Government Insurance Programs

Social insurance is insurance administered or supervised by the government. It provides benefits to the elderly and to unemployed, disabled, and sick workers and their families, and to families of deceased workers.

Social insurance programs are financed mainly by taxes paid by workers and employers. Participation in such programs is required for most workers. Benefits are paid to all people entitled to receive them, regardless of their need. Social insurance programs differ from public assistance programs, which are financed by general taxes and pay benefits according to an individual's need.

The major forms of social insurance in the United States are (1) old-age, survivors, and disability insurance (OASDHI)., (2) Medicare, (3) workers' compensation, and (4) unemployment insurance. Most other industrialized nations and many less developed countries also have social insurance.

1. Old-age, Survivors, and Disability Insurance
Old-age, survivors, and disability insurance pays benefits to retired workers and their dependents, to disabled workers and their dependents, and to the survivors of workers who die. Nearly all American workers are covered by the insurance. Benefits are based on a worker's average earnings and are financed by a payroll tax shared by workers and employers.

2. Medicare
Medicare is a health insurance program. It covers nearly all Americans 65 years of age or older and certain disabled people. Medicare consists of hospital insurance and supplementary medical insurance. Hospital insurance is financed by a payroll tax paid by workers and their employers. The insurance helps cover the cost of hospital, nursing home, and at-home care. Supplementary medical insurance is financed by premiums paid by people eligible to receive benefits and by general tax revenues. It helps pay doctor bills and other medical costs not covered by hospital insurance.

Many elderly people supplement their Medicare coverage with private insurance called Medigap insurance. Medigap insurance pays hospital bills, doctor bills, and other medical expenses that Medicare does not cover.

3. Workers' Compensation
Workers' compensation pays the cost of medical care for employees who are injured in a job-related accident or who contract a disease as a result of their job. Workers also receive compensation for lost income. In addition, the insurance provides payments to dependents of workers if death occurs. Employers pay the cost of the insurance.

4. Unemployment Insurance
Unemployment insurance provides cash payments for a limited number of weeks to workers who lose their job. It is financed by a payroll tax paid by employers.

OASDHI(Old-age, Survivors, Disability, and Hospital Insurance)

Coverage
Old-age, survivors, disability, and hospital insurance covers most U.S. workers, including nearly all workers in private industry and most public employees. It does not cover some state and municipal employees and certain self-employed people. It also does not cover some foreign workers admitted temporarily to the United States. Most workers not covered by Social Security contribute to other retirement and disability funds.

Administration
The OASDHI program consists of old-age, survivors, and disability insurance (OASDI) and Medicare. The U.S. government administers OASDI through an independent agency called the Social Security Administration. Medicare is managed by the Health Care Financing Administration, an agency of the U.S. Department of Health and Human Services.

Workers in jobs covered by Social Security must have a Social Security card. Each card has a number that enables the Social Security Administration to monitor the worker's earnings. Any U.S. resident may apply for a card at a local Social Security office. Applicants must present proof of age and citizenship or alien status.

Old-age, survivors, and disability insurance forms the foundation of the U.S. Social Security system. It protects almost all of the nation's workers.

Eligibility
Workers or their families become eligible for retirement or survivors benefits after the workers earn a specified number of work credits in jobs covered by Social Security. The number of work credits earned depends on the amount of money the person earns per year. But workers may receive only four work credits each year, no matter how much money they earn.

To qualify for benefits, workers must be fully insured or currently insured. Fully insured workers are those who have earned 40 work credits. Workers who reached age 62 before 1991 needed fewer than 40. Fully insured workers are entitled to complete old-age, survivors, disability, and hospital coverage. Currently insured workers are those who have earned at least six work credits during the 39 months before their death or disability. They qualify for limited survivors coverage.

Workers disabled before age 31 may collect disability benefits if they have earned at least six work credits and if they have earned work credit for at least half the time between their 21st birthday and the time they became disabled. Workers disabled after their 31st birthday generally need at least five years of work credit in the 10-year period before they became disabled.

Benefits
To collect benefits, retired or disabled workers or their survivors must file a claim with the Social Security Administration. Benefits are paid monthly, except for lump-sum death payments.

Insured workers may collect full retirement benefits when they reach retirement age. Beginning in 2003, the retirement age began to increase gradually from 65 to 67. It will rise by two months per year to age 66 by 2009 and remain fixed through 2020. It will then increase gradually to age 67 by 2027.

