The legally required employee benefits constitute nearly a quarter of the benefits package that employers provide. These benefits include employer contributions to Social Security, unemployment insurance, and workers compensation insurance. Altogether such benefits represent about twenty-one and half percent of payroll costs. Social Security Social Security is the federally administered insurance system. Under current federal laws, both employer and employee must pay into the system, and a certain percentage of the employees salary is paid up to a maximum limit.
Social Security is mandatory for employees and employers. The most noteworthy exceptions are state and local government employees. The Social Security Act was passed in 1935. It provides an insurance plan designed to indemnify covered individuals against loss of earnings resulting from various causes. This loss of earnings may result from retirement, unemployment, disability, or the case of dependents, the death of the person supporting them.
Social Security does not pay off except in the case where a loss of income through loss of employment actually is incurred. In order to be eligible for old age and survivors insurance (OAS I) as well as disability and unemployment insurance under the Social Security Act, an individual must have been engaged in employment covered by the Act. Most employment in private enterprise, most types of self-employment, active military service after 1956 and employment in certain nonprofit organizations and governmental agencies are subject to coverage under the Act. Railroad workers and United States civil service employees who are covered by their own systems and some occupational groups, under certain conditions, are exempted form the Act The Social Security Program is supported by means of a tax levied against an employees earnings which must be matched buy the employer. Self-employed persons are required to pay a tax on their earnings at a rate, which is higher than that paid by employees but less than the combined rates paid by employees and their employers.
In order to receive old age insurance benefits, a person must have reached retirement age and be fully insured. A full-insured person is one who must have earned at least $50 in a quarter for a period of 40 quarters. It is possible for an individual who dies or becomes totally disabled at an early age to be classified as fully insured with less than 40 quarters. To receive old age insurance benefits, covered individuals must also meet the test of retirement. To meet this test, persons under 70 cannot be earning more than an established amount through gainful employment.
This limitation of earnings does not include income from sources other than gainful employment such as investments or pensions. Social security retirement benefits consist of those benefits which individuals are entitled to receive in their own behalf, called the primary insurance amount, plus supplemental benefits for eligible dependents. These benefits can be determined from a prepared table. There are also both minimum and maximum limits to the amount that individuals and their dependents can receive. The Social Security program provides benefit payments to workers who are too severely disabled to engage in gainful employment. In order to be eligible for such benefits, an individuals disability must have existed for at least 6 month and must be expected to continue for at least 12 months.
Those eligible for disability benefits must have worked under Social Security for a t least 5 out of the 10 years before becoming disabled. Disability benefits, which include auxiliary benefits for dependents, are computed on the same basis as retirement benefits and are converted to retirement benefits when the individual reaches the age of 65. The survivors insurance benefits represent the form of life insurance that is paid to members of a deceased persons family who meet the requirements for eligibility. As in the case of life insurance, the benefits that the survivors of a covered individuals receive may be far in excess of their cost to this individual.
Survivors of individuals, who were currently insured, as well as those who were fully insured at the time of death, are eligible to receive certain benefits, provided that the survivors meet other eligibility requirements. A currently insured person is one who has been covered during at least six out of the thirteen quarters prior death. Many people think of Social Security as a retirement program. But, retirement benefits are just one part of the Social Security program. Some of the Social Security taxes person pays go toward survivors insurance. In fact, the value of the survivors insurance he / she has under Social Security is probably more than the value of his / her individual life insurance.
When someone who has worked and paid into Social Security dies, survivor benefits can be paid to certain family members. These include widows, widowers, children, and dependent parents. Anyone earns survivors insurance by working and paying Social Security taxes. When someone dies, certain members of his / her family may be eligible for survivors benefits if the person worked, paid Social Security taxes and earned enough credits. You can earn a maximum of four credits each year. The number of credits you need depends on your age when you die.
The younger a person is, the fewer credits he or she needs to have family members be eligible for survivors benefits. But nobody needs more than forty credits to be eligible for any Social Security benefits. Under a special rule, benefits can be paid to your children and your spouse, who is caring for the children, even if you do not have the number of credits needed. They can get benefits if you have credit for one and one-half years of work in the three years just before your death. When you die, Social Security survivors benefits can be paid to your: (a) Widow or widower - full benefits at age 65 or older (if born before 1938) or reduced benefits as early as age 60. A disabled widow or widower can get benefits at 50 60.
