FINANCIAL ADVISORS GUIDE TO SOCIAL SECURITY AND MEDICARE BENEFITS (2015 EDITION)

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FINANCIAL ADVISORS

GUIDE TO SOCIAL SECURITY

AND MEDICARE BENEFITS

(2015 EDITION)

Researched and Written by:

Edward J. Barrett

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Disclaimer

This course is designed as an educational program for financial

professionals. EJB Financial Press is not engaged in rendering legal or other

professional advice and the reader should consult legal counsel as

appropriate.

We try to provide you with the most accurate and useful information

possible. However, one thing is certain and that is change. The content of

this publication may be affected by changes in law and in industry practice,

and as a result, information contained in this publication may become

outdated. This material should in no way be used as an original source of

authority on legal and/or tax matters.

Laws and regulations cited in this publication have been edited and

summarized for the sake of clarity.

Names used in this publication are fictional and have no relationship to any

person living or dead.

This presentation is for educational purposes only. The information

contained within this presentation is for internal use only and is not intended

for you to discuss or share with clients or prospects. Financial advisors are

reminded that they cannot provide clients with tax advice and should have

clients consult their tax advisor before making tax-related investment

decisions.

EJB Financial Press, Inc.

7137 Congress St.

New Port Richey, FL 34653

(800) 345-5669

www.EJBfinpress.com

This book is manufactured in the United States of America

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ABOUT THE AUTHOR

Edward J. Barrett CFP®, ChFC®, CLU, CEBS®, RPA, CRPC®, CRPS®, began his career in the financial and insurance services back in 1978 with IDS Financial Services, becoming a leading financial advisor and top district sales manager in Boston,

Massachusetts. In 1986, Mr. Barrett joined Merrill Lynch in Boston as an estate and business-planning specialist working with over 400 financial advisors and their clients throughout the New England region.

In 1992, after leaving Merrill Lynch and moving to Florida, Mr. Barrett founded The Barrett Companies Inc. and Broker Educational Sales & Training Inc., Wealth Preservation Planning Associates and The Life Settlement Advisory Group Inc.

Mr. Barrett was a qualifying member of the Million Dollar Round Table, Qualifying Member Court of the Table® and Top of the Table® producer. He holds the Certified Financial Planner designation CFP®, Chartered Financial Consultant (ChFC), Chartered Life Underwriter (CLU), Certified Employee Benefit Specialist (CEBS), Retirement Planning Associate (RPA), Chartered Retirement Planning Counselor (CRPC) and the Chartered Retirement Plans Specialist (CRPS) professional designations.

EJB Financial Press

EJB Financial Press, Inc. (www.ejbfinpress.com) was founded in 2004, by Mr. Barrett to provide advanced educational and training manuals approved for correspondence continuing education credits for insurance agents, financial advisors, accountants and attorneys throughout the country.

Broker Educational Sales & Training Inc.

Broker Educational Sales & Training Inc. (BEST) is a nationally approved provider of continuing education and advanced training programs to the mutual fund, insurance and financial services industry.

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Basic Benefits ... 281 Medigap Plan A ... 282 Medigap Plan B ... 282 Medigap Plan C ... 283 Medigap Plan D ... 284 Medigap Plan E ... 284 Medigap Plan F ... 285 Medigap Plan G ... 286 Medigap Plan H ... 287 Medigap Plan I ... 287 Medigap Plan J ... 288 Medigap Plan K ... 289 Medigap Plan L ... 289 Medigap Plan M ... 290 Medigap Plan N ... 291 Medigap Premiums ... 291 Issue Age ... 292 Attained Age ... 292

Community Age Rated ... 292

Medigap Premium Rates ... 293

Choosing a Medigap Policy ... 294

Medigap Enrollment Dates ... 295

Open Enrollment ... 295

Guaranteed Issue ... 295

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Role of the NAIC ... 296

State Regulation ... 296

Medigap Policies and the ACA ... 297

CHAPTER 16 OPTIONS FOR REFORMING MEDICARE ... 305

Overview ... 305

Background ... 306

Raise the Medicare Eligibility Age ... 306

Argument in Favor ... 307

Argument Against ... 307

Raise Medicare Premiums for Higher-Income Beneficiaries ... 307

Generate New Revenue by Increasing the Payroll Tax Rate ... 308

Increase Supplemental Plan Costs and Reduce Coverage ... 309

Impose Cost Sharing for the First 20 days of a Stay in a SNF ... 311

Require Drug Companies to Give Rebates or Discounts to Medicare ... 312

Medicare Outlook ... 314

SECTION TWO MEDICAID ... 317

CHAPTER 17 INTRODUCTION TO MEDICAID ... 319

Overview ... 319

Background ... 319

State Participation Requirements ... 320

Medicaid Financing ... 321

Medical Costs Covered by Medicaid ... 323

Services Covered in Every State ... 324

Optional Services ... 324

Eligibility for Medicaid... 325

General Requirements ... 326

Requirements for Coverage ... 327

Care Must Be Prescribed by Doctor ... 327

Provider Must Be Participating In Medicaid ... 327

Treatment Must Be Medically Necessary ... 327

Medicaid Coverage Groups ... 328

Category Needy ... 328

SSI Based Standards ... 328

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Medicaid Eligibility Rules for Married Spouses ... 330