Workers also may collect retirement benefits as early as age 62. But such workers get a permanently reduced benefit. The amount of reduction depends on their age at retirement. Workers who retire at age 62 collect 80 percent of the monthly amount they would have received on retiring at age 65. Workers who retire at age 62 between 2005 and 2016 will collect 75 percent of the full monthly benefit. After that, the benefits received by 62-year-olds who are entering retirement will gradually be reduced until those retiring in 2022 or later will get only 70 percent of the full monthly benefit.

To collect disability benefits, workers must have a severe physical or mental condition. The condition must have lasted at least 12 months or must be expected either to last that long or to result in death.

Social Security also provides benefits to the families of retired or disabled workers. Spouses may collect full benefits at age 65. A spouse's full benefit equals 50 percent of the worker's benefit. Spouses may collect reduced benefits if they apply while age 62 to 64. The age at which spouses may collect full benefits, like that of retired workers, will gradually increase to 67 between 2003 and 2027. Additional benefits are paid to the child of a retired or disabled worker if the child is (1) unmarried and under 18, (2) under 19 and in elementary or high school, or (3) 18 or older and unmarried and disabled since before age 22. A spouse under age 62 may also claim benefits if he or she is caring for a child who is under age 16 or disabled. A divorced wife may collect benefits based on her former husband's work record if the marriage lasted 10 years or more.

When an insured worker dies-either before or after retirement-the worker's dependents may be eligible for a monthly survivors benefit. Payments may be made to a surviving spouse age 60 or older, a surviving unmarried child under age 18, or a surviving, disabled, unmarried child age 18 or older who became disabled before age 22. Monthly survivors benefits also may go to a surviving disabled spouse, a disabled divorced spouse age 50 to 60, dependent parents age 62 or older, or a surviving spouse under 62 years of age who is caring for either a disabled child or a child under 16 who is collecting benefits. Payments are based on the benefits the worker was receiving at the time of death, or would have received at retirement. The spouse also receives a single lump-sum payment after the worker's death.

Total benefits payable on a worker's earnings record may not exceed the maximum family benefit. This amount varies from 150 to 180 percent of the worker's basic monthly benefit. When the total benefits exceed the maximum, each dependent's or survivor's benefit is proportionately reduced.

How Benefits are Figured
The amount workers receive in OASDI benefits depends on their average lifetime earnings, over a maximum of 35 years, in jobs covered by Social Security. A worker who has paid the maximum in Social Security taxes receives a larger benefit than a worker who has paid less. However, workers with low lifetime earnings collect benefits that are greater in proportion to their earnings than are the benefits collected by workers with high lifetime earnings.

When calculating OASDI benefits, the government wage-indexes the worker's covered earnings-that is, it adjusts the earnings record to reflect the rise in wages over a working lifetime. The government also automatically raises benefits to reflect increases in the cost of living. In addition, people who work beyond the normal retirement age without claiming benefits collect a bonus. This bonus provides 4.5 percent more in benefits for each year between ages 65 and 70 that such workers did not claim benefits. It is scheduled to increase gradually until it reaches 8 percent per year of delay in 2008.

Some higher-income individuals and couples must pay federal income tax on their benefits. This tax revenue helps finance the Social Security program.

Medicare

Medicare is a United States government health insurance program that covers nearly all people age 65 or older. It also covers certain people with kidney disease and people who have received Social Security disability benefits or Railroad Retirement Board disability benefits for at least two years. The Railroad Retirement Board is a federal agency that administers a pension system for railroad employees.

Medicare consists of two types of insurance-hospital insurance and medical insurance. Hospital insurance helps pay the cost of hospital care, certain skilled nursing facility care after leaving the hospital, and home health services. Medicare also has an optional hospice benefit that is available for terminally ill patients. Hospice is a type of home-centered health care for people dying of an incurable illness. Medicare hospital insurance is financed by a tax paid by workers and their employers and by self-employed people.

Medicare medical insurance helps pay for physicians' services and certain other costs not covered by hospital insurance. Medical insurance is financed by the federal government and by monthly payments from members. In 2003, Congress passed legislation to add prescription drug coverage to Medicare.

Eligible people can get Medicare coverage by signing up at a Social Security Administration office or, if appropriate, a Railroad Retirement Board office. Medicare beneficiaries normally must pay premiums and some of their own medical expenses. But for certain low-income people, a welfare program called Medicaid pays part or all of these premiums and expenses. Medicare is managed by the Health Care Financing Administration of the U.S. Department of Health and Human Services.