The surviving spouses benefits may be reduced if he or she also receives a pension from a job where Social Security taxes were not withheld. Widow or widower - at any age if he or she takes care of your child under age 16 or disabled who get benefits. (b) Unmarried children under age 18 or up to age 19 if they are attending elementary or secondary school full time. Your child can get benefits at any age if he or she was disabled before age 22 and remained disabled. Under certain circumstances, benefits also can be paid to you stepchildren, grandchildren, or adopted children. (c) Dependent parents at 62 or older.
Some people find Social Security taxes an unwelcome deduction from the family earnings. They are thinking about how they could use the money to pay bills or plan for their children's college education. But the illness or injury-or even the death-of a parent in a family with young children can suddenly make Social Security a very important part of the family's survival. Those paycheck deductions for Social Security taxes could make it possible for the family to stay together. For example, some families can get as much as $2, 000 a month when the worker is disabled. This fact sheet focuses on benefits paid to the children when one or both parents become disabled, retire or die.
When people think of Social Security benefits, they usually think of older men and women who are retired or who are widows or widowers. If you find it difficult to picture a small child as a Social Security beneficiary, you may be surprised to learn that 3. 8 million children receive approximately $1. 4 billion each month because one or both of their parents are disabled, retired or deceased. Those dollars are helping provide the necessities of life for the family members and helping make it possible for those children to complete high school.
When a parent becomes disabled or dies, Social Security benefits help stabilize the young family's financial future. The child can be the worker's biological child, adopted child or stepchild. The child also could be a dependent grandchild. To get benefits, a child must have a parent (s) who is disabled or retired and entitled to Social Security benefits, or have a parent who died after having worked long enough in a job where he or she paid Social Security taxes.
The child also must be under age 18; be 18-19 years old and a full-time student (no higher than grade 12); or be 18 or older and disabled. The disability must have started before age 22. Normally, benefits stop when the child reaches age 18 unless he or she is disabled. Five months before the beneficiary's 18 th birthday, we send the child a notice that benefits will end at age 18, unless he or she is a full-time student at a secondary (or elementary) school. If the beneficiary is under age 19 and still attending a secondary or elementary school, he or she must notify us by completing a statement of attendance. The benefits then will continue until he or she graduates or until two months after becoming age 19, which ever comes first.
If a child who is receiving Social Security benefits is in the mother's (or father's) care, the parent may be able to receive benefits until the child reaches age 16. The child's benefits continue, but the parent's benefits stop unless he or she is age 60 or over and is receiving benefits as a widow or widower or is age 62 or older and receiving retirement benefits. Within a family, each child may receive up to one-half of the worker's full retirement or disability benefit, or 75 percent of the deceased parent's basic Social Security benefit. However, there's a limit to the amount of money that can be paid to a family. The family maximum payment is determined as part of every Social Security benefit computation and can be from 150 to 180 percent of the worker's full benefit amount. If the total amount payable to all family members exceeds this limit, each person's benefit is reduced proportionately (except the worker's) until the total equals the maximum allowable amount.
As an example of monthly benefits, let's say Tom Brown earns $30, 000 a year, is age 35, married and has one child. Tom is severely injured in a car accident and is found to be eligible for Social Security disability benefits. Tom, his wife and their child receive $1, 640 each month. As another example of how Social Security benefits can help the young family, Sara was age 45 and earning $50, 000 when she died, leaving her husband and two children. The husband and children receive $2, 370 each month based on Sara's earnings record. If you were like most people, you would rather work than stay home.
But working is a big step for a person with a disability. Social Security and SSI have special rules called "work incentives" to help you overcome some problems. These work incentives include cash benefits while you work; Medicare or Medicaid while you work; help with any extra work expenses you may have as a result of your disability; and help with education, training and rehabilitation to start a new line of work. Social Security disability insurance benefits are paid to people with disabilities or to individuals who are blind who have worked under Social Security and to their dependents.
SSI disability benefits are paid to people with disabilities or to individuals who are blind who have little income and few resources. Social Security beneficiaries with low income and few resources also may qualify for SSI. Although there are differences between Social Security and SSI, the work incentives under both programs are designed to accomplish the same objective: to provide support and assistance while you attempt to return to work or as you enter the workforce for the first time. The disabled individual will receive his or her full monthly Social Security benefit for a year after the individuals return to work. If he or she continues to work beyond that while still disabled, the persons eligibility for monthly cash benefits will continue for at least another 36 months. The person usually can have a trial work period of nine during which his or her benefits will not be affected by your earnings regardless of how much you earn.
