[Senate Report 107-158]
[From the U.S. Government Publishing Office]
107th Congress SENATE Rept. 107-158
2d Session Volume 1
DEVELOPMENTS IN AGING: 1999 and 2000_VOLUME 1
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R E P O R T
of the
SPECIAL COMMITTEE ON AGING
UNITED STATES SENATE
pursuant to
S. RES. 54, SEC. 17(c), MARCH 8, 2001
Resolution Authorizing a Study of the Problems of the Aged and Aging
June 4, 2002.--Ordered to be printed
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512-1800
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SPECIAL COMMITTEE ON AGING
JOHN B. BREAUX, Louisiana, Chairman
HARRY REID, Nevada LARRY CRAIG, Idaho, Ranking Member
HERB KOHL, Wisconsin CONRAD BURNS, Montana
JAMES M. JEFFORDS, Vermont RICHARD SHELBY, Alabama
RUSSELL D. FEINGOLD, Wisconsin RICK SANTORUM, Pennsylvania
RON WYDEN, Oregon SUSAN COLLINS, Maine
BLANCHE L. LINCOLN, Arkansas MIKE ENZI, Wyoming
EVAN BAYH, Indiana TIM HUTCHINSON, Arkansas
THOMAS R. CARPER, Dalaware JOHN ENSIGN, Nevada
DEBBIE STABENOW, Michigan CHUCK HAGEL, Nebraska
JEAN CARNAHAN, Missouri GORDON SMITH, Oregon
Michelle Easton, Staff Director
Lupe Wissel, Ranking Member Staff Director
LETTER OF TRANSMITTAL
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U.S. Senate,
Special Committee on Aging,
Washington, DC, 2002.
Hon. Dick Cheney,
President, U.S. Senate,
Washington, DC.
Dear Mr. President: Under authority of Senate Resolution
54, agreed to March 8, 2001, I am submitting to you the annual
report of the U.S. Senate Special Committee on Aging,
Developments in Aging: 1999 and 2000, volume 1.
Senate Resolution: 4, the Committee Systems Reorganization
Amendments of 1977, authorizes the Special Committee on Aging
``to conduct a continuing study of any and all matters
pertaining to problems and opportunities of older people,
including but not limited to, problems and opportunities of
maintaining health, of assuring adequate income, of finding
employment, of engaging in productive and rewarding activity,
of securing proper housing and, when necessary, of obtaining
care and assistance.'' Senate Resolution 4 also requires that
the results of these studies and recommendations be reported to
the Senate annually.
This report describes actions taken during 1999 and 2000 by
the Congress, the administration, and the U.S. Senate Special
Committee on Aging, which are significant to our Nation's older
citizens. It also summarizes and analyzes the Federal policies
and programs that are of the most continuing importance for
older persons and their families.
On behalf of the members of the committee and its staff, I
am pleased to transmit this report to you.
Sincerely,
John Breaux, Chairman.
C O N T E N T S
Page
Letter of Transmittal............................................ III
Chapter 1: Social Security--Old Age, Survivors and Disability:
Overview..................................................... 1
A. Social Security--Old Age and Survivors Insurance.......... 3
1. Background............................................ 3
2. Financing and Social Security's Relation to the Budget 5
3. Benefit and Tax Issues and Legislative Response....... 11
B. Social Security Disability Insurance...................... 19
1. Background............................................ 19
2. Issues and Legislative Response....................... 20
C. The 107th Congress........................................ 25
Chapter 2: Employee Pensions:
Background................................................... 27
A. Private Pensions.......................................... 27
1. Background............................................ 27
2. Issues and Legislative Response....................... 29
B. State and Local Public Employee Pension Plans............. 34
1. Background............................................ 34
2. Issues and Legislative Response....................... 36
C. Federal Civilian Employee Retirement...................... 38
1. Background............................................ 38
2. Issues and Legislative Response....................... 44
D. Military Retirement....................................... 46
1. Background............................................ 46
2. Issues and Legislative Response....................... 49
3. Recent Issues and Legislative Response................ 54
E. Railroad Retirement System................................ 55
1. Background............................................ 55
2. Issues and Legislative Response....................... 55
3. Prognosis............................................. 59
Chapter 3: Taxes and Savings:
Overview..................................................... 61
A. Taxes..................................................... 62
1. Background............................................ 62
B. Savings................................................... 74
1. Background............................................ 74
2. Issues................................................ 76
Chapter 4: Employment:
A. Age Discrimination........................................ 91
1. Background............................................ 91
2. The Equal Employment Opportunity Commission........... 92
3. The Age Discrimination in Employment Act.............. 93
B. Federal Programs.......................................... 103
1. The Adult and Dislocated Worker Program Authorized
Under the Workforce Investment Act..................... 103
2. Title V of the Older Americans Act.................... 105
Chapter 5: Supplemental Security Income:
Overview..................................................... 107
A. Background................................................ 107
B. Issues.................................................... 109
1. Limitations of SSI Payments to Immigrants............. 109
2. SSA Disability Determination Process.................. 110
3. Employment and Rehabilitation for SSI Recipients...... 111
4. Fraud Prevention and Overpayment Recovery............. 113
Chapter 6: Food Assistance Programs and Food Security Among the
Elderly:
Overview..................................................... 115
A. Background on the Programs................................ 116
1. Food Stamps........................................... 116
2. The Commodity Supplemental Food Program............... 121
3. The Child and Adult Care Food Program................. 122