Critically reviewed by the Health Care Financing Administration

Unemployment Insurance

Unemployment insurance is a means of protecting workers who are out of work and looking for employment. These unemployed workers receive cash payments, usually each week for a limited period. Besides aiding individual workers, unemployment insurance may help limit slumps in business activity by enabling unemployed people to buy goods and services. Such purchases help preserve existing jobs. Most industrial nations have government-sponsored unemployment insurance systems.

The first known unemployment insurance plan was adopted in Baisle Town (now Basel), Switzerland, in 1789. In 1911, Britain set up an unemployment insurance system that required the participation of workers and employers.

In 1932, Wisconsin adopted the first unemployment insurance law in the United States. A federal-state unemployment insurance plan was established by the Social Security Act of 1935. By 1937, all the states had unemployment insurance laws that met the requirements of the Social Security Act. Canada adopted an unemployment insurance program in 1940.

Workers' Compensation

Workers' compensation is an insurance program that provides pay and medical help for workers who are injured on the job or become ill because of work conditions. Workers' compensation also provides benefits to the dependents of such workers in cases where death occurs. Loss of income due to accidents on the job has been a major problem of workers since the introduction of machine methods to industry. Today, most industrialized countries have laws or private programs for workers' compensation.

In the United States, almost all states require employers to provide workers' compensation coverage for employees. Federal laws provide such coverage for employees of the federal government and certain other workers.

Injured workers normally receive about two-thirds of their salary while disabled. However, most states limit the size of cash payments to any individual. Medical benefits are unlimited. Most states provide training in new jobs for workers who cannot continue in their old work because of injuries.

Some states limit workers' compensation coverage for farm and domestic workers as well as for workers employed in small businesses. In most states, employers pay the full cost of workers' compensation benefits through taxes or insurance premiums. In a few states, such costs are financed with money from the state's general fund.

Each state administers its own compensation program, but the level of state agency involvement varies considerably among the states. Federal compensation programs are administered by the Office of Workers' Compensation Programs in the Department of Labor.

Employers' liability laws preceded workers' compensation laws. They made an employer responsible for injuries to workers caused by defective machinery or by negligence on the part of management. In 1880, Britain adopted one of the first such laws.

The first workers' compensation laws were passed in Germany in 1883. Austria passed similar laws in 1887. Norway, Finland, France, Denmark, and Britain passed such laws in the 1890's. During the early 1900's, most other European nations passed workers' compensation laws.

In the United States, Maryland passed the first state compensation law in 1902. But the U.S. Supreme Court declared the Maryland law and other compensation acts of that decade unconstitutional. The growth of workers' compensation coverage increased greatly after Congress passed the Federal Employees' Compensation Act of 1916. This law provided benefits for certain federal civilian workers, or their survivors, in connection with injuries or death on the job.

Ten states passed workers' compensation laws in 1911. Wisconsin was the first. In 1948, the last of the then 48 states enacted a workers' compensation program. Alaska and Hawaii had such laws when they became states in 1959. In several states, however, workers' compensation coverage by employers is voluntary. An average company spends an amount equal to about 2 percent of its payroll on workers' compensation protection.

Other Government Insurance Programs

Certain agencies of the U.S. government provide special types of insurance. For example, the Federal Deposit Insurance Corporation insures bank deposits. If an insured bank cannot pay its depositors, the corporation pays them, up to a maximum of $100,000 for each bank account.

Farmers can obtain coverage against crop losses from flood, drought, and other natural perils through the government's Farm Service Agency. The Federal Insurance Administration provides protection against losses from flood damage in areas where floods often occur. The government also provides life insurance to members of the armed forces.

Crop Insurance

Crop Insurance provides protection for a farmer's income in case bad weather or other unavoidable hazards cause crop losses. There are two main types of crop insurance sold in the United States--multiperil insurance and hail insurance. Both types are designed to provide coverage for only a fraction of a farmer's crop.

Multiperil insurance is sold by private agents. However, the Farm Service Agency of the U.S. Department of Agriculture guarantees the availability of money for the payment of claims. Multiperil insurance covers losses due to almost all natural causes, including disease, drought, flood, and insects. It is available for corn, cotton, tobacco, wheat, and about 50 other crops. In some areas, multiperil insurance also protects farmers against large drops in the market price of a crop.

Hail insurance is sold by private agents, whose companies also pay the claims on crop losses. Its coverage is limited to losses caused by hail, wind, or fire. This insurance is restricted to only a few causes in order to offer some protection for the insurer. A private insurer, unlike a government agency, could be ruined if crop losses occurred over a wide area.