A trial work month is any month in which his or her total earnings are more than $200 or, if he or she are self-employed, the person will earn more than $200 (after expenses) or spend more than 40 hours in the persons own business. Before the person will start loosing benefits he or she can earn more than $500 a month. Nearly every American-man, woman and child-has Social Security protection, either as a worker or as a dependent of a worker. Most women did not work outside the home. Today, the role of women is far different. Nearly 60 percent of all women are in the nation's workforce.
Many women work throughout their adult lives. Although Social Security always has provided benefits for women, it has taken on added significance. More women work, pay Social Security taxes and earn credit toward a monthly income for their retirement. Working women with children earn Social Security protection for themselves and their families. This could mean monthly benefits to a woman and her family if she becomes disabled and can no longer work.
If she dies, her survivors may be eligible for benefits. Although some women choose lifetime careers outside the home, many women work for a few years, leave the labor force to raise their children, and then return to work. Some women choose not to work outside their homes. They usually are covered by Social Security through their husband's work and can receive benefits when he retires, becomes disabled or dies. Whether a woman works, has worked or has never worked, it is important that she knows exactly what Social Security coverage means to her.
She also should know about Social Security coverage for anyone she may hire as a household worker or provider of childcare. She needs to know what to do if she changes her name. And she needs to know that if she receives a pension for work not covered by Social Security, her Social Security benefits could be affected. Unemployment Compensation Unemployment insurance provides workers, whose jobs have been terminated through no fault of their own.
Monetary payments for a given period of time or until they find a new job. Unemployment payments are intended to provide an unemployed worker time to find a new job equivalent to the one lost without major financial distress. Without employment compensation many workers would be forced to take jobs for which they were overqualified or end up on welfare. Unemployment compensation has also been justified in terms of providing the economy with consumer spending during periods of economic adjustment. Unemployment compensation is a form of insurance designed to provide funds to employees who have lost their jobs and are seeking other jobs.
Title IX of the Social Security Act of 1935 requires employers to pay taxes for unemployment compensation. The law was written in such a manner as to encourage individual states to establish their own unemployment systems. If a state established its own unemployment compensation system according to prescribed federal standards, the proceeds of the unemployment taxes paid an employer go to the state. By 1937, all states and the District of Columbia had adopted acceptable unemployment compensation plans.
Employees who have been working in employment covered by the Social Security Act and who are laid off may be eligible for unemployment insurance benefits during their unemployment for a period up to twenty-six weeks. Eligible persons must submit an application for unemployment compensation with their state employment agency, register for available work and be willing to accept any suitable employment that may be offered to them. However, the term suitable permits individuals to enjoy considerable discretion in accepting or rejecting job offers. The amount of the compensation that workers are eligible to receive which varies among states, is determined by their previous wage rates and previous periods of employment.
Funds for unemployment compensation are derived from a federal payroll tax based upon the wages paid to each employee, up to an established maximum. The major portion of this tax is refunded to the individual states, which operate their unemployment compensation programs is accordance with minimum standards prescribed by the federal government. While not required by law, in some industries unemployment compensation is augmented by supplemental unemployment benefits (SUBs) financed by the employer. These benefits were introduced in 1955 when the United Auto Workers successfully negotiated a SUB plan with the auto industry which established a pattern for other industries. This plan enables an employee who is laid off to draw, in addition to state unemployment compensation, weekly benefits from the employer that are paid from a fund created for this purpose.
Many SUB plans in recent years have been liberalized to permit employees to receive weekly benefits when the length of their workweek is reduced and to receive a lump-sum payment if their employment is terminated permanently. The amount of these benefits is determined by length of service and wage rate. Employer liability under the plan is limited to the amount of money that has been accumulated within the fund from employer contributions based on the total hours of work performed by union members. In the United States, the unemployment insurance program is based on a dual program of federal and state statutes. The program was established by the federal Social Security Act in 1935. Much of the federal program is implemented through the Federal Unemployment Tax Act.