Treatment of Assets ... 331

The Community Spouse Resource Allowance (CSRA) ... 331

The Assessment ... 333

Treatment of Income ... 334

The Minimum Monthly Maintenance Needs Allowance ... 334

The Revised Community Spouse Resource Allowance ... 335

Reconciling the Revised CSRA and the CSMIA ... 335

Medically Needy Program ... 336

Medicaid Needy Eligibility ... 337

Spend-Down ... 338

Income Eligibility ... 339

Pay-In Spend-down ... 341

Costs of Medicaid Coverage ... 341

No Payments to Medical Providers... 341

Fees to States for Medicaid Services ... 341

Enrollment Fee ... 341

Monthly Premium ... 342

Copayments... 342

The Deficit Reduction Act (DRA) of 2005 ... 342

The Look-Back Period [Section 6011] ... 343

The Penalty Period Start Date [Section 6011(b)] ... 343

When Period of Ineligibility Starts and the Penalty ... 344

Imposing Partial Months of Ineligibility [Section 6016(a)] ... 344

Hardship Waivers [Section 6011(d)(e)] ... 345

Codifying “Income First” Methodology for Protecting Community Spouse ... 345

Home Equity Limits (Section 6014) ... 346

Disclosure and Treatment of Annuities (Section 6012) ... 346

State Long-Term Care Partnerships (Section 6021) ... 347

Continuing Care Retirement Communities (Section 6015) ... 347

Promissory Note, Loan, or Mortgage ... 347

Life Estate ... 348

ACA Impact on Medicaid ... 348

CHAPTER 18 MEDICAID PLANNING... 351

Overview ... 351

The Ethics of Medicaid Planning ... 351

Transferring Assets to Qualify for Medicaid ... 353

Permitted Transfers ... 355

Medicaid Planning and Trusts ... 355

Revocable Trusts ... 356

Irrevocable Trust ... 356

Special Needs Trusts ... 357

Qualified Income (‘Miller”) Trusts ... 359

Testamentary Trusts ... 361

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How Purchasing an Annuity Depletes Assets ... 361

Single Premium Immediate Annuity ... 362

Why Annuities Don’t Violate Medicaid Rules ... 362

Annuity Requirements to Avoid Medicaid Penalties... 363

Recent Court Cases ... 363

Medicaid Planning and IRAs ... 367

IRA in Payout Status ... 368

Use of an Annuity in an IRA ... 368

Medicaid and Promissory Notes ... 370

How It Works ... 370

Medicaid Estate Recovery Program (MERP) ... 371

Status of Estate Recovery Program ... 372

Use of Liens ... 372

Role of the Children ... 373

Filial Responsibilities Laws ... 373

Generally Not Enforced ... 374

CHAPTER 19 MEDICAID EXPANSION UNDER ACA ... 377

Overview ... 377

PPACA Background ... 377

Medicaid Expansion ... 378

States Participating/Not Participating in the Medicaid Expansion ... 379

Who Pays For Medicaid Expansion? ... 380

Additional Provisions Affecting Medicaid Expansion ... 381

Projected Costs of ACA on the Medicaid Program ... 382

CHAPTER REVIEW ANSWERS... 385

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CHAPTER 1 INTRODUCTION

Overview

The Old-Age, Survivor and Disability Insurance (OASDI)—which for most Americans means Social Security—is the largest income-maintenance program in the United States. Based on social insurance principles, the program reaches almost every family, and at some point will touch the lives of nearly all Americans. Today, nearly one in six Americans receives a benefit from Social Security.

In this chapter, we will examine the history of Social Security (OASDI), its expansion and evolution.

Learning Objectives

Upon completion of this chapter, you will be able to:  Define the history and purpose of Social Security;

 Introduce the expansion of Social Security benefit programs;

 Determine who is responsible for administering the Social Security programs.

History of the Social Security Program

The Social Security program began on August 14, 1935 when Congress passed, and President Franklin D. Roosevelt signed into law, the Social Security Act (now codified as 42 U.S.C. Ch. 7). This act was originally named the Economic and Security Act, but was changed during congressional consideration of the bill.

Initially, the intention of the Social Security program was to provide financial security for older Americans. It was designed to help compensate for limited job opportunities

available to older people in our society and it was intended to help bridge the gaps

created by the disappearance of the multigenerational family household; this breakup was caused in a large measure by the need for American workers to move around the country to find decent employment.

The Act provided benefits to retirees and the unemployed, as well as a lump sum benefit at death. During this time, the U.S. was going through the “Great Depression” and many older Americans fell into deep poverty. While the Social Security program could not solve this problem immediately since many benefits would not be payable for several

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years later, the program was intended to prevent such a situation from recurring. The Act also gave money to states to provide assistance to aged individuals (Title 1), for

unemployment insurance (Title III), for Aid to Families with Dependent Children (Title IV), for Maternal and Child Welfare (Title V), for public health services (Title VI), and for the blind (Title X).

Initially, the Social Security Act provided only retirement benefits and covered about 60 percent of the country’s workers. Today 97 percent of jobs are covered by the program. The original benefit levels set were never enough to guarantee a standard of living above the poverty level.

The first reported Social Security payment was to Ernest Ackerman, who retired only one day after Social Security began. Five cents was withheld from his pay during that period, and he received a lump sum payout of seventeen cents from Social Security.

The first monthly payment was issued on January 31, 1940 to Ida Fuller of Ludlow Vermont. In 1937, 1938, and 1939 she paid a total of $24.75 into the Social Security system. Her first check was for $22.54. After her second check, Ms. Fuller already received more than she contributed over the three-year period. She lived to be 100 and collected a total of $22,888.92.

Expansion and Evolution

In 1939, Social Security benefits were extended to a retired worker’s spouse (survivor benefits) and minor children (dependent benefits). Benefit levels also increased, as a result of frequent legislation, both to reflect changes in the cost of living and in real terms.

In the original 1935 law, due to the constitutionality of the law, the taxing provisions were included within the law as a separate title, Title VIII. With the beginning of the tax rate in 1937, the government began collecting taxes of 2 percent on wages up to $3,000 per year, split evenly between the employer and the employee (1 percent paid by each, respectively). As part of the 1939 Amendments, the Title VIII taxing provisions were taken out of the Social Security Act and placed in the Internal Revenue Code. Since it wouldn’t make any sense to call this new section of the Internal Revenue Code “Title VIII,” it was renamed the “Federal Insurance Contributions Act” (FICA).

