KEYWORDS: SOCIAL SECURITY

Prior to reading this chapter, please review the following keywords. An understanding
of their basic definitions will improve your comprehension of the chapter content.

Blackout Period: This is the period following the death of a family breadwinner
during which no Social Security benefits are available to the surviving spouse.
Credits: These are the determining factor between being classified as fully insured
or currently insured. Once a person becomes fully insured, death benefits are
extended to his family. In other words, the family becomes eligible for survivorship
benefits. Four credits are the maximum that any one person can earn in a given year.
Therefore, for the 40-quarter rule to apply, an individual must have been employed
and have paid FICA taxes for at least 10 years.
Currently Insured: As it relates to Social Security, this is a status of limited eligibility
that provides only death benefits.
Disability Benefit Qualifications: Used when Social Security uses both medical
disability criteria and non- medical criteria to determine whether a person qualifies for
Social Security Disability Insurance (SSDI), which is a program that’s based on work
credits. However, a person must first be able to prove that she’s medically disabled.
FICA Taxes (Federal Insurance Contributions Act): FICA taxes are used to fund
the Social Security program.
Fully Insured: This status represents complete eligibility for the full range of Social
Security benefits, including death benefits, retirement benefits, disability benefits, and
Medicare benefits. To be fully insured, a person must have contributed to FICA taxes
for 40 quarters of employment.
Fully and Permanently Insured: This status means that an individual has paid FICA
contributions for at least 40 quarters (which are not required to be consecutive).
Old Age, Survivor, and Disability Insurance (OASDI): This is more commonly
referred to as Social Security. To pay for these programs, the federal government
imposes a tax on earned income that must be withheld by a person’s employer. The
OASDI deduction on a person’s paycheck shows the amount that was withheld.
Primary Insurance Amount (PIA): This is the benefit (before rounding down to the
next lower whole dollar) that a person would receive if he elected to begin receiving
retirement benefits at his normal retirement age. At this age, the benefit is neither
reduced for early retirement nor increased for delayed retirement.
Quarter of Coverage: This is a basic unit for determining whether a worker is
insured under the Social Security program.
Retirement Benefits: Social Security retirement benefits are only available to
covered workers and their spouses who are full insured upon retirement. These
benefits are paid monthly. If a covered worker retires at the normal retirement age,
she will receive 100% of the PIA. Although a person can choose to retire as early as
age 62, if a covered worker retires early at the age of 62, the maximum Social
Security benefit may be reduced by as much as 30%. This reduction remains all
through retirement. Retirement benefits pay a monthly retirement income to a
covered retired worker, her spouses, and other eligible dependents.
Social Security Act of 1935: This act was created to provide for the general welfare
of United States citizens who are 65 years of age and older. The act was enacted by
the Senate and House of Representatives of the United States to enable individual
states to make more adequate provisions for providing financial assistance to the
aged, blind, dependent and crippled children, maternal and child welfare, public
health, and to establish more adequate provisions for the administration of their
unemployment compensation laws, to establish a Social Security Board, to raise
revenue and to provide a basic floor of protection to all working Americans against
the financial problems brought on by death, disability, and aging. In 1939 the law was
changed to add survivors’ benefits and benefits for the retiree’s spouse and children.
In 1956, disability benefits were added. Social Security is an entitlement program, not
a welfare program. It’s based on a “pay now in exchange for benefits later” system.
INTRODUCTION

This chapter will introduce social insurance. Social insurance programs can be operated by
federal and state governments and are generally comprised of Social Security, Medicare,
Medicaid, Workers’ Compensation, and other mediums. This chapter primarily focuses on Social
Security programs. Social Security provides social insurance and it’s funded by payroll taxes that
are collected from employees, employers, and self-employed individuals. Social Security
provides many benefits to those who are eligible, including retirement income, disability income,
a lump-sum death benefit, and survivor benefits. To receive the full benefit, an individual must
first meet specific requirements.

