so that they are aware of
the need to save on their own.
2. Should Gavin consider possible later retirement ages in the company human resource
planning process?
Yes, Gavin should be prepared for workers that might wait until later to retire. It is very likely,
especially in an economic downturn, that employees may delay retirement. In addition to
continuing full income from working, delaying retirement results in an increase in the amount of
payments that retired workers receive. While workers can retire and begin receiving retirement
benefits at age 62, full retirement age is likely later based on their year of birth. Further,
additional incentives are in place for those who delay later, up to age 70. The fact that workers
may retire later should also be considered as an organization designs their own retirement plan.
7-18

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Chapter 07 - Government-Mandated Social Security Programs

Solution Manual for Employee Benefits 5th

I. Learning Objectives (use PP 7.2)

II. Origins of Social Security

III. Introduction to Social Security Programs

A. Overview (use PP 7.3)

b. A system of unemployment insurance administered by the federal and state

IV. Old-Age Survivor, and Disability Insurance (OASDI)

c. Employees must earn 40 credits to be eligible to receive retirement benefits

C. Medicare Part A Coverage

G. Medicare Part D - Medicare Prescription Drug Benefit (use PP 7.18)

VI. Financing OASDI & Medicare Programs (use PP 7.19)

VII. Unemployment Insurance

a. Mentally & physically able (ability)

2. Describe the differences between FICA and FUTA.

 Student answers will vary.

 Student answers will vary.

Understanding Your Benefits

Qualifying for Unemployment Benefits

1. Are you eligible to receive unemployment if you resign?

1. Are you eligible to receive unemployment if you resign?

Social Security and Retirement Planning at Taylor Foods

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