The 1939 Amendments

The 1939 Amendments also established the Social Security Trust Fund (Title VIII) for any surplus funds. The managing trustee of this fund is the Secretary of the Treasury. The money could be invested in both non-marketable and marketable securities.

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In the Amendments of 1950, after years of debate, Social Security was expanded to include domestic labor, household employees working at least two days a week for the same person, nonprofit workers and the self-employed. Hotel workers, laundry workers, all agricultural workers, and state and local government employees were added in 1954. The Social Security Amendments of 1954 initiated a disability insurance program which provided individuals with additional coverage against economic insecurity. At first, there was a disability “freeze” of a worker’s Social Security record during the years when they were unable to work. While this measure offered no cash benefits, it did prevent such periods of disability from reducing or wiping out retirement and survivor benefits. On August 1, 1956, the Social Security Act was amended to provide benefits to disabled workers aged 50-64 and disabled adult children.

In addition, below are some additional changes the 1956 Amendments made to the Social Security programs:

 The FICA tax rate was raised to 4.0% (2% for the employer, 2.0% for the employee);

 Provided monthly benefits to permanently and totally disabled workers aged 50-64;

 Provided monthly benefits to disabled children aged 18 or over of retired or deceased workers, if their disability began before age 18;

 Women were allowed to retire at 62 with benefits reduced by 25%;

 Widows of covered workers were allowed to retire at 62 without the reduction in benefits; and

 Set the widow’s unreduced benefit amount at 75% of the deceased worker’s PIA. Amendments of the 1960s

In September 1960 President Eisenhower signed a law amending the disability rules to permit payment of benefits to disabled workers of any age and to their dependents. By 1960, 559,000 people were receiving disability benefits, with the average benefit amount being around $80 per month.

In 1961, retirement at age 62 was extended to men. Since the number of beneficiaries and their benefit levels rose, taxes also needed to rise, especially since the program had no significant accumulated funds on hand to finance these increases. It also raised the unreduced benefit amount for widow(er)’s to 82 ½ percent at age 62. This benefit was not subject to reduction for age.

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In 1962, the changing role of the female worker was acknowledged when benefits of covered women could be collected by dependent husbands, widows, and children. These individuals, however, had to be able to prove their dependency.

Medicare was added in 1965 by the Social Security Act of 1964, part of President

Lyndon B. Johnson’s “Great Society” program. Social Security was changed to withdraw funds from the independent “trust fund” and put it into the General Fund for additional congressional revenue.

In 1965, the age at which widows could begin collecting benefits was reduced to 60. Benefits were reduced 5/9 of 1% for each month prior to age 62. Widowers were not included in this change. When divorce, rather than death, became the major cause of marriage ending, divorcees were added to the list of recipients. Divorcees over the age of 65 who had been married for at least 20 years, remained unmarried, and could

demonstrate dependency on their ex-husbands received benefits.

The government adopted a unified budget in the Johnson Administration in 1968. This change resulted in a single measure of the fiscal status of the government, based on the sum of all government activity. The surplus in Social Security trust funds offset the total debt, making it appear much smaller than it otherwise should.

Amendments of the 1970s

The 1970s were a watershed decade in program history. Benefit increases legislated by Congress accelerated sharply in the early 1970s, which when combined with difficult economic conditions and a fully mature Social Security program caused concern about the program’s financial status.

In 1972 two important sets of amendments were enacted. These amendments created the Social Security SSI and introduced automatic Cost-of-Living Adjustments (COLAs). The amendment creating the SSI program contained important provisions for increasing Social Security benefits for certain categories of beneficiaries (primarily aged widows and widowers). It also provided the following change in benefits:

 A minimum retirement benefit

 An adjustment to the benefit formula governing early retirement at age 62 for men, in order to make it consistent with that for women

 Extension of Medicare to those who received disability benefits for at least two years and to those with Chronic Renal Disease

 Liberalized the Retirement Test

 Provided for Delayed Retirement Credits to increase the benefits of those who delayed retirement past age 65

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The separate bill creating automatic COLAs also provided for automatic increases in the earnings subject to Social Security taxes and an automatic adjustment in the wage-base used in calculating benefits. This second adjustment was put in the law as a sort of companion to the COLA. The COLA adjusts for increases in prices, whereas the wage-base adjustment corrects for increases in wages. The purpose of the COLA was to

maintain the purchasing power of benefits already awarded. The purpose of the automatic adjustment in the wage base was to maintain the relative value of Social Security benefits for future applicants.

When Congress approved by overwhelming majorities a 20 percent increase in benefits for 27.8 million Americans (much more than was justified by inflation) the average payment per month rose from $133 to $166. The bill also set up a cost of living

adjustment (COLA) to take effect in 1975. This adjustment would be made on a yearly basis if the Consumer Price Index increased by 3% or more. This addition was an attempt to index benefits to inflation so that benefits would rise automatically.

Unfortunately, the procedure for adjusting for price and wage increases contained a flaw which resulted in future benefit levels soaring out of control. Indeed, it became apparent that if the trends of the mid-1970s continued, future Social Security beneficiaries could end up receiving more in their monthly retirement benefit than their gross salaries while working.

The 1977 Amendments signed into law by President Carter attempted to correct this problem, known as “double-indexing.” The initial benefit level was allowed to retain some of the unintended increases that resulted from the operation of the faulty law during 1972-78, and was permanently higher than the pre-1972 level. However, while

individuals collecting Social Security that were born between 1911 and 1916 were

grandfathered from the fix, the people born after 1917 but before 1922, informally known as “The Notch Babies”, saw a reduction in their benefits due to fixing the “double

indexing.”

