Social Security and Medicare

History
Present Configuration
Future Projection

GERO100
March 31, 2012

Hopefully we will all be physically able to work until the age of 65, collect retirement and Social Security and live an enriching life until we leave this world. Not all companies financially support their employees with fully funded retirement plans so it is left up to the individual to actively participate in saving for their future. When someone reaches retirement age, if the finances are there, they are usually only a fraction of what they were making as a full-time employee. This is when one hopes of having Social Security and Medicare benefits to supplement our retirement income for a more stable financial future.
There are several reasons the Social Security Act was passed in August 1935. The elderly were living longer due to the availability of better health care, autonomy in workplaces to make jobs easier on individuals, and the modernization of our country’s water systems. Due to this increased longevity in the lives of the elderly, they were also more poverty stricken. An intention of the passage of the Social Security Act was to reduce the burden of loss of income to retired workers aged 65 or older. (Quadagno, 2008) It also included provisions for unemployment insurance, old age assistance and aid to dependent children. Benefits were to be paid based on the primary worker and was to be funded through payroll taxes deducted from the worker’s check. Social security numbers were set up in 1936 in order to track how much an individual paid into social security through their payroll taxes. (www.ssa.gov/history)
In January 1937 the first FICA taxes were collected from worker’s paychecks. The payroll taxes were invested in Special Trust Fund Accounts. Payments would be made as lump sum payments until enough was accumulated in the Trust Fund Accounts to allow monthly distributions. Over the years there have been several revisions made to the Social Security Act. The first being the 1939 Amendments that added dependent’s benefits and survivor benefits. The distribution was changed to monthly and benefits had increased so that the elderly with retirement benefits would receive more than the elderly receiving welfare benefits. (www.ssa.gov/history)
The 1950 Amendments added a first time COLA benefit. The disability insurance program began with the 1954 Amendments and changed with the 1956 Amendments to coverage for disability to workers aged 50-64 and disabled adult children. One more change to the disability benefits occurred in 1960 removing the age restriction to disability benefits. The 1961 Amendments reduced the age for collecting social security to workers aged 62 and older. If collected at age 62, there was a benefit reduction for collecting early. One of the major changes to occur with the Social Security program was the Amendment of 1965 with the introduction of Medicare, which enabled health coverage for almost all Americans aged 65 or older. (www.ssa.gov/history)
Supplemental Security Income program for the poor and annual COLA’s were introduced with the Amendments of 1972. Maintaining a financially secure Social Security program was addressed with the 1977 Amendments when payroll tax deductions were changed from 6.45% to 7.45% and the wage base of workers increased. Further addressing the needs of the financial stability of the Social Security program was the introduction of the 1983 Amendments in which Social Security benefits were to be taxed, federal employees could now be covered under the program and in preparation for future generations, the retirement age was increased to 67 years old. (www.ssa.gov/history)
Provisions were made to the disability program with the introduction of the 1996 Amendments in which individuals could not collect disability payments if they were considered disabled due to drug addiction or alcoholism. New programs were provided to enable disabled beneficiaries to obtain services to enable them to lead a more productive life with the Ticket to Work and Work Incentives Improvement Act of 1999. The hopes were with enhanced programs, the disabled would be able to return to the workforce. With the introduction of the Senior Citizens’ Freedom to Work Act of 2000, retirement age individuals were able to continue to work at their full retirement age and still receive benefits. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 added the voluntary prescription drug program under the Medicare program. With the No Social Security Benefits for Prisoners Act of 2009, prisoners were prohibited from collecting social security benefits while they were in prison or in violation of parole or probation. The most recent change enacted to the Social Security program was the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. This Act instituted a 2% reduction in employee’s payroll taxes. (www.ssa.gov/history)