B. Legislative Developments.................................. 122
C. Food Security Among the Elderly........................... 123
Chapter 7: Health Care:
A. National Health Care Expenditures......................... 129
1. Introduction.......................................... 129
2. Medicare and Medicaid Expenditures.................... 131
3. Hospitals............................................. 132
4. Physicians' Services.................................. 134
5. Nursing Home and Home Health Costs.................... 135
6. Prescription Drugs.................................... 136
7. Health Care for an Aging U.S. Population.............. 142
Chapter 8: Medicare:
A. Background................................................ 145
1. Hospital Insurance Program (Part A)................... 146
2. Supplementary Medical Insurance (Part B).............. 148
3. Medicare+Choice (Part C).............................. 151
4. Supplemental Health Coverage.......................... 153
B. Issues.................................................... 154
1. Medicare Solvency and Cost Containment................ 154
2. Program Modifications................................. 155
3. Program Restructuring................................. 157
4. Prescription Drugs.................................... 158
Chapter 9: Long-Term Care:
Overview..................................................... 161
A. Background................................................ 162
1. What is Long-Term Care?............................... 162
a. Adult Day Care.................................... 163
b. Home Care......................................... 164
c. Respite Care...................................... 165
d. Supportive Housing................................ 165
e. Continuing Care Retirement Communities............ 166
f. Assisted Living................................... 166
g. Nursing Homes..................................... 169
h. Access Services................................... 169
i. Nutrition Services................................ 169
2. Who Receives Long-Term Care?.......................... 170
3. Where is Long-Term Care Delivered?.................... 172
4. Who Provides Long-Term Care?.......................... 172
5. Who Pays for Long-Term Care?.......................... 174
B. Federal Programs.......................................... 178
1. Medicaid.............................................. 178
a. Introduction...................................... 178
b. Medicaid Availability and Eligibility............. 180
c. Low-Income Beneficiaries also Eligible for
Medicare........................................... 181
d. Spousal Impoverishment............................ 182
e. Personal Needs Allowance for Medicaid Nursing Home
Residents.......................................... 184
f. 1915(c) Waiver Programs........................... 186
2. Medicare.............................................. 187
a. Introduction...................................... 187
b. The Skilled Nursing Facility Benefit.............. 187
c. The Home Health Benefit........................... 189
d. The Hospice Benefit............................... 191
e. Program for All-Inclusive Care for the Elderly.... 192
3. Social Services Block Grant........................... 192
C. Special Issues............................................ 193
1. Nursing Home Quality.................................. 193
2. System Variations and Access Issues................... 195
3. The Role of Case Management........................... 195
Chapter 10: Health Benefits for Retirees of Private Sector
Employers:
A. Background................................................ 197
1. Who Receives Retiree Health Benefits?................. 198
2. Design of Benefit Plans............................... 199
3. Recognition of Employer Liability..................... 200
4. Pre-Funding........................................... 201
B. Benefit Protection Under Existing Federal Laws............ 202
1. ERISA................................................. 202
2. COBRA................................................. 202
3. HIPAA................................................. 203
C. Outlook................................................... 204
Chapter 11: Health Research and Training:
A. Background................................................ 207
B. The National Institutes of Health......................... 208
1. Mission of NIH........................................ 208
2. The Institutes........................................ 208
a. National Institute on Aging....................... 209
b. National Cancer Institute......................... 210
c. National Heart, Lung, and Blood Institute......... 210
d. National Institute of Dental Research............. 210
e. National Institute of Diabetes and Digestive and
Kidney Diseases.................................... 211
f. National Institute of Neurological Disorders and
Stroke............................................. 211
g. National Institute of Allergy and Infectious
Diseases........................................... 212
h. National Institute of Child Health and Human
Development........................................ 212
i. National Eye Institute............................ 212
j. National Institute of Environmental Health
Sciences........................................... 212
k. National Institute of Arthritis and
Musculoskeletal and Skin Diseases.................. 213
l. National Institute on Deafness and Other
Communication Disorders............................ 213
m. National Institute of Mental Health............... 214
n. National Institute on Drug Abuse.................. 214
o. National Institute of Alcohol Abuse and Alcoholism 214
p. National Institute of Nursing Research............ 215
q. National Center for Research Resources............ 215
r. National Center for Complementary and Alternative
Medicine........................................... 215
s. National Center on Minority Health and Health
Disparities........................................ 215
C. Issues and Congressional Response......................... 216
1. NIH Appropriations.................................... 216
2. NIH Authorizations.................................... 217
3. Alzheimer's Disease................................... 218
4. Arthritis and Musculoskeletal Diseases................ 222