The chapter is broken into the following sections:

▪ Characteristics of Social Security

▪ Types of OASDHI Benefits

The state-specific portion of this course (located at the end) will detail the specific insurance
definitions, rules, regulations, and statutes for your state. If a conflict exists, state law will
supersede the general content.

Review of this chapter will enable a person to:

▪ Become familiar with the characteristics of Social Security

▪ Understand how Social Security benefits are calculated

▪ Understand who’s eligible and covered under Social Security

▪ Differentiate between fully insured and currently insured

▪ Understand how Social Security benefits are funded

▪ Understand the taxation of Social Security

▪ List different types of OASDHI benefits

▪ Understand the concept of dual benefit liability

▪ Understand the concept of disability

CHARACTERISTICS OF SOCIAL SECURITY

The federal law that created Social Security in the United States is the Old Age
Survivors Disability Health Insurance program, which is referred to as OASDHI. The
programs can also be referred to separately as OASDI for Social Security, and HI for
Health Insurance. The Social Security program was signed into law in 1935 by
President Roosevelt as part of the Social Security Act. Social Security is “funded” by
payroll taxes that are collected from employees, employers, and those who are self-
employed. Social Security provides several benefits to those who are eligible,
including (but not limited to) retirement income, disability income, a lump-sum death
benefit, and survivor benefits.

It’s a common misconception for many Americans that Social Security will fulfill all of
their financial needs. The Social Security system delivers a basic protection level to
most working Americans against the financial problems brought on by death,
disability, and aging. Social Security supplements but does NOT replace a sound
personal insurance plan.

The misunderstanding has resulted in many Americans discovering, often too late,
that they were inadequately covered when they needed life insurance, disability
income, or retirement income.
PURPOSE

Social Security was established during the Great Depression to assist the masses of
people who could not afford to sustain their way of life because of unemployment,
disability, illness, old age, or death.

FUNDING SOCIAL SECURITY BENEFITS

Funding for Social Security and all of its social insurance counterparts (i.e., Medicare
and Medicaid) is accomplished through the Federal Insurance Contributions Act
(FICA) payroll taxes. Social Security payroll taxes are collected from employers
(7.65%), employees (7.65%), and the self-employed (15.3%). Therefore, employers,
employees, and the self-employed (i.e., sole proprietors) fund social insurance
programs.

FICA tax is applied to an employee’s income up to a certain income amount. This

amount is referred to as the taxable wage base. There’s a maximum amount of
earnings that can be subject to Social Security tax each year. This amount is indexed
each year to the national average wage index. This maximum applies to employers,
employees, and self-employed individuals. However, Medicare Part A taxes are not
subject to a maximum taxable wage cap.

TAXATION OF SOCIAL SECURITY BENEFITS

Social Security benefits may be subject to federal income taxation. For beneficiaries
who file individual (single) tax returns, a portion of their Social Security benefit will be
taxed when their Adjusted Gross Income exceeds $25,000. For beneficiaries who file
joint tax returns, a portion of their Social Security benefit will be taxed when their
Adjusted Gross Income exceeds $32,000. Regardless of income, 15% of all Social
Security benefits received will always be 100% income tax-free.
CALCULATING SOCIAL SECURITY BENEFITS

A person must be insured under the Social Security program in order for a survivor,
disability, or retirement benefits to be paid. Social Security benefits are based on how
long a covered worker has worked throughout his life.

The amount of Social Security benefits a person receives is based on the individual’s
average indexed monthly earnings (AIME) during his working years. Average indexed
monthly earnings are used to account for inflation and bring past earnings up to
current economic standards.

The primary insurance amount (PIA) determines the full amount of retirement benefits
for an eligible person at the age of 65. If a worker retires early (e.g., at the age of 62),
his retirement benefits will be 80% of his PIA and will remain lower for the covered
worker’s life.