Each state administers a separate unemployment insurance program, which must be approved by the Secretary of Labor, based on federal standards. The state programs are explicitly made applicable to areas normally regulated by laws of the United States. There are special federal rules for nonprofit organizations and governmental entities. Which employees are eligible for compensation, the amount they receive, and the period of time benefits are paid are determined by a mix of federal and state law. To support the unemployment compensation systems a combination of federal and state taxes are levied upon employers. State employers are normally based on the amount of wages they have paid, the amount they have contributed to the unemployment fund, and the amount that their discharged employees have been compensated from the fund.
Any state tax imposed on employers (and certain credits on that tax) may be credited against the federal tax. The proceeds from the unemployment taxes are deposited in an Unemployment Trust Fund. Each state has a separate account in the Fund to which deposits are made. Within the fund there are also separate accounts for state administrative costs and extended unemployment compensation. During economic recessions the federal government has provided emergency assistance to allow states to extend the time for which individuals can receive benefits. This has been accomplished by transferring money to a state from its Extended Unemployment Account by passing a temporary law authorizing the transfer.
The ability of a state to tap into this emergency system is usually dependent on the employment rate reaching a designated percentage within the state or the nation. Some states provide addition unemployment benefits to workers who are disabled. Financing for the California disability compensation program comes from a tax on employees. The Railroad Unemployment Insurance Act provides unemployment compensation for workers in the railroad industry who lose their jobs. Federal Unemployment Tax. Unemployment insurance is a Federal-State program jointly financed through Federal and State employer payroll taxes.
Generally, employers must pay both State and Federal Unemployment taxes if: (1) they pay wages to employees totaling $1, 500, or more, in any quarter of a calendar year; or, (2) they had one employee during any day of a week during 20 weeks in a calendar year, regardless of whether or not the weeks were consecutive. However, some State laws differ from the Federal law and you should check with your State Employment Security Agency to learn the exact requirements. Federal Unemployment Tax. The Federal Unemployment Tax (FUTA), paid to the Internal Revenue Service (Form IRS 940), covers the costs of administering the Unemployment Insurance and Job Service programs in all States. In addition, FUTA pays one-half of the cost of extended benefits and provides for a fund from which States may borrow, if necessary, to pay benefits. State Unemployment Tax.
The State Unemployment Tax, paid to State Employment Security Agencies, is used solely for the payment of benefits to workers who have lost their through no fault of their own. In addition, these taxes are used to pay one-half the cost of extended benefits. Domestic employees. Employers of domestic employees must pay State and Federal unemployment taxes if they cash wages to household workers totaling $1, 000, or more, in any calendar quarter of the current or preceding year. A household worker is an employee who performs domestic services in a private home, local college club, or local fraternity or sorority chapter.
Employers of agricultural employees must pay State and Federal unemployment taxes if: (1) they pay cash wages to employees of $20, 000, or more, in any calendar quarter; or (2) in each of 20 different calendar weeks in the current or preceding calendar year, there was at least 1 day in which they had 10 or more employees performing service in agricultural labor. The 20 weeks do not have to be consecutive weeks, not must they be the same 10 employees, nor must all employees be working at the same time of the day. Tax rate. The FUTA tax rate is 6. 2% of taxable wages. The taxable wage base is the first $7, 000 paid in wages to each employee during a calendar year.
Employers who pay the State unemployment tax, on a timely basis, will receive an offset credit of 5. 4% regardless of the rate of tax they pay the State. Therefore, the net Federal tax rate is 0. 8%. The issue of the Federal Unemployment Tax Act is that whether the national employment the security system should be reformed and updated. The FUTA came into existence in 1939 to guarantee financing for a national employment security system.
The idea was for employers to pay the costs of administering the unemployment compensation and national job placement system. In return, employers would receive assistance in recruiting new workers and the unemployed would be able to find jobs faster. Unemployment insurance pays benefits to qualified workers who are unemployed and looking for work. Unemployment payments (compensation) are intended to provide an unemployed worker time to find a new job equivalent to the one lost without major financial distress.
Benefits are paid as a matter of right and are not based on need. In the United States, the unemployment insurance program is based on a dual program of federal and state statutes. The program was established by the federal Social Security Act in 1935. Much of the federal program is implemented through the Federal Unemployment Tax Act. Each state administers a separate unemployment insurance program within minimum guidelines established by Federal Statute. Who is eligible, the amount they receive, and the period of time benefits are paid are determined by each state.