5. Geriatric Training and Education...................... 223
6. Social Science Research and the Burdens of Caregiving. 224
D. Conclusion................................................ 225
Chapter 12: Housing Programs:
Overview..................................................... 227
A. Rental Assistance Programs................................ 229
1. Introduction.......................................... 229
2. Housing and Supportive Services....................... 229
3. Public Housing........................................ 232
4. Section 8 Housing Programs............................ 234
5. Project-based and Tenant-based Vouchers............... 234
6. Rural Housing Services................................ 235
7. Federal Housing Administration........................ 239
8. Low-Income Housing Tax Credit......................... 240
B. Preservation of Affordable Rental Housing................. 241
1. Introduction.......................................... 241
2. Portfolio Re-Engineering Program...................... 242
C. Homeownership............................................. 243
1. Homeownership Rates................................... 243
2. Homeownership Tax Provisions.......................... 244
3. Legislative Proposals to Increase Homeownership....... 246
4. Home Equity Conversion................................ 247
D. Innovative Housing Arrangements........................... 251
1. Shared Housing........................................ 251
2. Accessory Apartments.................................. 252
E. Fair Housing Act and Elderly Exemption.................... 253
F. Homeless Assistance....................................... 253
G. Housing Cost Burdens of the Elderly....................... 257
Chapter 13: Energy Assistance and Weatherization:
Overview..................................................... 259
A. Background................................................ 260
1. The Low-Income Home Energy Assistance Program......... 260
2. The Department of Energy Weatherization Assistance
Program................................................ 263
Chapter 14: Older Americans Act:
Historical Perspective....................................... 266
A. The Older Americans Act Titles............................ 267
1. Title I--Objectives and Definitions................... 268
2. Title II--Administration on Aging..................... 268
3. Title III--Grants for States and Community Programs on
Aging.................................................. 268
4. Title IV--Research, Training, and Demonstration
Program................................................ 269
5. Title V--Senior Community Service Employment Program.. 269
6. Title VI--Grants for Native Americans................. 270
7. Title VII--Vulnerable Elder Rights Protection
Activities............................................. 270
B. Summary of Major Issues in the 106th Congress............. 271
1. Activity during the 106th Congress.................... 272
2. Issues in Reauthorization............................. 273
C. Older Americans Act Appropriations........................ 275
D. Older Americans Act Funding............................... 287
Chapter 15: Social, Community, and Legal Services:
A. Block Grants.............................................. 291
1. Background............................................ 291
2. Issues................................................ 294
3. Federal Response...................................... 298
B. Adult Education and Literacy.............................. 299
1. Background............................................ 299
2. Program Description................................... 300
3. Legislation in the 106th Congress..................... 301
C. Domestic Volunteer Service Act............................ 302
1. Background............................................ 302
D. Transportation............................................ 305
1. Background............................................ 305
2. Federal Response...................................... 306
3. Issues in Transportation Services for Older Persons... 309
E. Legal Services............................................ 314
1. Background............................................ 314
2. Issues................................................ 318
3. Federal and Private Sector Response................... 322
Chapter 16: Crime and the Elderly:
1. Background............................................ 327
2. Legislative Response.................................. 328
A. Elder Abuse............................................... 328
1. Background............................................ 328
2. Federal Programs...................................... 329
C. Consumer Frauds and Deceptions............................ 329
1. Background............................................ 329
2. Legislative Response.................................. 330
SUPPLEMENTAL MATERIAL
List of Hearings and Forums Held in 1999 and 2000................ 333
107th Congress Rept. 107-158
2d Session SENATE Volume 1
======================================================================
DEVELOPMENTS IN AGING: 1999 AND 2000--VOLUME 1
_______
June 4, 2002.--Ordered to be printed
_______
Mr. Breaux, from the Special Committee on Aging, submitted the
following
R E P O R T
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Chapter 1
SOCIAL SECURITY--OLD AGE, SURVIVORS AND DISABILITY
OVERVIEW
Social Security continues to be an important topic of
national debate. In May 2001, President George W. Bush
established the President's Commission to Strengthen Social
Security. The Commission has been directed to submit
recommendations to ``modernize and restore fiscal soundness to
the Social Security system'' in accordance with 6 guiding
principles: (1) modernization must not change Social Security
benefits for retirees or near-retirees; (2) the entire Social
Security surplus must be dedicated to Social Security only; (3)
Social Security payroll taxes must not be increased; (4)
government must not invest Social Security funds in the stock
market; (5) modernization must preserve Social Security's
disability and survivors components; and (6) modernization must
include individually controlled, voluntary personal retirement
accounts, which will augment the Social Security safety net.