PRIMARY INSURANCE AMOUNT

As just described, benefits that are payable by Social Security are based on what an
individual worker has contributed to the program. In other words, this is the average
indexed monthly earnings (i.e., average income over a person’s working lifetime).
This is referred to as the worker’s primary insurance amount.

COVERAGE AND ELIGIBILITY

Social Security offers coverage to virtually every American who’s employed or self-
employed, with a few exceptions. Those who are not offered coverage include:

▪ Most federal employees who were hired prior to 1984 and are covered by Civil
Service Retirement or another similar plan

▪ Approximately 25% of state and local government employees who are covered by
a state pension program and elect not to participate in the Social Security Program

▪ Railroad workers who are covered under a separate federal program which is
referred to as the Railroad Retirement System

Individuals who are actively contributing to the Social Security program through FICA
taxes are considered covered. Coverage does NOT guarantee benefit eligibility. Each
Social Security benefit has eligibility requirements that must be met prior to receiving
the benefit.

INSURED STATUS
Social Security establishes benefit eligibility based on an “insured” status. There are
two types of insured statuses that qualify individuals for Social Security benefits—
fully insured and currently insured. Most Social Security benefits are paid to fully
insured individuals.
Fully Insured and Currently Insured A worker is considered to be fully insured if
she has earned the required number of quarters of coverage. A worker with 40
quarters of coverage (i.e., 10 years of employment) is considered to be fully insured.
A fully insured worker is entitled to retirement benefits, and survivors are eligible for
retirement benefits when the worker dies.
Fully insured status alone doesn’t provide for disability benefits. This benefit is
provided if a worker is fully insured and meets the definition of disability . In this case,
a worker must have 40 quarters of coverage and 20 of the 40 quarters must be
earned immediately preceding the disabling event. Therefore, under this
classification, the worker is entitled to retirement benefits, disability benefits, and
survivors are eligible for retirement benefits when the worker dies.
A worker is currently insured if she has earned at least six quarters of coverage in
the 13 quarters immediately preceding death or disability. This status provides for
survivor benefits only; it doesn’t provide for disability or retirement benefits.

To obtain a fully insured status, a covered worker must accrue a total of 40 quarters
of credit, which is approximately 10 years of work. To be considered currently insured
and eligible for limited survivor benefits, a worker must have earned six credits during
the last 13-quarter period.
[EXAM TIP: To receive maximum benefits, the eligible individual must be “fully
insured.” This means that the eligible person must have 40 quarters of coverage. In
other words, a person must have worked for 10 years to be fully insured.
▪ The minimum requirement for workers under age 24 to obtain “currently
insured” status is six (6) credits in the last three years
▪ Beginning at age 24, additional credits are required to obtain “currently
Insured” status based on the worker’s age at the time of disability
▪ 40 credits (fully insured status) is required to obtain disability, retirement,
premium-free Medicare Part A benefits, and eligibility for Medicare Part B]
TYPES OF OASDHI BENEFITS
Death/Survivors’ Benefits

Social Security Survivors’ benefits or death benefits pay a lump-sum death benefit
and, in some cases, monthly income to survivors of deceased covered workers.

The program provides for a lump-sum death benefit to be paid to the eligible spouse
and, in some cases, the children when a fully or currently insured worker dies. The
lump-sum death benefit is $255 and has been capped at that amount for over 60
years.
In addition to the lump sum death benefit, Social Security provides a survivor with
monthly life income that’s equal to the deceased spouse’s PIA at death. A surviving
spouse of a fully insured deceased worker without dependent children is eligible for
Social Security survivor benefits as early as age 60. However, benefits are reduced if
they’re taken prior to the age of 65. To be considered currently insured, and thus
eligible for limited survivor benefits, the deceased worker must have earned 6 credits
during the last 13-quarter period .