To support the unemployment compensation systems a combination of federal and state taxes are levied upon employers. The proceeds from the unemployment taxes are deposited in an Unemployment Trust Fund. Each state had a separate account in the Fund to which deposits are made. The Federal Government provides funding for benefits for unemployed federal employees and ex-military personnel.
The Railroad Unemployment Insurance Act provides unemployment compensation for workers in the railroad industry who lose their jobs. Unemployment Compensation for Federal Employees is the benefit program for unemployed federal employees. Funding comes from the Federal Government and is distributed through State agencies. Federal wages are not reported to a state unemployment compensation agency until a claim is filed. The claimants federal wages will be assigned to the state of the last duty or the state of residency if the duty station was outside the United States, if covered work was dome in the state after leaving federal service, or if employer was the Federal Emergency Management Agency (FEMA).
This is the only Federal agency that does not report wages to the last duty station. Benefits amounts and length of weeks benefits can be paid are determined by the law of the state in which the claim is made. Federal wages assigned to another state may be transferred to the resident state under the Combined Wage Claim program. When a claim is filed following a period of federal employment, the claimant must bring all forms the federal agency furnished upon departure. These include the SF-8 Notice to Federal Employees About Unemployment Compensation and the Notification of Personnel Action. Also bring proof of the federal wages, if available.
Certain services for the federal government are not covered by unemployment compensation. The agency worked for must certify that the services were covered under the UCF E program. Information from a federal agency regarding the location of the duty station, the wages, and whether the employment was covered, are final and binding. If claimants disagree with any of this information, they have the right to ask the agency to reconsider its findings and appeal the denial of benefits. Unemployment Compensation for Ex-Service members is the benefit program for ex-military personnel to provide weekly income to meet basic needs while searching for employment.
Those who were on active duty with a branch of the United States military may be entitled to unemployment benefits based on that service. The military wages are assigned to the state where they first file a new claim after the separation from active duty. They must meet the following requirements: The claimants must have been separated under honorable conditions. They must have completed a full term of service, or if released early, it must have been for a qualifying reason. And they served on active duty in reserve status as a member of a National Guard or Reserve component continuously for 90 or more days. Unemployment Compensation for Ex-Service benefits are paid under the same conditions as benefits based on other employment.
However, military wages, for claims purposes, are determined by pay grade at time of separation. A wage table furnished by the federal government which shows the equivalent civilian wage for each military pay grade is used for the determination. Information the military furnished about length of service and the reason for separation is considered as final and binding. If any of this information is incorrect on the Form DD-214, or other military documents, it is the responsibility of the claimants to contact the service to have the information reviewed by them or the Department of Veterans Affairs. Workers Compensation Workers compensation is meant to protect employees from loss of income and to cover extra expenses associated with job-related injuries or illness. Accidents in which the employee does not lose time from work, accidents in which the employee loses time from work, temporary partial disability, permanent partial or total disability, death, occupational diseases, non crippling physical impairments, such as deafness, impairments suffered at employer-sanctioned events, such as social events or during travel to organization business, and injuries or disabilities attributable to an employers gross negligence are the types of injuries and illnesses most frequently covered by workers compensation laws.
Since 1955, several states have allowed workers compensation payments for job-related cases of anxiety, depression, and certain mental disorders. Although some form of workers compensation is available in all 50 states, specific requirements, payments, and procedures vary among states. Certain features are common to virtually all programs: The laws generally provide for replacement of lost income, medical expense payments, rehabilitation of some sort, death benefits to survivors, and lump-sum disability payments. The employee does not have to sue the employer to get compensation. The compensation is normally paid through an insurance program financed through premiums paid by employers. Workers compensation insurance premiums are based on the accident and illness record of the organization.
Having a large number of paid claims results in higher premiums. Medical expenses are usually covered in full under workers compensation laws. It is a no-fault system; all job-related injuries and illnesses are covered regardless of where the fault for the disability is placed. Workers compensation coverage is compulsory in all but a few states. In these states, it is elective for the employer. When it is elective, any employers who reject the coverage also give up certain legal protections.
Benefits paid are generally provided for four types of disability: permanent partial disability, permanent total disability, temporary partial disability, and temporary total disability. Before any workers compensation is reorganized, the disability must be shown to be work-related. This usually involves an evaluation of the claimant by an occupational physician. One major criticism of workers compensation involves the extent of coverage provided by different states.