The Commission will make specific recommendations on program
changes in its final report expected in the fall of 2001.
In January 1997, the 1994-1996 Advisory Council on Social
Security issued a report on ways to solve the program's long-
range financing problems. The Council could not reach a
consensus on a single approach, so the report contains three
different proposals that are intended to restore long-range
solvency to the Social Security system. The first proposal,
labeled the ``maintain benefits''
plan, keeps the program's benefit structure essentially the
same by addressing most of the long-range deficit through
revenue increases, including an eventual rise in the payroll
tax, and minor benefit cuts. To close the remaining gap, it
recommends that investing part of the Social Security trust
funds in the stock market be considered. The second, labeled
the ``individual account'' plan, restores financial solvency
mostly with reductions in benefits, and in addition imposes
mandatory employee contributions to individual savings
accounts. The third, labeled the ``personal security account''
plan, achieves long-range financial balance through a major
redesign of the system that gradually replaces a major portion
of the Social Security retirement benefit with individual
private savings accounts.
Elements of the Council's recommendations were reflected in
a number of bills introduced in the 106th Congress. Many of the
financing reform bills introduced would permit or require the
creation of personal savings accounts to supplement or replace
Social Security benefits for future retirees. Some of the bills
would allow or require the investment of Social Security trust
funds in the financial markets. None of these measures were
acted upon during the 106th Congress.
Lawmakers, however, took up a number of other Social
Security measures during the 106th Congress. In December 1999,
the Ticket to Work and Work Incentives Improvement Act of 1999
was signed into law (H.R. 1180, P.L. 106-170). Under the
legislation, a disabled recipient is provided with a ``ticket
to work'' that can be used to obtain employment, vocational
rehabilitation, or other support services from approved
providers. In turn, the service provider is entitled to a share
of the cash benefit savings that result from the recipient's
return to work.
In April 2000, Congress enacted the Senior Citizens'
Freedom to Work Act (P.L. 106-182) eliminating the earnings
test for persons at the full retirement age through age 69 (the
earnings test did not apply to persons age 70 and older). Under
the new law, beneficiaries who have earnings from work above a
certain amount are no longer subject to a reduction in Social
Security benefits once they reach the full retirement age. P.L.
106-182 does not affect persons below the full retirement age
(currently ages 62 to 64).
In July 2000, the House of Representatives passed H.R. 4865
which would repeal the second (or 85 percent) tier of benefit
taxation effective in 2001. To compensate for the loss of
revenue to the Medicare HI trust fund, an amount equal to the
revenue that would have been generated had the tax not been
repealed would be credited to the HI trust fund through a
permanent appropriation from the general fund. The Senate did
not act on the measure prior to adjournment of the 106th
Congress.
Congress considered a number of Social Security ``lock
box'' measures that would create additional procedural
obstacles for bills that cause the budget surpluses to fall
below a level equal to the Social Security (and, in some cases,
Medicare) surpluses if not used for Social Security or Medicare
reform. Among them were measures to create new points of order
that could be lodged against bills that would cause budget
surpluses to be less than Social Security and Medicare HI
surpluses, to require new limits on Federal debt that would
decline by the amount of annual Social Security surpluses, and
to amend the Constitution to require a balanced Federal budget
without counting Social Security. While the House approved
three specific ``lock box'' bills consisting primarily of
procedural points of order (H.R. 3859, H.R. 5173 and H.R.
5203), the Senate could not reach a consensus on them and none
were ultimately passed.
A. SOCIAL SECURITY OLD AGE AND SURVIVORS INSURANCE
1. Background
Title II of the Social Security Act, the Old Age and
Survivors Insurance (OASI) and Disability Insurance (DI)
program together named the OASDI program is designed to replace
a portion of the income an individual or a family loses when a
worker in covered employment retires, dies, or becomes
disabled. Known generally as Social Security, monthly benefits
are based on a worker's earnings. In December 1999, $385.8
billion in monthly benefits were paid to Social Security
recipients, with payments to retired workers averaging $804 and
those to disabled workers averaging $754. In 1999,
administrative expenses were $3.0 billion, representing less
than 1 percent of total revenues.
The Social Security program touches the lives of nearly
every American. In December 1999, there were 44.6 million
Social Security recipients: 27.8 million retired workers (62.3
percent of total recipients); 4.9 million disabled workers
(10.9 percent); 4.9 million dependent family members of retired
and disabled workers (11.0 percent); and 7.0 million surviving
family members of deceased workers (15.8 percent). In 1999,
there were an estimated 158.5 million workers in Social
Security-covered employment, representing over 95 percent of
the total American work force.