Survivor benefits are also available to:

▪ A spouse of any age who’s caring for children under the age of 16, or over the age
of 15 and disabled

▪ Unmarried children who are under the age of 18, or 19 if still in high school

▪ Children at any age if they’re disabled before the age of 22 and they remain
disabled

‒ A Social Security benefit of 75% of the Primary Insurance Amount (PIA) is given
to an underage child of a deceased worker.

▪ Parents, beginning at the age of 62, of a deceased, fully insured worker, if the
child provided at least 50% of the parent’s support at the time of death
‒ A Social Security benefit of 75% of the Primary Insurance Amount (PIA) is given
to each eligible parent. If only one parent is eligible, the benefit is increased to 82.5%
of the worker’s PIA.
Blackout Period
The blackout period is the period between the insured’s death until the surviving
spouse is permitted to receive retirement income benefits. However, benefits are
provided for other dependents (i.e., children) during the blackout period until the
youngest child reaches the age of 18.
The blackout period begins when Social Security survivorship benefits cease.
This is when the youngest child turns the age of 16, or immediately if there are no
children. The blackout period ends when the surviving spouse turns at least the
age of 60. Remember, benefits are paid to the children of a deceased worker
during the blackout period until the youngest child reaches the age of 18 .
Maximum Family Benefit

There’s a limitation when several family members are eligible for Social Security
benefits. Similar to the Primary Insurance Amount, a maximum family benefit is
established by Social Security for every level of average earnings.

Disability Benefits

Disability benefits may be paid by Social Security (OASDHI) under the federal
government or through state governments providing state-sponsored disability
benefits or Workers' Compensation.

Social Security Disability Benefits are only available to covered workers who are fully
insured, as defined by Social Security, at the time of disability. Disability, as defined
for Social Security purposes, describes an employee who is unable to engage in any
occupation. A person may first become eligible for disability benefits under Social
Security after having been disabled for five months. An individual is eligible for
disability benefits under Social Security based upon his or her length of employment.
These benefits will be paid to a worker (and eligible dependents) if that worker meets
the restrictive total disability definition under Social Security.

▪ Social Security disability benefits are only available prior to the age of 65.

▪ Social Security does not pay partial disability or short-term disability benefits.

▪ The disability must be total and expected to last 12 months or end in death.

▪ Benefits include monthly payments to the disabled worker, spousal benefits,

and children's benefits.
 Definition of Disability

As defined under Social Security benefits, a disability describes an employee who is

unable to engage in any occupation. The insured has a disability that is expected to
result in early death or is expected to last for a continuous period of 12 months.

Disability, as defined for Social Security purposes, is "the inability to engage in any
gainful activity by reason of any medically determinable physical or mental
impairment which has lasted, or could be expected to last, for a continuous period of
12 months or result in death.
The impairment must be so severe that the individual is unable to engage in
substantial gainful work that exists in the national economy regardless of whether or
not such work exists in the immediate area in which the worker lives.
Once a worker is eligible, he or she must satisfy a five-month waiting period before
benefits are payable. Therefore, benefit payments would begin in the sixth month .
These benefits are also based on a worker's primary insurance amount (PIA).
Remember, the minimum requirement for workers under age 24 to obtain “currently
insured” status is 6 credits in the last three years. Beginning at age 24 additional
credits are required to obtain “currently Insured” status based on the worker’s age at
the time of disability.
Retirement Benefits

Retirement benefits pay covered retired workers, their spouses, and other eligible
dependents a monthly retirement income. Workers who are the age of 65 or older and
fully insured are entitled to monthly retirement income for the remainder of their lives.
The retirement income that’s paid to the person who retires at the age of 65 is based
on the primary insurance amount (PIA). The retirement income that’s paid by Social
Security begins on the first day of the month in which an eligible individual reaches
the age of 65 (or other qualifying age). However, retirement income is not paid
automatically when a retiree reaches age 65. The recipient must complete an
application and submit it if he wants to receive a monthly income. All other
OASDHI/Social Security benefits are based on this amount. Recipients may receive
retirement income at the age of 62 if they so choose, but at a reduced amount.
Full Retirement Age (FRA)

If a covered worker retires at the full (normal) retirement age, she will receive 100%
of the PIA, starting on the first day of the month in which she reaches full retirement
age. However, if a covered worker retires early at the age of 62, the maximum Social
Security benefit is reduced. This reduction remains throughout her retirement.
Similarly, if a covered worker chooses to delay benefits beyond reaching full
retirement age (up to the age of 70), she will experience a slight benefit increase.

