Chapter 19 Key terms

Pay-as-you-go-financing

As is true for social insurance programs in most western developed countries, apart from some temporary partial funding, social security benefits are largely financed using what is commonly known as pay as you go financing.

Average Indexed monthly Earnings

Basic idea is to first adjust or index the retiredworker's annual earnings that were subject to OASDI tax up through the second year prior to age 62 for growth in national average wages since the time the wages were earned.

Primary insurance amount (PIA)

Depends on the worker's earnings history. Survivor and disability benefits also depend on the worker's PIA and benefits payable to eligible dependents also depend on the worker's PIA and benefits payable to eligible dependents are expressed as a percent of the worker's PIA.

Survivor benefits

Eligible beneficiaries of fully insured workers who die prior to retirement age receive monthly survivor benefits. These survivor benefits represents about 16% of total OASDI benefits paid in 2001.

COLA Cost of living adjustment

Monthly OASDI benefits are subject to a yearly automatic cost of living adjustments based on the percentage change in the consumer price index. Thus these benefits are protected against reductions in purchasing power due to general price inflation.

OASDI

Old-age, survivors, and disability insurance. Provides monthly retirement benefits, benefits to dependents of deceased workers, and disability benefits.

OASDHI

Old-age, survivors, disability and health insurance. Or formally known as the US social security program Has two broad components: OASDI and medicare program

Means test

Social security benefits are not subject ot a means test. That is people do not have to show that they have little or no income/wealth from any source to qualify for benefits. Instead, benefits are payable for specified contingencies.

Earnings test

Social security benefits are subject to this test. Reduces benefits if earnings exceed specified thresholds under certain conditions. In contrast to a means test, the earnings test does not apply to nonwage / salary income, such as investment income and payments from private pension plans

Retirement Benefits

Sometimes called old-age benefits, after the program's name. Retirement benefits represented about 60% of annual OASDI benefits in 2001

Payroll taxes

With te exception of the use of income taxes on OASDI benefits paid by higher income beneficiaries and interest income on assets in the OASDI trust funds, OASDI benefits are financed almost exclusively from these taxes. These taxes known as Federal Insurance Contribution Act taxes and are shown as FICA on your pay stub.

Disability benefits

Workers who are fully insured with at least 20 quarters of coverage during the 40 quarters ending with the onset of disability are said to be disability insured and qualify for monthly disability benefits; less restrictive eligibility rules apply to younger workers. Disability benefits represent about 18 percent of total OASDI benefits paid in 2001