The higher benefit costs, combined with very poor economic conditions in 1979-82, brought the Social Security program to its most serious crisis. The 1977 Amendments also altered the tax formulas to raise more money, increasing withholding from 2% to 6.15%. With these changes, President Carter remarked,

“Now this legislation will guarantee that from 1980 to 2030, the Social Security funds will be sound.”

This of course, did not turn out to be the case. The financial picture declined almost immediately and by the early 1980s, the system was again in crisis (sound familiar). If you notice, all the Congressional amendments to Social Security mentioned above took place in even numbered years. This coincided with election years since the bills were politically popular. However, by the late 1970s this era was over and for the next three decades, projections of Social Security finances would show large, long-term deficits. From the early 1980s, the program flirted with immediate insolvency. Social Security

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reform now meant politically unpopular tax increases and benefit reductions. From this point forward, amendments to Social Security would take place in odd numbered years, far removed from election periods. Social Security became known as the “Third Rail of American Politics” and touching it became political suicide.

Amendments of the 1980s

From 1975 through November 1982, the trust funds dropped from $46 billion — about one year’s outgo at the beginning of the period — to zero. Special legislation enacted at the end of 1981 allowed Social Security to borrow funds temporarily from the Medicare Hospital Insurance program. Loans totaling $12.4 billion in 1982 permitted Social

Security benefit payments to be made until permanent changes could be enacted into law. The 1981 amendments were of a “stop-gap” nature, while the 1983 amendments were intended to provide a complete solution to the problem.

The 1981 act significantly reduced benefit outgo in the short range by the following actions:

 The regular minimum benefit (an initial PIA of $122) was eliminated for all new eligible after 1981, except for certain covered members of religious orders under a vow of poverty.

 Benefits for children ages 18-21 who were still in school (mainly college), were eliminated by a gradual phase-out, except for high school students aged 18.  Mother’s and father’s benefits with respect to nondisabled children terminate

when the youngest child is age 16 (formerly 18).

 Lump-sum death benefit payments were eliminated, except when a surviving spouse who was living with the deceased worker is present, or when a spouse or child is eligible for immediate monthly benefits.

 Sick pay in the first six months of illness is considered to be covered wages.  Lowering of the exempt age under the earnings test to age 70 in 1982 was delayed

until 1983.

 The Worker’s Compensation offset against disability benefit was extended to several other types of governmental disability benefits.

Further action beyond the 1981 amendments was essential to restore both the short-range and long-range solvency of the OASDI program. President Reagan established the National Commission on Social Security Reform—a bipartisan group whose members were appointed by him and the Congressional leadership—to make recommendations for its solutions. Such recommendations were adopted almost in their entirety in the 1983 act. Note: Alan Greenspan was the chairman of the commission.

The 1983 amendments were based on the NCSSR’s Final Report. “Report of the National Commission on Social Security Reform.” http://www.ssa.gov/history/reports/gspan.html. The NCSSR made the following recommendations to reform and strengthen Social Security’s financial condition:

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 Payroll taxes were increased in 1984, 1988, and 1989.

 Coverage was expanded to include most of the remaining non-covered groups, including Federal government employees hired in 1984 and after.

 Cost-of-living benefit increases were delayed by six months each year (i.e., will always be in checks for December payable in early January).

 The normal retirement age (NRA) was raised gradually from age 65 for workers born before 1938 to age 67 for workers born after 1959. Age 62 is retained as the early-retirement age, but with appropriate, larger actuarial reductions.

 Deemed all disabled widow(er)’s to be age 60 beginning January 1, 1984.  Eliminated the additional reduction for the period between age 50 and age 60.  Increased full retirement age for widow(er)’s benefits for people born after

1/1/1938.

 Increased the full retirement age for widow(er)’s benefits for people born after 1/1/1940.

 Benefits became subject to Federal income tax for the first time, but only for those beneficiaries with substantial incomes from other sources. The income from that taxation of benefits was returned to Social Security.

The 1983 Amendments also included a provision to exclude the Social Security Trust Fund from the unified budget (in political jargon, it was proposed to be taken “off-budget”). Yet today Social Security is treated like all the other trust funds of the Unified Budget. This provision also provided for the exemption of Social Security and portions of the Medicare trust funds from any general budget cuts beginning in 1993. This change was one way of trying to protect Social Security funds for the future.

As a result of these changes, particularly the tax increases, the Social Security system began to generate a large short-term surplus of funds, intended to cover the added retirement costs of the “baby boomers.” Congress invested these surpluses into special series, non-marketable U.S. Treasury securities held by the Social Security Trust Fund. Under the law, the government bonds held by Social Security are backed by the full faith and credit of the U.S. government. Because the government had adopted the unified budget during the Johnson administration, this surplus offsets the total fiscal debt, making it look much smaller. There has been significant disagreement over whether the Social Security Trust Fund has been saved, or has been used to finance other government programs and other tax cuts (see Chapter 7 for a discussion of the Social Security Trust Fund).

The Senior Citizens’ Freedom to Work Act of 2000

On April 7, 2000 “The Senior Citizens’ Freedom to Work Act of 2000” was signed into law, eliminating the Retirement Earnings Test (RET) for those beneficiaries at or above Normal Retirement Age (NRA). (The RET still applies to those beneficiaries below NRA.)

The legislation began its swift march through Congress on March 1, 2000 when the full House of Representatives passed H.R. 5 by a vote of 422 to 0. The Senate, on March 22,

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2000 then passed the bill by a vote of 100-0 (with a technical amendment). On March 28, 2000 The House agreed to the Senate amendment by a vote of 419-0 and cleared the measure for transmission to the President.