Full retirement age (FRA), also referred to as normal retirement age (NRA), is the age
at which retirement benefits are equal to the covered worker’s PIA. Although the age
of 65 is typically considered the full (normal) retirement age, full retirement age is
actually determined by the covered worker’s birth year. Age 65 is the full retirement
age for covered retired workers who were born prior to 1938. Since 1938, the full
retirement age gradually increases by a few months for every birth year until it
reaches the age of 67 for individuals who were born in 1960 and later (as displayed in
the following chart).
Full (Normal) Retirement
Birth year
Age

Prior to 1938 65

1938 65 and 2 months

1939 65 and 4 months

1940 65 and 6 months

1941 65 and 8 months

1942 65 and 10 months

1943 to 1954 66

1955 66 and 2 months

1956 66 and 4 months

1957 66 and 6 months

1958 66 and 8 months

 1959 66 and 10 months

1960 and later 67

Retirement Earning Limit

When a person reaches retirement age (age 65 or older), there’s no limitation or
restriction on the amount of income he can earn from any type of employment. If an
individual decides to begin receiving retirement income prior to reaching full
retirement age (age 62 through 64 or older), whatever they earn will reduce the
retirement benefit to which he’s entitled. This is referred to as the earnings test.

Individuals who are under full retirement age for the entire year will experience a
benefit reduction of $1 for every $2 they earn above the annual limit.

Individuals who reach full retirement age during the year will experience a benefit
reduction of $1 for every $3 they earn above a different limit. Only earnings up to the
month before they reach full retirement age count, not earnings for the entire year.

An individual who’s collecting retirement income benefits at full retirement age is still
allowed to work, and there’s no longer any reduction or offset from Social Security
income.
Dual Benefit Liability

In some cases, an individual is eligible for two retirement income benefits; however,
he’s only allowed to collect one. For example, if a surviving spouse reaches the age
of 65 (or his actual retirement eligible age), he’s now eligible for a retirement income
benefit. However, he’s also entitled to his deceased spouse’s benefit. Since both
cannot be collected, the surviving spouse will select the greater of the two.
Medical Insurance Benefits

Medicare is a federal program founded in 1965. The federal government administers

Medicare through the Centers for Medicare and Medicaid Services (CMS). It is
considered part of OASDHI and funded primarily through payroll taxes. Medicare
provides hospital and medical expense insurance mainly to those aged 65 and older.
Any person who is eligible for Social Security retirement benefits is automatically
eligible for Medicare. Those 65 and older who do not qualify for Social Security
retirement benefits may still apply for Medicare and pay the unsubsidized premium.

Eligibility
Individuals who are 65 years of age and older who are entitled to Social Security
benefits are automatically eligible for Medicare benefits Part A and Part B. Also, some
people under age 65 are eligible if they are suffering from certain disabilities or are in
end-stage renal disease (i.e., kidney failure or on dialysis).
Persons Age 65 and Over

Traditionally, Medicare eligibility is associated with senior citizens. Most people

become eligible to enroll in Medicare by turning age 65. As such, this group accounts
for the majority of those enrolled in Medicare.

You qualify for full Medicare benefits at age 65 or older if:

▪ You are a U.S. citizen or continuous permanent legal resident for at least five
years; and

▪ You or your spouse has worked long enough to be eligible for Social Security
or railroad retirement benefits by earning 40 credits (about ten years of work); or

▪ You paid Medicare taxes for at least ten years or have a spouse who paid
Medicare taxes for at least ten years.