The state of our current Social Security program is that there are fewer workers to fund the Social Security program through payroll taxes due to the decrease in number of birth rates per woman. Simple math shows that less people to contribute equals less money being funded. Social Security payroll taxes were just reduced from 6.2% to 4.2% per worker. To be eligible to receive Social Security benefits, you must earn 40 “credits” which is equivalent to 10 years of working. The monthly retirement benefit amount is based on the retired workers lifetime earnings. A calculation is made based on the average monthly income from the past 35 years of highest income. If you start taking deductions at the stated retirement age, you will be entitled to full retirement benefits. Distributions can be made early but will have a deduction based on each year that you withdraw before your full retirement age. In 2012, 64.3% of Social Security benefits will be disbursed to retired workers, 4.1% will be disbursed to spouses, 8.2% to widows, widowers, and parents, 8 % to children and 15.5% to disabled workers. (http://www.ssa.gov/policy/docs/quickfacts/stat_snapshot/) From this breakdown, you can tell that over one-third of Social Security benefits are disbursed monthly to individuals other than retired workers.
If we do nothing to the current configuration of our Social Security program, projections are showing that by the year 2035, the Trust Fund will only adequately support 75% of beneficiaries. (Goss, 2010) This is in large part due to the current generation of baby boomers who are living longer, more healthful and active lives. When they start collecting Social Security benefits, they will collect for more years than previous generations. Although Social Security benefits account for approximately 40% of prior earnings for an individual who has worked, this would be a substantial amount of earnings to lose. Some changes that could be made to alleviate some of the budget shortfalls would be to implement a reduction in benefits, further increase the full retirement age, or increase the payroll tax rate back to 6.2% for employees. This additional 2% increase could net the program additional income of approximately $100 billion based on our current 150 million workers. Why the rate was reduced to 4.2% in January 2011 is a mystery to me. Talks of shortages in the Social Security system were already discussed and this did nothing but add to the problem. Once payroll taxes were increased back to 6.2% for employees, then possibly increase it further to 14.4% total for both employers and employees. A 2% increase in payroll taxes on an average yearly income of $38,818 is $14.93 per week. This is a small amount to contribute now to ensure the stability of our Social Security program in future years. (Goss, 2010)
Our Medicare program began in 1965 due to lack of health insurance coverage by individuals aged 65 and older. The main purpose was to ensure all U.S. citizens aged 65 or older would have health insurance coverage at the time when they most needed it. The Medicare program was introduced as an affordable health care plan for these citizens. When Medicare was first authorized as part of the Social Security Act, it was titled, Health Insurance for the Aged. There were 2 parts – part A, HI – hospital insurance and part B, SMI – supplemental medical insurance. Funding for the Medicare program was through payroll taxes paid by both employees and employers and some self-funding. Part A was provided at no cost to the individual while Part B, which was a voluntary enrollment plan, cost approximately $3.00 per month. In 1972, the Social Security Amendments permitted those individuals who were receiving disability benefits to qualify for Medicare as well as those with end-stage kidney disease. Hospice care coverage was added in 1983 for individuals who were given a prognosis of living for an additional 6 months. In 2000, increased payments to plans participating in Medicare were enacted with the hopes of keeping these plans from withdrawing from the program. Due to rising costs of prescription drugs, prescription drug coverage was added to the Medicare program in 2003 through the Medicare Prescription Drug Improvement and Modernization Act, which created Medicare Part D. (EBRI Notes, 2008)
Funding for Medicare Part A, HI is generated through payroll taxes which is currently 2.9% which is a combination of employee and employer rates, taxes from Social Security benefits, interest, premium payments and other sources of revenue. Medicare Part B, SMI is funded from revenue from beneficiary’s premium payments (no more than 25%) and revenues from the federal budget. Financing for Medicare Part D, prescription drug coverage is through beneficiary’s premium payments (25.5%) as well as transfers from the government. (www.medicare.gov)
As a beneficiary of Medicare Part A, hospital insurance, a deductible of $1,156.00 must be met before Medicare payments will begin for an in-hospital stay. Payment is also based on the number of days an individual spends in the hospital. Nursing home stay is calculated differently with no deductible for the first 20 days of the individual’s stay. Hospice and home health care are also covered under Medicare Part A. There is no cost for beneficiaries who have had 10 years of creditable work history. Individuals who purchase Medicare Part A without work history credits will need to pay a monthly premium of $451.00 in 2012. (www.medicare.gov)