In 2001, Social Security contributions are paid on earnings
up to $80,400, a wage cap that is annually indexed to keep pace
with inflation. Workers and employees alike each pay Social
Security taxes of 6.2 percent on earnings. In addition, workers
and their employers pay 1.45 percent on all earnings for the
Hospital Insurance (HI) part of Medicare. For the self-
employed, the payroll tax is doubled, or 15.3 percent of
earnings, counting Medicare.
Social Security is accumulating large reserves in its trust
funds. As a result of increases in Social Security payroll
taxes mandated by the Social Security Act Amendments of 1983,
the influx of funds into Social Security is currently exceeding
the outflow of benefit payments. At the end of 2000, the Social
Security trust funds held assets totaling $1.1 trillion.
(A) History and Purpose
Social Security emerged from the Great Depression as one of
the most solid achievements of the New Deal. Created by the
Social Security Act of 1935, the program continues to grow and
become even more central to larger numbers of Americans. The
sudden economic devastation of the 1930's awakened Americans to
their vulnerability to sudden and uncontrollable economic
forces with the power to generate massive unemployment, hunger,
and widespread poverty. Quickly, the Roosevelt Administration
developed and implemented strategies to protect the citizenry
from hardship, with a deep concern for future Americans. Social
Security succeeded and endured because of this effort.
Although Social Security is uniquely American, the
designers of the program drew heavily from a number of well-
established European social insurance programs. As early as the
1880's, Germany had begun requiring workers and employers to
contribute to a fund first solely for disabled workers, and
then later for retired workers as well. Soon after the turn of
the century, in 1905, France also established an unemployment
program based on a similar principle. In 1911, England followed
by adopting both old age and unemployment insurance plans.
Borrowing from these programs, the Roosevelt Administration
developed a social insurance program to protect workers and
their dependents from the loss of income due to old age or
death. Roosevelt followed the European model: government-
sponsored, compulsory, and independently financed.
While Social Security is generally regarded as a program to
benefit the elderly, the program was designed within a larger
generational context. According to the program's founders, by
meeting the financial concerns of the elderly, some of the
needs of the young and middle-aged would simultaneously be
alleviated. Not only would younger persons be relieved of the
financial burden of supporting their parents, but they also
would gain a new measure of income security for themselves and
their families in the event of their retirement or death.
In the more than half a century since the program's
establishment, Social Security has been expanded and changed
substantially. Disability insurance was pioneered in the
1950's. Nevertheless, the underlying principle of the program
as a mutually beneficial compact between younger and older
generations remains unaltered and accounts for the program's
lasting popularity.
Social Security benefits, like those provided separately by
employers, are related to each worker's average career
earnings. Workers with higher career earnings receive greater
benefits than do workers with lower earnings. Each individual's
earnings record is maintained separately for use in computing
future benefits. The earmarked payroll taxes paid to finance
the system are often termed ``contributions'' to reflect their
role in accumulating credit.
Social Security serves a number of essential social
functions. First, Social Security protects workers from
unpredictable expenses in support of their aged parents or
relatives. By spreading these costs across the working
population, they become smaller and more predictable.
Second, Social Security offers income insurance, providing
workers and their families with a floor of protection against
sudden loss of their earnings due to retirement, disability, or
death. By design, Social Security only replaces a portion of
the income needed to preserve the recipient's previous living
standard and is intended to be supplemented through private
insurance, pensions, savings, and other arrangements made
voluntarily by the worker.
Third, Social Security provides the individual wage earner
with a basic cash benefit upon retirement. Significantly,
because Social Security is an earned right, based on
contributions over the years on the retired or disabled
worker's earnings, Social Security ensures a financial
foundation while maintaining recipients' self-respect.
The Social Security program came of age in the 1980's as
the first generation of lifelong contributors retired and drew
benefits. During the 1990's, payroll tax rates stabilized and,
at the start of the 21st century, there are large accumulated
reserves in the Social Security trust funds.
2. Financing and Social Security's Relation to the Budget
(A) Financing in the 1970's and Early 1980's
As recently as 1970, OASDI trust funds maintained reserves
equal to a full year of benefit payments, an amount considered
adequate to weather any fluctuations in the economy affecting
the trust funds. When Congress passed the 1972 amendments to
the Social Security Act, it was assumed that the economy would
continue to follow the pattern prevalent in the 1960's:
relatively high rates of growth and low levels of inflation.
Under these conditions, Social Security revenues would have
adequately financed benefit expenditures, and trust fund
reserves would have remained sufficient to weather economic
downturns.
The experience of the 1970's was considerably less
favorable than forecasted. The energy crisis, high levels of
inflation and slow wage growth increased program expenditures
in relation to income. The Social Security Act Amendments of
1972 had not only increased benefits by 20 percent across-the-
board, but also indexed automatic benefit increases to the CPI.
Inflation fueled large benefit increases, with no corresponding
increase in payroll tax revenues due to comparatively lower
real wage growth. Further, the recession of 1974-1975 raised
unemployment rates dramatically, lowering payroll tax income.