Persons Under Age 65

Anyone who has received Social Security Disability Insurance (SSDI) benefits or
Railroad Retirement Board (RRB) benefits for at least 24 months (following their 5-
month waiting period) because they are disabled and cannot work may become
eligible for Medicare before reaching age 65.

The program makes two exceptions to the 24-month rule.

▪ Persons with Amyotrophic Lateral Sclerosis: While disabled individuals

typically have a 24-month waiting period, Medicare benefits are available immediately
for those who qualify for Social Security disability insurance benefits due to having
Amyotrophic Lateral Sclerosis (ALS), also known as Lou Gehrig's disease.

▪ Persons with End-Stage Renal Disease: Anyone suffering from End-Stage

Renal disease (ESRD), or kidney failure can receive coverage after receiving a
kidney transplant or 3 months on dialysis.
‒ If the insured also has group insurance coverage through an employer (or
spouse’s employer), the group insurance plan is the primary coverage for the first 30
months and Medicare is secondary.

Original Medicare consists of Part A hospital insurance and Part B medical insurance.

▪ PART A, also referred to as hospital insurance, provides inpatient hospital

care, skilled nursing care, home health care, and hospice care subject to deductibles,
copayments, and benefit period limits. Unlike many other medical expense policies,
Part A assigns a new benefit period per claim instead of per year. Most people don't
pay a monthly premium for Part A as they have earned their permanent status as
"fully insured." A worker with 40 quarters of coverage (i.e., 10 years of employment
paying sufficient FICA taxes for at least 10 years) is considered to be fully insured.
Medicare-eligible persons who are not fully insured under Social Security are required
to pay monthly premiums for coverage based upon either 0-39 credits or 0-29 credits.

▪ PART B, also referred to as supplemental medical insurance, provides

benefits for doctors' services, outpatient medical services, medical supplies, durable
medical equipment, the cost of physicians, surgeons, and anesthesiologists services
in and out of the hospital. Medicare Part B also covers 100% of certain preventative
services such as an annual wellness visit, certain screenings (cardiac, diabetes, etc.),
and vaccinations. Everyone that elects Medicare Part B pays a monthly premium,
which is deducted directly from one's Social Security check. Most participants pay the
standard monthly premium.
CHAPTER SUMMARY: SOCIAL SECURITY

Key points to remember from this chapter include:

▪ Social Security is also referred to as OASDHI.

▪ Social Security is funded by payroll taxes that are collected from employees,
employers, and those who are self-employed.
▪ The amount of Social Security benefits that a person receives is based on the
individual’s average indexed monthly earnings (AIME) during her working years.
▪ The primary insurance amount (PIA) determines the full amount of retirement
benefits for an eligible person at the age of 65.
▪ There are two types of insured statuses that qualify individuals for Social
Security benefits:

‒ Fully insured

‒ Currently insured

▪ To receive maximum benefits, the eligible individual must be fully insured.

▪ A worker is considered to be fully insured if he has earned 40 quarters of
coverage.
▪ Social Security also offers survivor’s and death benefits.
▪ The lump-sum death benefit is $255.
▪ The blackout period is the period between the insured’s death and the time that
the surviving spouse is permitted to receive retirement income benefits.
▪ Full retirement age (FRA), also referred to as normal retirement age (NRA), is
the age at which retirement benefits are equal to the covered worker’s PIA.

▪ Individuals who are eligible for a dual benefit are only permitted to collect the
greater benefit.

▪ A disability describes an employee who’s unable to engage in any occupation.

▪ Medicare Part A covers Hospital Insurance.

▪ Medicare Part B covers Supplementary Medical Insurance.

▪ Medicare Part C is Medicare Advantage.

▪ Medicare Part D covers the Prescription Drug Plan.