The amounts paid, ease of collecting, and the likelihood of collecting all vary significantly from state to state. After a decade of yearly double-digit increases in the cost of workers compensation, in the early 1990 s at least 35 states began to make changes in their workers compensation laws. These changes included tighter eligibility standards, benefit cuts, improved workplace safety, and campaigns against fraud. Recent data indicate that these changes are paying off. The rates of increases in the cost of workers compensation have slowed considerably, and in 1993 the cost actually declined.
From 1993 through 1996, the cost of workers compensation insurance continued to decrease. State and federal workers compensation insurance is based on the theory that the cost of industrial accidents should be considered as one of the costs of production and should ultimately be passed on to the consumer. Individual employees should neither be required to stand the expense of their treatment or loss of income nor be required to be subjected to complicated, delaying, and expensive legal procedures. In most states, workers compensation insurance is compulsory. Only in New Jersey and Texas is it elective. When compulsory, every employer subject to it is required to comply with the laws provisions for the compensation of work injuries.
The law is compulsory for the employee also. When elective, the employers have the option of either accepting or rejecting the law. If they reject it, they lose the customary common law defenses assumed risk of employment, negligence of a fellow servant, and contributory negligence. Workers compensation laws typically provide that injured employees will be paid a disability benefit that is usually based on a percentage of their wages. Each state also specifies the length of the period of payment and usually indicates a maximum amount that may be paid.
In addition to the disability benefits, provision is made for payment of medical and hospitalization expenses to some degree, and in all states, death benefits are paid to survivors of the employee. Commissions are established to adjudicate claims at little or no expense to the claimant. Two methods of providing for workers compensation risks are commonly used. One method is for the state to operate an insurance system that employers may join and are required to join. Another method is for the states to permit employers to insure with private companies, and in some states, employers may be certified by the commission handling workers compensation to handle their own risks without any type of insurance. Under most state and private insurance plans, the employer and the employee gain by maintaining good safety records.
Disability payments from other sources do not affect your Social Security disability benefits. But, if the disability payment is workers compensation or another public disability payment, your Social Security benefits may be reduced. After the reduction, your total public disability benefits should not exceed eighty percent of your average current earnings before you became disabled. These include your combined family Social Security benefits, your workers compensation payment and any other public disability payment you receive. The workers compensation payment and another type of public disability payment are kinds of payments that affect your Social Security disability benefits. Workers compensation payment is one that is made to a worker because of a job-related injury and illness.
It may be paid by federal or state workers compensation agencies, employers or insurance companies on behalf of employers. Public disability payments that may affect your Social Security benefits are those paid under a federal, state or local government law or plan that pays for conditions that are not job-related. They differ from workers compensation because the disability that the worker has may not be job related. Examples are civil service disability benefits, military disability benefits, state temporary disability benefits and state or local government retirement benefits that are based on disability. The higher costs of providing workers' compensation benefits in risky occupations may lead employers to improve safety in order to lower their insurance costs. The 75 th anniversary of the Federal Employees' Compensation Act (FECA) is an opportune time to reflect on broad policy issues of no-fault work injury liability statutes.
Policy discussions regarding occupational safety and health usually are divided into two distinct parts with government standards established under the Occupational Safety and Health Administration (OSHA) as the regulatory device for encouraging prevention and workers' compensation considered as the program for providing benefits to disabled workers. The much debated standards approach established under the Occupational Safety and Health Act draws attention to the role of workers' compensation as apart of the policy mix for improving the health and safety of employees. General issues of safety and health and their effect on employers and employees are first considered in this article. Then the mechanics of determining workers' compensation benefits in the private sector and how this process relates to employer prevention incentives are briefly reviewed. Evidence on the effect of workers' compensation on safety and health is also discussed. Finally, the specific arrangements by which Federal agencies are charged for the work injury liabilities of their employees are compared with arrangements used in the private sector to determine whether the Federal arrangements are consistent with the objective of encouraging prevention of injury and illness.
All workers' compensation systems in the United States require employers to guarantee that compensation to injured workers will be paid. Some large employers may self-insure but most employers meet this obligation by purchasing insurance. Several States offer workers' compensation insurance in competition with commercial carriers, while other States have a monopoly insurance fund. The largest source of workers' compensation, however, is insurance purchased from private companies.