This was a historic change in the Social Security retirement program. From the beginning of Social Security in 1935, retirement benefits have been conditional on the requirement that the beneficiary be substantially retired. This requirement was carried out by the provisions of the Retirement Earnings Test (RET). The RET has changed considerably over the years. The requirement was first scaled-back in the 1950 Amendments, which exempted workers age 75 and older from the RET. The exempt age was reduced to 72 in 1954, and to age 70 and older in 1977. With the new legislation, starting at the normal retirement age (aka, full retirement age), Social Security retirement benefits will be paid to beneficiaries who are still working. Effectively, for those who have reached full retirement age, this repealed the requirement that the beneficiary be substantially retired in order to receive full Social Security retirement benefits.

Program Principles

Certain fundamental principles have shaped the development of the Social Security program. These basic principles are largely responsible for the program’s widespread acceptance and support:

 Work Related—Economic security for workers and their families is based on their work history. Entitlement to benefits and the benefit level are related to earnings covered in work.

 No Means Test—Benefits are an earned right and are paid regardless of income from savings, pensions, private insurance, or other forms of non-work income.  Contributory—The concept of an earned right is reinforced by the fact that

workers make contributions to help finance the benefits

 Universal Compulsory Coverage—Workers at all income levels and their families have protection if earnings stop or are reduced due to retirement, disability, or death. With nearly all employment covered by Social Security, this protection continues when workers change jobs.

 Rights Clearly Defined in the Law—How much a person gets and under what conditions are clearly defined in the law and are generally related to facts that can be objectively determined. The area of administrative discretion is severely limited.

Social Security Administration

The Social Security Administration (SSA) is an independent agency of the Federal government which has the duty of administering the Nation’s social insurance programs, such as:

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 Old-age, Survivors, and Disability Insurance programs commonly known as Social Security

 Administers the Supplemental Security Income program for the aged, blind, and disabled

 Assigns Social Security numbers to U.S. citizens

 Maintains earnings records for workers under their Social Security numbers. The SSA was established by Reorganization Plan No 2 of 1946 (5 U.S.C. app.) effective July 16, 1946. It became an independent agency in the executive branch by the Social Security Independence and Program Improvements Act of 1994 (codified at 42 U.S.C. § 901) effective March 31, 1995.

The SSA is headed by a Commissioner and has a staff of almost 60,000 employees. The Commissioner is responsible for administering the OASDI program (except for the collection of FICA taxes, which is performed by the Internal Revenue Service of the Department of the Treasury), the preparation and the payment of benefits through direct deposit (Federal law requires federal benefit payments to be made electronically), and the management and investment of the trust funds, which is supervised by the Secretary of the Treasury as Managing Trustee. The Commissioner is appointed by the President and confirmed by the Senate for a 6-year term. Currently, the Acting Commissioner is Carolyn W. Colvin, she was nominated by President Obama on June 20, 2014. A bipartisan Advisory Board, which is composed of seven members who serve 6-year terms, examines issues regarding the Social Security system and advises the

Commissioner on policies related to the OASDI (and SSI) programs.

The Social Security number (SSN) is the method used for posting and maintaining the earnings and employment records of persons covered under the Social Security program. By the end of February of each year, employers file wage reports (Form W-2) with the SSA showing the wages paid to each employee during the preceding year. In turn, SSA shares this information with the IRS.

Reported earnings are posted to the worker’s earnings record at SSA headquarters in Baltimore, Maryland. When a worker or his or her family member applies for Social Security benefits, the worker’s earnings record is used to determine the claimant’s eligibility for benefits and the amount of the benefit.

The SSA is made up of many different bureaus and branches to accomplish all its duties. The main offices are headquartered in Woodlawn, Maryland; and they are known as the Central Office. The entire United States is divided up by SSA into districts (10 districts), each of which has its own District office. Many of these District Offices also have branch offices. There are approximately 1300 field offices throughout the nation. The District Office is set up to handle all contact with the public. To view information about the nearest SSA office visit: www.ssa.gov. In addition, there are 8 processing centers, and 37 Teleservice Centers (TSCs). The TSCs are set up to handle telephone inquiries from the

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public. They are designed to take the burden of voluminous phone calls away from the District Offices. The nationwide toll free number is 1-800-772-1213. Service

representatives handle calls from 7 a.m. to 7 p.m. on business days. Pre-recorded information and automated services are available after hours. Hearing impaired callers with TDD equipment can call 1-800-325-0778.

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Chapter 1 Review Questions

1. In what year was the Social Security program enacted into law? ( ) A. 1929

( ) B. 1933 ( ) C. 1935 ( ) D. 1951

2. Which of the following U.S. Presidents signed the Social Security Act into law? ( ) A. President Lyndon B. Johnson

( ) B. President Franklin D. Roosevelt ( ) C. President Harry S. Truman ( ) D. President Dwight D. Eisenhower

3. Which of the following Social Security Amendments introduced the automatic Cost-of-Living Adjustments (COLAs)?

( ) A. 1983 Amendments ( ) B. 1965 Amendments ( ) C. 1972 Amendments ( ) D. 1977 Amendments

4. Which of the Social Security Amendments raised the normal retirement age (NRA) from age 65 for workers born before 1938 to age 67 for workers born after 1959? ( ) A. 1983 Amendments

( ) B. 1965 Amendments ( ) C. 1970 Amendments ( ) D. 1977 Amendments

5. Which of the following agencies of the Federal government has the duty of administering the Social Security OASDI program?

