Ch6. Social Insurance — Medicare, Medicaid, Social Security, and Workers Comp

Overview of Social Insurance

Social Insurance Characteristics:
Mandatory participation (unlike private/voluntary insurance)
Government-administered or government-supervised
Income redistribution function
Guarantees a minimum floor of protection

Major US Social Insurance Programs:
Medicare (federal health insurance for seniors/disabled)
Medicaid (federal-state health coverage for low-income)
Social Security (retirement, disability, survivors)
Workers' Compensation (state-level, employer-funded)
Unemployment Insurance (state-federal, for job loss)

Private vs. Social Insurance:
Private: voluntary, for-profit, experience/risk-rated premiums
Social: mandatory, non-profit/public, wage-based contributions

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Medicare and Medicaid

Medicare (federal program):
Eligibility: age 65+; or under 65 with qualifying disability;
  or end-stage renal disease (ESRD).

Part A — Hospital Insurance:
Inpatient hospital, skilled nursing facility (SNF), hospice.
Funded by payroll taxes (FICA); no monthly premium if
  sufficient work credits.

Part B — Medical Insurance:
Outpatient services, physician visits, preventive care.
Monthly premium (~$170/month in 2024; income-adjusted).
Standard cost-sharing: 20% coinsurance after deductible.

Part C — Medicare Advantage:
Private insurer bundles Part A + B + often Part D.

Part D — Prescription Drug:
Voluntary; private insurers; monthly premium varies.

Medicaid (federal-state program):
Income-based; eligibility varies by state.
ACA expanded Medicaid to adults up to 138% FPL in many states.

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Social Security (OASDI)

Social Security Programs:
OASI: Old-Age and Survivors Insurance (retirement + survivors)
DI: Disability Insurance
Combined: OASDI

Funding:
FICA payroll tax: 6.2% employee + 6.2% employer = 12.4%
  on wages up to the Social Security wage base (~$168,600 in 2024)

Retirement Benefits:
Full Retirement Age (FRA): 67 for those born 1960 or later.
Early claiming at 62: permanent ~30% reduction.
Delayed claiming up to 70: +8%/year in benefit.

Disability Benefits (SSDI):
Must have qualifying work history (credits) and a severe
disability expected to last 12+ months or result in death.

Cost-of-Living Adjustment (COLA):
Benefits increase annually tied to CPI-W.

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Workers’ Compensation and Unemployment Insurance

Workers' Compensation:
Covers work-related injuries and occupational diseases.
Funded entirely by the employer (employees pay nothing).
Benefits: medical treatment, wage replacement (~66% of wages),
  permanent disability, death/survivors benefits.
No-fault system: the worker need not prove employer negligence.
Administered at the state level; each state sets its own rules.

Unemployment Insurance (UI):
Federal-state partnership (FUTA + SUTA).
Funded by employer payroll taxes; employees generally do not pay.
Eligibility: involuntary job loss; must actively seek work;
  typically 26 weeks of benefits (extended during recessions).
Benefit amount: varies by state; ~40–50% of prior weekly wage.

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Key Concept Cards

4 Core Social Insurance Programs = Medicare, Medicaid, Social Security, Workers Comp ★★★★★ : Mandatory, government-backed safety nets covering health, retirement, and workplace injury. Memory hook: M-M-SS-WC

Workers’ Comp = 100% Employer-Funded ★★★★★ : Employees contribute nothing to workers’ compensation premiums. Memory hook: WC = employer pays all

UI Eligibility = Involuntary Separation + Active Job Search ★★★★☆ : Must be laid off (not fired for cause or quit voluntarily) and actively look for work. Memory hook: UI = involuntary + seeking

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Practice Quiz

Q. What are the fundamental differences between social insurance and private insurance?

Mandatory vs. voluntary: Social insurance requires participation; private insurance is an individual choice. Purpose: Social insurance provides a universal minimum floor and redistributes income across the population; private insurance protects individual risk according to premium paid. Premium structure: Social insurance uses wage-based contributions regardless of individual risk; private insurance prices premiums based on actuarial risk. Profit motive: Social insurance is non-profit, government-managed; private insurance is a for-profit industry. Adverse selection: Mandatory participation in social insurance prevents low-risk individuals from opting out — which would otherwise collapse the pool.

Q. Why is Social Security generally considered more reliable than a private annuity for retirement income?

Lifetime payment: Social Security pays until death regardless of longevity, eliminating outliving-your-savings risk. COLA: benefits rise with inflation (CPI-W), preserving purchasing power. Survivor and disability protection: built-in coverage for family members and for disability before retirement. Forced savings: mandatory contributions ensure most workers accumulate some benefit. Tax efficiency: SS benefits are only partially taxable for most recipients. Limitations: replacement rate is modest (~40% of pre-retirement earnings for average earners); solvency of the trust funds is a long-run policy concern. Best practice: Social Security as base + employer 401(k)/403(b) + personal savings = three-legged stool of retirement security.