Workers' compensation insurance rates are based on the riskiness of the firm's industrial classification within each State. Approximately 600 groupings are used to determine the firm's "manual" rate, which is stated as a percent of payroll. If a firm is large enough, the manual rate will begin to be adjusted by the experience of the individual firm. The larger the firm's payroll, the larger will be the degree of this experience rating. In a typically risky industry, firms with approximately 1, 800 employees will have premiums based on their own experience.
It is obvious from this cursory review of the rate-setting procedure, that the system is quite subtle in its attention to the accident and disease experience of the individual firm. Within the workers' compensation community, experience rating is often viewed as a matter of equity-firms with poor claims experience are charged a premium that reflects poor performance and firms with good experience are charged less. However, the potential for using this scheme to regulate behavior is also apparent. Considering the significance of occupational safety and health as a regulatory concern, it is somewhat surprising that so few studies have examined experience rating. It is a complex area to study, largely because of the complicating factor of the employee's response to higher benefits. A straightforward prediction about the effect of experience rating on employers is that higher statutory benefit levels should encourage more prevention.
Benefit levels vary across States and are regularly increased within States. However, higher benefit levels are associated with higher reported levels of accidents. Higher levels of benefits apparently encourage employees to report accidents. It is very difficult to remove this employee effect from any effect higher benefits might have on the employer.
More attention should be paid to how liability arrangements can be improved to create a better workplace environment. Suggestions have been made to allow, or even require, all employers to self-insure deductibles for workers' compensation, and thus sharpen the immediate reward for reduced injuries and disease. Other possibilities for refining the incentives of the experience-rating system are to simplify the relationships between experience and premiums. The current formula is a complex array of actuarially important factors that are beyond the comprehension of most safety and health professionals. Perhaps some elements of the relationship between experience and premiums could be simplified so as to make the reward for improved safety and health more apparent to decision makers. The use of claims experience from the first 3 of the last 4 years is another reason that the linkage between experience and premiums is more obtuse than is desirable.
A final suggestion for improvement in the experience-rating scheme concerns the workers' compensation rate regulation system used in most States. Workers' compensation rates are still heavily regulated in most States, and although there are several mechanisms through which competition can manifest itself, pricing is not explicitly and visibly competitive in most States. This results in a marketplace that is not as effective as one would expect under open competition-and this lack of creative tension is manifested, in part, by producing few new ideas in experience rating. Regulated rates also often subvert the potential of experience rating by holding rates below the level established by the benefit levels and claims. In an effort to please worker groups, State legislators frequently set higher benefit levels, but then seek to appease employers by keeping rates below the level implied by those benefits. This eventually results in rates that make many employers unprofitable customers for insurers, which leads to employers being unable to obtain voluntary insurance.
Because employers are legally obligated to have insurance, they are forced into assigned risk pools. Assigned risk pools, with rates that do not fully reflect benefit levels and claims experience, further diffuse the relationship between experience and premiums, and thus distort the incentives of workers' compensation. Federal employee work injury and disease benefits are paid by the employing agency through regular payroll funding during the 45-day period of pay continuation and then through an annual bill that accounts for benefits paid to the agency's work- disabled employees. This is essentially self-insurance, with extended claims administered through the Office of Workers' Compensation Programs, the Department of Labor agency responsible for administering FECA. This arrangement avoids the imperfections of the experience-rating system, because employers are fully rewarded or penalized for their claims experience. Although employers pay the full amount due, there are some problems.
For example, it is not clear that anyone at the "insurer's" level is inclined to encourage disabled employees to return to work. Another potential problem is that agencies must deal only with the one authorized "insurer." In most private insurance markets, the amount of prevention services is used as a device to attract and retain customers. It is not clear whether the Office of Workers 'Compensation Programs has any incentive to offer these key services. Occupational health and safety is as important a regulatory issue today as it was in the early 20 th century, when it was at the vanguard of government intervention in the labor market. We should clearly be using all available devices for improving the operation of the labor market. Because employees will be compensated for their occupational injuries, it is necessary to take full advantage of the financing of that compensation system in order to create incentives for prevention.
The financing arrangements now in use are quite strong, but reinforcing prevention incentives has never been viewed as their primary purpose. Recognition of this preventive incentive role and attention to its improvement will serve to improve the occupational health and safety of American workers.