( ) A. Department of Labor

( ) B. Social Security Administration

( ) C. Department of Health and Human Services ( ) D. Department of Consumer and Financial Services

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CHAPTER 2 OASDI PROGRAMS

Overview

Old-Age, Survivors, and Disability Insurance (OASDI) is a series of connected programs, each with its own rules and payment schedules. All of the programs have one thing in common: Benefits are paid—to a retired or disabled worker, or to the worker’s dependent or surviving family--based on the worker’s average, wage, salary or self-employment income from work covered by Social Security.

In this chapter, we will examine the various types of OASDI benefit programs, their qualifications and eligibility requirements, as well as the funding mechanism for OASDI.

Learning Objective

Upon completion of this chapter, you will be able to:  Describe the various OASDI programs  Determine qualification for OASDI benefits;  Calculate quarters of coverage (credits);

 Differentiate between the currently and fully insurance; and  Explain how OASDI programs are funded.

OASDI Background

The Old-Age, Survivors, and Disability Insurance (OASDI) program provides monthly benefits designed to replace, in part, the loss of income due to retirement (Old-age—OA), death (Survivor Insurance—S), or disability (Disability—DI). Coverage is nearly

universal: About 96% of the jobs in the United States are covered. Eligibility and benefit amounts are determined by the worker’s contribution to Social Security. There is no means test to qualify for benefits, although there is a limit on income earned from working that applies to those under the full retirement age.

Types of OASDI Benefits

There are three basic Social Security (OASDI) benefit programs that will pay benefits based on the worker’s record of earnings. They are:

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 Disability benefits (DI); and

At the end of 2013, the OASDI program was providing benefit payments to about 58 million people: 41 million retired workers and dependents of retired workers (70 percent) who were receiving an average monthly check of $1,237.53, 6 million survivors of deceased workers (11 percent) who were receiving an average monthly check of $1,108.45, and 11 million disabled workers and dependents of disabled workers (19 percent) who were receiving an average monthly check in the amount of $996.09 (see Table 2.1).

Table 2.1

Beneficiaries in Current Payment Status, December 2013

Beneficiary Number

(Thousands) Percent

Average Monthly Benefit

Total 57,979 100 $1,182.24

Retired workers and dependents 40,804 70 $1,247.53

Workers 37,893 65 $1,293.83

Spouses and children 2,911 5 $640.23

Disabled workers and dependents 10,986 19 $996.09

Workers 8,941 15 $1,146.42

Spouses and children 2,045 4 $324,64

Survivors of deceased workers 6,189 11 $1,108.45

Source: SSA Master Beneficiary Record;

http://www.ssa.gov/policy/docs/chartbooks/fast_facts/2014/fast_facts14.pdf

During the year, an estimated 163 million people had earnings covered by Social Security and paid payroll taxes. Total expenditures in 2013, were $823 billion. Almost 99 percent of expenditures from the combined OASI and DI Trust Funds in 2013 were retirement, survivor, and disability benefits totaling $812.3 billion. Total income was $855 billion, which consisted of $752 billion in non-interest income and $103 billion in interest earnings. Asset reserves held in special issue U.S. Treasury securities grew from $2,732 billion at the beginning of the year to $2,764 billion at the end of the year. (See Chapter 9 for a review of the 2014 OASDI Trustees Report.)

As of October 2014, the Social Security Master Beneficiary report (see Table 2.2) shows that there were 48 million beneficiaries receiving Old-Age and Survivor Insurance (OASI), while another 11 million beneficiaries received Disability Insurance (DI) benefits, for a total of 59 million beneficiaries. The same report estimates that OASDI paid out a total monthly benefit of $70.2 billion to those beneficiaries, who received an average monthly check of $1,192.21.

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Table 2.2

Number of People Receiving Social Security Benefits, October 2014

Type of Beneficiary Beneficiaries Total monthly benefits (millions of dollars) Average monthly benefit (dollars) Total Percent Total 58,862 100.0 $70,176 $1,192.21

Old-Age and Survivors Insurance 47,936 81.4 59,249 1,235.99

Retirement benefits 41,810 71.0 52,583 1,257.67

Retired workers 38,876 66.0 50,665 1,303.24

Spouses of retired workers 2,304 3.9 1,518 658.94

Children of retired workers 629 1.1 399 634.45

Survivor benefits 6,127 10.4 6,666 1,088.04

Children of deceased workers 1,877 3.2 1,530 815.05

Widowed mothers and fathers 145 0.2 134 922.39

Nondisabled widow(er)s 38,425 6.5 4,817 1,252.73

Disabled widow(er)s 258 0.4 184 712.53

Parents of deceased workers 1 (L) 1 1,101.78

Disability Insurance 10,926 18.6 10,927 1,000.12

Disabled workers 8,958 15.2 10,259 1,145.22

Spouses of disabled workers 150 0.3 46 309.00

Children of disabled workers 1,818 3.1 622 342.32

Source: SSA Master Beneficiary (L) less than 0.05 percent:

http://www.ssa.gov/policy/docs/quickfacts/stat_snapshot/2014-10.pdf

Relative Importance of OASDI

In 2013, 87% of married couples and 86% of non-married persons aged 65 or older received Social Security (OASDI) benefits. Social Security was the major source of income (providing at least 50% of total income for 52% of aged beneficiary couples and 74% of aged non-married beneficiaries. It was 90% or more of income for 22% of aged beneficiary couples and 47% of aged non-married beneficiaries. Total income excludes withdrawals from savings and non-annualized IRAs or 401(k) plans (see Table 2.3).

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Table 2.3

Percentage of Aged Units Receiving Social Security Benefits, By Relative Importance of Benefits to Total Income

Source: SSA calculations from the March 2014 Annual Social and Economic Supplement

to the Current Population Survey. NOTE: An aged unit is a married couple living together or a non-married person, which also includes persons who are separated or married but not living together.

Next, let’s review each of the OASDI benefits in greater detail beginning with Old-age (OA) retirement benefits.