Enrollment in Medicare Part B, supplemental health medical insurance, is voluntary. If you are a participant, you are required to pay a monthly premium, which is automatically deducted from your Social Security benefit if you receive one. In 2012, the monthly premium ranges from $99.90-$319.70, based on your 2010 individual gross income. In addition to the monthly premium, there is an annual deductible for all services except home health care. In 2012, the deductible was decreased by $22.00 to $140.00. Some services available for coverage under Medicare Part B include doctor and health care provider services, outpatient care, and durable medical equipment. Some coverage may also be available for preventive care services. (www.medicare.gov)
Participation in Medicare Part D, the prescription drug plan is also voluntary. Costs to participants in 2012 ranges from $11.60-$66.40 based on an individual’s 2010 gross income. There are benefit limits and threshold limits with this plan. Medicare approved private insurance companies run the Medicare Part D program. (www.medicare.gov)
As Medicare was established to ensure adequate health care coverage for older individuals, it is not all encompassing, it does not cover everything, and it may not be affordable for everyone. The private market has developed Medigap policies to help with the lack in coverage that Medicare does not provide. But again, this will entail more expense on an individual.
There is another part of Medicare called Medicare Part C, which is known as Medicare Advantage, which offers health plans through private insurance companies. This plan acts like a traditional HMO and also includes prescription drug coverage. The optional Medigap policy cannot be combined with Medicare Part C.
In 2011, it was estimated that 77 million baby boomers would begin enrolling in Medicare. (Sammut, 2008) The current program will need to make adjustments in order to financially afford this large group of beneficiaries as well as future generations. With this many individuals reaching retirement age, that means less in the work force which in turn means less income from payroll taxes. Future funding will need to come from other sources or an increase in the current payroll taxes to support Medicare will be needed. Increasing Medicare premiums should not be considered as these costs are already a burden for some individuals and will make health care even less affordable for others. Giving individuals the option to opt-out of Medicare by offering them a cash incentive could also be an considered. Some employer plans offer health benefit coverage to retirees which may be better than Medicare coverage. If an individual chooses to continue with their former employer’s coverage and opt-out of Medicare, they should be given a cash buy-out per month. This will decrease Medicare costs for that individual over the course of their lifetime. Medicare and Social Security programs need improvements by the incoming President and the government to ensure the stability of current and future generations. Another consideration to ensure stability of both programs would be to have means testing. There could be a tiered payroll tax system in that the wealthier individuals pay more into the Social Security system – more than the current 4.2%. The government should be held accountable for the times they “borrowed” from the Social Security program when it was solvent and had a surplus. With the guarantee of repayment of these IOU’s, the Social Security program should be able to remain a sustainable program for years to come. This is not a short-term problem. If changes are not made now, future generations may not be able to retire when they have reached retirement age for fear of falling below the poverty level. All the years of establishing the Social Security and Medicare programs and time spent in administering Amendments will be for naught as we will be back to where we were before 1935. We are not a nation that regresses, we are a nation that moves forward, which is what makes us a better nation. Everyone, from ourselves in the way of education on saving for retirement to the policy makers who will make the necessary improvements to Social Security and Medicare, need to work together to ensure a brighter outlook for future generations.

Resources:
Facts from EBRI-the basics of Medicare: updated with the 2008 Board of Trustees Report. (2008). EBRI Notes, 29(5), 13-18.

Goss, S. C. (2010). THE FUTURE FINANCIAL STATUS OF THE SOCIAL SECURITY PROGRAM. Social Security Bulletin, 70(3), 111-125.

Quadagno, Jill, (2008). Aging and the Life Course New York, NY: McGraw-Hill, pp. 98-108, 271-273, 335-339.

Sammut, J. (2008). A HIGH-TAX FUTURE FOR GEN X AND Y? MEDICARE AND THE INTERGENERATIONAL CRISIS. Policy, 24(3), 21-25.

Social Security Administration. (2012). Information retrieved 15 Feb 2012 from http://ssa.gov

The Official Government Site for Medicare (2012). Information retrieved 15 Feb 2012 from http://medicare.gov