Finally, a technical error in the initial benefit formula
created by the 1972 legislation led to ``over-indexing''
benefits for certain new retirees, and thereby created an
additional drain on trust fund reserves.
In 1977, recognizing the rapidly deteriorating financial
status of the Social Security trust funds, Congress responded
with new amendments to the Social Security Act. The Social
Security Act Amendments of 1977 increased payroll taxes
beginning in 1979, reallocated a portion of the Medicare (HI)
payroll tax rate to OASI and DI, and resolved the technical
problems in the method of computing the initial benefit amount.
These changes were predicted to produce surpluses in the OASDI
program beginning in 1980, with reserves accumulating to 7
months of benefit payments by 1987.
Again, however, the economy did not perform as well as
predicted. The long-term deficit, which had not been fully
reduced, remained. The stagflation occurring after 1979
resulted in annual CPI increases exceeding 10 percent, a rate
sufficient to double payouts from the program in just 7 years.
Real wage changes had been negative or near zero since 1977,
and in 1980, unemployment rates exceeded 7 percent. As a
result, annual income to the OASDI program continued to be
insufficient to cover expenditures. Trust fund balances
declined from $36 billion in 1977, to $26 billion in 1980.
Lower trust fund balances, combined with rapidly increasing
expenditures, brought reserves down to less than 3 months'
benefit payments by 1980.
The 96th Congress responded to this crisis by temporarily
reallocating a portion of the DI tax rate to OASDI for 1980 and
1981. This measure was intended to postpone an immediate
financing crisis in order to allow time for the 97th Congress
to comprehensively address the impending insolvency of the
OASDI trust funds. In 1981, a number of proposals were
introduced to restore short- and long-term solvency to Social
Security. However, the debate over the future of Social
Security proved to be very heated and controversial. Enormous
disagreements on policy precluded quick passage of
comprehensive legislation. At the end of 1981, in an effort to
break the impasse, the President appointed a 15-member,
bipartisan, National Commission on Social Security Reform to
search for a feasible solution to Social Security's financing
problem. The Commission was given a year to develop a consensus
approach to financing the system.
Meanwhile, the condition of the Social Security trust funds
worsened. By the end of 1981, OASDI reserves had declined to
$24.5 billion, an amount sufficient to pay benefits for only
1.5 months. By November 1982, the OASI trust fund had exhausted
its cashable reserves and in November and December was forced
to borrow $17.5 billion from DI and HI trust fund reserves to
finance benefit payments through July 1983.
The delay in the work of the National Commission deferred
the legislative solution to Social Security's financing
problems to the 98th Congress. Nonetheless, the Commission did
provide clear guidance to the new Congress on the exact
dimensions of the various financing problems in Social
Security, and on a viable package of solutions.
(B) The Social Security Act Amendments of 1983
Once the National Commission on Social Security Reform
reached agreement on its recommendations, Congress moved
quickly to enact legislation to restore financial solvency to
the OASDI trust funds. This comprehensive package eliminated a
major deficit which had been expected to accrue over 75 years.
The underlying principle of the Commission's bipartisan
agreement and the 1983 amendments was to share the burden of
restoring solvency to Social Security equitably between
workers, Social Security recipients, and transfers from other
Federal budget accounts. The Commission's recommendations split
the near-term costs roughly into thirds: 32 percent of the cost
was to come from workers and employers, 38 percent was to come
from recipients, and 30 percent was to come from other budget
accounts including contributions from new Federal employees.
The long-term proposals, however, shifted almost 80 percent of
the costs to future recipients.
The major changes in the OASDI Program resulting from the
1983 Social Security Amendments were in the areas of coverage,
the tax treatment and annual adjustment of benefits, and
payroll tax rates. Key provisions included:
Coverage.--All Federal employees hired after January
1, 1984, were covered under Social Security, as were
all current and future employees of private, nonprofit,
tax-exempt organizations. State and local governments
were prohibited from terminating coverage under Social
Security.
Benefits.--COLA increases were shifted to a calendar
year basis, with the July 1983 COLA delayed to January
1984. A COLA fail-safe was set up so that whenever
trust fund reserves do not equal a certain fraction of
outgo for the upcoming year (15 percent until December
1988, 20 percent thereafter), the COLA will be
calculated on the lesser of wage or price index
increases.
Taxation.--One-half of Social Security benefits
received by taxpayers whose income exceeds certain
limits ($25,000 for an individual and $32,000 for a
couple) were made subject to income taxation, with the
additional tax revenue being funneled back into the
retirement trust fund.
Payroll Taxes.--The previous schedule of payroll tax
increases was accelerated, and self-employment tax
rates were increased.
Retirement Age Increases.--An increase in the
retirement age from 65 to 67 was scheduled to be
gradually phased in from 2000 to 2022.