Old-Age (OA) Retirement Benefits

Old-Age (OA) retirement benefits are designed to replace part of a worker’s earnings from work. Monthly retirement benefits are payable at age 62 but are permanently reduced if claimed before full (normal) retirement age (currently, age 66). The formula used to calculate these benefits takes into account lifetime earnings over 35 years. (See Chapter 3 for a review on how SSA calculates OA retirement benefits).

Table 2.4 displays how Old-Age retirement benefits compare to a retiree’s past earnings for a “low,” “medium,” “high,” and “maximum taxable” earner. The short bars are the benefits that a retiree would receive at age 65. The tall bars represent the retiree’s typical (or average indexed) lifetime earnings while working. Old Age retirement benefits replace a larger share of past earnings for lower earners. While higher earners receive larger benefit checks, those checks represent a smaller fraction of what they had been making.

Example: A 65 year old who retired in 2014 with a lifetime of “medium”

earnings (about $45,853 in 2013) would receive about $18,520 a year, which would replace about 40 percent of past earnings. A “low” earner who made about $20,634 in 2013 would receive about $111,244, which would replace about 55 percent of prior earnings. A worker who always earned the “maximum” taxable amount ($113,700 in 2013) would get benefits of $29,470 a year that replace about 26 percent of prior earnings.

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Table 2.4

How Benefits Compare to Earnings Retired Worker, Age 65 in 2014

$20,63 4 $45,85 3 $73,36 5 $113,7 00 $11,24 4 $18,52 0 $24,57 4 $29,47 0 $0 $100,000

Replacement Rates for Retired Worker Age 65, …P…

E i 5 4 0 % 3 4 % 2 6 %

Source: Annual Trustees’ Report, Social Security Administration, 2012; Table V.C7 http://www.nasi.org/learn/socialsecurity/benefits-compare-earnings

http://www.ssa.gov/oact/tr/2014/lr5c7.html

Note: These benefits may increase with a yearly cost of living adjustment (COLA).

Projections made by SSA show an annual increase of 2.8%.

Overall, the amount of retired worker’s benefits will be between 20% of their average income (if their income was high) and 50% (if income was low). According to Social Security Administration (SSA), the average monthly Social Security benefit for a retired worker in 2015 will be $1,328. This amount changes monthly based upon the total amount of all benefits paid and the total number of people receiving benefits.

In addition, OA benefits may also be payable to the spouse and children of retired-worker beneficiaries. A spouse receives benefits at age 62 or at any age if he/she is caring for a child under age 16 or disabled. A divorced spouse aged 62 or older who had been married to the worker for at least 10 years is also entitled to benefits. If the spouse has been divorced for at least 2 years, the worker who is eligible for benefits need not be receiving benefits for the former spouse to receive benefits. Benefits are payable to unmarried children under age 18, or aged 18-19 if they attend elementary or secondary school full-time. A child can be the worker’s natural child, adopted child, stepchild, and –under certain circumstances—a grandchild or step-grandchild. A person aged 18 or older may also receive benefits under a disability that began before age 22. (See Chapter 4 for a review of spousal and dependent auxiliary benefits).

As of October 2014, 42 million (71 percent) retired workers, spouses of retired workers and children of retired workers were paid out $53 billion in monthly benefits with an average monthly check of $1,235.99 (see Table 2.2).

The maximum benefit for a 66-year old person first claiming retirement benefits in 2015, is estimated by SSA to be $2,663. This figure is based on earnings at the maximum taxable amount for every year after age 21.

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Note: SSA has an online calculator that provides an estimate of monthly-Old-age benefits

based upon a worker’s earnings, birth date, and expected retirement age. You can view

at: http://www.socialsecurity.gov/retire2/AnypiaApplet.html

Survivor Benefits

Survivor benefits are also paid out to the families of workers who die and leave behind spouses, children under the age of 20, and sometimes other relations such as parents and ex-spouses. A widow(er) married to the worker for at least 9 months (3 in the case of accidental death) may receive an unreduced benefit if claimed at full (normal) retirement age (currently age 66), if the spouse never received a retirement benefit reduced for age. It is permanently reduced if claimed at age 60-66, and for disabled survivors at age 50-59. Benefits are payable to a widow(er) or surviving divorced spouse at any age who is caring for a child under age 16 or disabled. A surviving divorced spouse aged 60 or older is entitled to benefits if he/she had been married to the worker for at least 10 years. A deceased worker’s dependent parent aged 62 or older may also be entitled to benefits. Surviving children of deceased workers may receive benefits if they are under age 18, or are full-time elementary or secondary school students aged 18-19, or were disabled before age 22.

As of October 2014, there were 6.1 million survivor beneficiaries (10.4 percent) who received total monthly benefits of $7 billion, with an average monthly benefit in the amount of $1,088.04 (see Table 2.2). Each dependent receives about 75 percent or 100 percent of the deceased worker’s basic Social Security benefit. However, as per the SSA, “there is a limit to the amount of money that can be paid each month to a family. The limit varies, but is generally equal to about 150 to 180 percent of your benefit rate.” (See Chapter 4 for a review of Survivor benefits.)

Disability Insurance (DI) Benefits

Disability insurance benefits are payable to disabled workers after a waiting period of 5 full calendar months. This rule applies because DI is not intended to cover short-term disabilities. Benefits terminate if the beneficiary medically improves and returns to work (at a substantial gainful activity level) despite the impairment. At age 65, beneficiaries are transferred to the OA retirement program. Benefits for family members of a disabled worker are payable under the same conditions as those of retired workers.

As of October 2014, there were 10.9 million disabled workers (19% percent) who received total monthly benefits of $10.9 billion with an average benefit amount of $1,000.12. (See Chapter 8 for a full review of Social Security Disability Insurance (DI) benefits.