(C) Trust Fund Projections
In future years, the Social Security trust funds income and
outgo are tied to a variety of economic and demographic
factors, including economic growth, inflation, unemployment,
fertility, and mortality. To predict the future state of the
OASI and DI trust funds, estimates are prepared using three
different sets of assumptions. Alternative I is designated as
the most optimistic, followed by intermediate assumptions
(alternative II) and finally the more pessimistic alternative
III. The intermediate assumptions are the most commonly used
scenario. Actual experience, however, could fall outside the
bounds of any of these assumptions.
One indicator of the health of the Social Security trust
funds is the contingency fund ratio, a number which represents
the ability of the trust funds to pay benefits in the near
future. The ratio is determined from the percentage of 1 year's
payments which can be paid with the reserves available at the
beginning of the year. Therefore, a contingency ratio of 50
percent represents 6 months of outgo.
Trust fund reserve ratios hit a low of 14 percent in 1983,
but increased to approximately 216 percent by 2000. Under the
Social Security trustees' intermediate assumptions, the
contingency fund ratio in 2001 is an estimated 239 percent.
(D) OASDI Near-Term Financing
Combined Social Security trust fund assets are expected to
increase over the next 5 years. According to the 2001 Trustees
Report, OASI and DI assets will be sufficient to meet the
required benefit payments throughout and far beyond the
upcoming 5-year period.
The projected expansion in the OASDI reserves is partly a
result of payroll tax increases from 6.06 percent in 1989 to
6.2 percent in 1990. The OASDI reserves are expected to
steadily build for the next 24 years peaking at $6.5 trillion
in 2024.
(E) OASDI Long-Term Financing
In the long run, the Social Security trust funds will
experience just over two decades of rapid growth, followed by
declining fund balances thereafter. Beginning in 2016, Social
Security's expenditures are projected to exceed tax income
(i.e., income excluding interest). Beginning in 2025, program
expenditures are projected to exceed total income (i.e., tax
income plus interest income). Under the intermediate
assumptions, the program's cost is projected to exceed its
income by 14 percent on average over the next 75 years.
It should be noted that the OASDI trust fund experience in
each of the three 25-year periods between 2001 and 2075 varies
considerably. In the first 25-year period (2001 to 2025) income
is expected to exceed costs on average by 3 percent. Annual
balances are projected to remain positive through 2024, with
negative balances occurring thereafter. The contingency fund
ratio is projected to peak at 436 percent at the beginning of
2014. In the second 25-year period (2026 to 2050) the financial
condition of OASDI deteriorates and the trust funds are
projected to become insolvent early in the period (2038) under
intermediate projections. On average, program costs are
expected to exceed income by 33 percent. The third 25-year
period (2051 to 2075) is expected to be one of continuous
deficits. As annual deficits persist, program costs are
expected to exceed income on average by 40 percent.
(1) Midterm Reserves
It is projected that, from 2001 to 2024, Social Security
will receive more in income than it must distribute in
benefits. Under current law, these reserves will be invested in
interest-bearing Federal securities, and will be redeemable by
Social Security in the years in which benefit expenditures
exceed tax revenues (beginning in 2016). During the years in
which the assets are accumulating, these reserves will far
exceed the amount needed to buffer the OASDI funds from
unfavorable economic conditions. As a matter of policy, there
is considerable controversy over the purpose and extent of
these reserve funds, and the political and economic
implications they entail.
During the period in which Social Security trust fund
reserves are accumulating, the surplus funds can be used to
finance other Government expenditures. During the period of
OASDI shortfalls, the Federal securities previously invested
will be redeemed, causing income taxes to buttress Social
Security. In essence, the assets Social Security accrues
represent internally held Federal debt, which is equivalent to
an exchange of tax revenues over time.
Though the net effect on revenues of this exchange is the
same as if Social Security taxes were lowered and income taxes
raised during periods of on-budget deficits, and Social
Security taxes raised and income taxes lowered when Social
Security's outgo begins to exceed its income, the two tax
methods have vastly different distributional consequences. The
significance lies with the fact that there is incentive to
spend reserve revenues at present and cut back on underfunded
benefits in the future. The growing trust fund reserves enable
Congress to spend more money on other government activities
without raising taxes or borrowing from private markets. At
some point, however, either general revenues will have to be
increased or spending will have to be drastically cut when the
debt to Social Security has to be repaid.
(2) Long-Term Deficits
The long-run financial strain on Social Security is
expected to result from the problems of financing the needs of
an expanding older population on an eroding tax base. The
expanding population of older persons is due to longer life
spans, earlier retirements, and the unusually high birth rates
after World War II, producing the ``baby-boom'' generation
which will begin to retire in 2008 (at age 62). The eroding tax
base in future years is forecast as a result of falling
fertility rates.