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OASDI Expenses

For calendar year 2013, disbursements from the OASI were $679.5 billion and the

disbursements from the DI Trust funds were $143.4 for a total disbursement from OASDI of $822.9 billion. Of the $679.5 billion in total OASI disbursements in 2013, $672.1 billion was for net benefit payments. Net benefit payments increased by 5.4 percent from calendar year 2012 to calendar year 2013. This increase is due primarily to (1) an

increase in the total number of beneficiaries and (2) an increase in the average benefit amount. The increase in the average benefit amount in 2013 was due in large part to the automatic cost-of-living benefit increases of 1.7 percent which became effective for December 2012 under the automatic-adjustment provision in Section 215(i) of the Social Security Act. In addition, new beneficiaries tend to have higher benefits than previous cohorts.

For the DI Trust fund net benefit payments increased 2.4 percent from calendar year 2012 to calendar year 2013. This increase in DI benefit payments was due to the same factors described earlier for OASI benefit payments. Total DI disbursements exceeded non-interest income in years 2005 through 2013 and exceeded total income in years 2009 through 2013.

2015 Projected OASDI Average Benefit Payments

Table 2.5 displays the projected OASDI average benefit payments for 2015 (with a projected COLA of 1.7%). SSA projects that the average benefit for retired workers beginning in January 2015 will be $1,328 a month, or about $15,936 a year. The average is somewhat lower for widowed spouses age 60 and older in 2015: $1,274 a month or about $15,288 a year. The average benefit for disabled workers is $1,165 or about

$13,980 a year in 2015. A disabled worker with a young spouse and one or more children will receive on average $1,976 a month or about $23,712 a year in 2015.

Table 2.5

Estimated Average Monthly Benefits, January 2015

Average Monthly Benefit (after COLA)

Average Yearly Benefit (after COLA) By Beneficiary Type Retired workers $1,328 $15,936 Disabled workers $1,165 $13,980 Aged widow(er)s $1,274 $15,288 By Family Type

Retired worker and aged spouse $2,176 $26,112 Widowed mother and two

children $2,680 $32,160

Disabled worker, young spouse

and one or more children $1,976 $23,712

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For comparison, the 2014/2015 federal poverty guideline is $11,670 for an individual, $19,790 annually for a family of three, and $23,850 for a family of four.

Next, let’s review how a worker (beneficiary) qualifies for OASDI benefits.

Qualifying for OASDI Benefits

To qualify for OASDI benefits, a worker must have worked a certain amount of time in employment covered by Social Security. According to the 2014 SSA Trustees report, in 2013 there were 163 million people who worked in employment or self-employment that was covered under the OASDI program. In recent years, coverage has become nearly universal for work performed in the United States, including American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands. Approximately 94 percent of the U.S. workforce is covered by OASDI. Workers excluded from coverage fall into five major categories:

 Civilian federal employees hired before January 1, 1984;

 Railroad workers (who are covered under the railroad retirement system, which is coordinated with Social Security);

 Certain employees of state and local governments who are covered under their employers’ retirement systems;

 Domestic workers and farm workers whose earnings do not meet certain minimum requirements (workers in industry and commerce are covered regardless of the amount of earnings); and

 Persons with very low net earnings from self-employment, generally under $400 annually.

The work requirement is called “insured status.” Insured status is also required to establish benefit eligibility for the worker’s family members and/or survivors. The requirements for insured status differ depending on the type of benefits involved.

Insured Status

Workers attain insured status upon earning the minimum number of credits needed to become eligible for Social Security benefits. Insured status is also required to establish benefit eligibility for the worker’s family members or survivors. The requirements for insured status differ depending on the type of benefits involved.

To determine a worker’s insured status, Social Security looks at the amount of the worker’s earnings (employment or self-employment) covered under Social Security and assigns “credits” for those earnings.

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37 Quarters of Coverage

These credits are called quarters of coverage. In 2015, one quarter of coverage (QC) is credited for each $1,220 in annual covered earnings, up to a maximum of four QCs for the year. Earnings of $4,880 or more in 2015 will give the worker the maximum four QCs for the year regardless of when the money is actually paid during the year. The amount of earnings required for a QC is adjusted automatically each year in proportion to increases in the average wage level (see Table 2.6)

Table 2.6

Earnings Required for a Quarter of Coverage

Year Earnings Year Earnings Year Earnings

1978 $250 1991 540 2004 900 1979 260 1992 570 2005 920 1980 290 1993 590 2006 970 1981 310 1994 620 2007 1,000 1982 340 1995 630 2008 1,050 1983 370 1996 640 2011 1,120 1984 390 1997 670 2012 1,130 1985 410 1998 700 2013 1,160 1986 440 1999 740 2014 1,200 1987 460 2000 780 2015 1,220 1988 470 2001 830 1989 500 2002 870 1990 520 2003 890

To calculate the Quarter of Coverage amount for 2015 the law specifies that the Quarter of Coverage is equal to the 1978 amount of $250, multiplied by the ratio or the national average wage index for 2013, to that for 1976, or if larger the 2014 amount of $1,200. If the amount so determined is not a multiple of $10, it shall be rounded to the nearest multiple of $10 (see Table 2.7).

Table 2.7

Determination of the Quarter of Coverage Amount for 2015

Amounts in

Formula 1978 earnings for one QC 1976 average wage index 9,226.48 $250 2013 average wage index 44,888.16 Computation $250 x 44,888.16 divided by 9,226.48 = $1,216.29,

which rounds to $1,220 Higher

Amount

$1,220 is less than the amount for 2014, so the earnings needed to earn one QC in 2015 is $1,220

FINANCIAL ADVISORS GUIDE TO SOCIAL SECURITY AND MEDICARE BENEFITS (2015 EDITION)