This relative increase in the number of recipients will
pose a problem if the Social Security tax base is allowed to
erode. If current trends continue and nontaxable fringe
benefits grow, less and less compensation will be subject to
the Social Security payroll tax. In 1950, fringe benefits
accounted for only 5 percent of total compensation, and FICA
taxes were levied on 95 percent of compensation. By 1980,
fringe benefits had grown to account for 16 percent of
compensation. Continuation in this rate of growth in fringe
benefits, as projected by the Social Security actuaries, might
eventually exempt over one-third of payroll from Social
Security taxes. This would be a substantial erosion of the
Social Security tax base and along with the aging of the
population and the retirement of the baby boom generation, the
long-term solvency of the system will be threatened.
While the absolute cost of funding Social Security is
expected to increase substantially over the next 75 years, the
cost of the system relative to the economy will, as a whole,
rise somewhat over levels in the 1970's. Currently, Social
Security expenditures represent approximately 4.2 percent of
GDP. Under intermediate assumptions, Social Security
expenditures are expected to rise to 6.7 percent of GDP by
2075, still substantially less than the ratios of other
developed nations.
(F) Social Security's Relation to the Budget
Over the years, Social Security has been entangled in
debates over the Federal budget. The inclusion of Social
Security trust fund shortages in the late 1970's initially had
the effect of inflating the apparent size of the deficit in
general revenues. More recently, it was argued that growing
reserves served to mask the true size of the deficit. In fact,
many Members of Congress contended that the inclusion of the
surpluses disguised the Nation's fiscal problems. As budget
shortfalls grew, concern persisted over the temptation to cut
Social Security benefits to reduce budget deficits.
An amendment was included in the 1990 Omnibus Budget
Reconciliation Act (P.L. 101-508), to remove the Social
Security trust funds from the Gramm Rudman Hollings Act of 1985
(GRH) deficit reduction calculations. Many noted economists had
advocated the removal of the trust funds from deficit
calculations. They argued that the current use of the trust
funds contributes to the country's growing debt, and that the
Nation is missing tremendous opportunities for economic growth.
A January 1989 GAO report stated that if the Federal deficit
was reduced to zero, and the reserves were no longer used to
offset the deficit, there would be an increase in national
savings, and improved productivity and international
competitiveness. The National Economic Commission, which
released its report in March 1989, disagreed among its members
over how to tame the budget deficit. Yet, the one and only
recommendation upon which they unanimously agreed is that the
Social Security trust funds should be removed from the GRH
deficit reduction process.
Taking Social Security off-budget was partially
accomplished by the 1983 Social Security Act Amendments and,
later, by the 1985 GRH Act. The 1983 Amendments required that
Social Security be removed from the unified Federal budget by
fiscal year 1993, and the subsequent GRH law accelerated this
removal to fiscal year 1986. To further protect the Social
Security trust funds, Social Security was barred from any GRH
across-the-board cut or sequester.
In OBRA 90, Social Security was finally removed from the
budget process itself. It was excluded from being counted with
the rest of the Federal budget in budget documents, budget
resolutions, or reconciliation bills. Inclusion of Social
Security changes as part of a budget resolution or
reconciliation bill was made subject to a point of order which
may be waived by either body.
However, administrative funds for SSA were not placed
outside of the budget process by the 1990 legislation,
according to the Bush Administration's interpretation of the
new law. This interpretation is at odds with the intentions of
many Members of Congress who were involved with enacting the
legislation. It leaves SSA's administrative budget, which like
other Social Security expenditures is financed from the trust
funds, subject to pressures to offset spending in other areas
of the Federal budget. Legislation was introduced in 1991 by
Senators Sasser and Pryor to take the administrative expenses
off-budget, but was not enacted. The Clinton Administration
continued to employ the same interpretation of the 1990 law.
(G) Current Rules Governing Social Security and the Budget
Congress created new rules in 1990, as part of OBRA 90
(P.L. 101-508), known as ``firewall'' procedures designed to
make it difficult to diminish Social Security reserves. The
Senate provision prohibits the consideration of a budget
resolution calling for a reduction in Social Security surpluses
and bars consideration of legislation causing the aggregate
level of Social Security spending to be exceeded. The House
provision creates a point of order to prohibit the
consideration of legislation that would change the actuarial
balance of the Social Security trust funds over a 5-year or 75-
year period. These firewall provisions make it more difficult
to enact changes in the payroll tax rates or other aspects of
the Social Security program such as benefit changes.
3. Benefit and Tax Issues and Legislative Response
Social Security has a complex system of determining benefit
levels for the millions of Americans who currently receive
them, and for all who will receive them in the future. Over
time, this benefit structure has evolved, with Congress
mandating changes when deemed necessary. Given the focus of
Congress on the paring back of spending, and the hostile
environment toward expanding entitlement programs, most
proposals for benefit improvements have made little progress.
(A) Taxation of Benefits
On September 27, 1994, 300 Republican congressional
candidates presented a ``Contract with America'' that listed 10
proposals they would pursue if elected. One of the proposals
was the Senior Citizens Equity Act which included a measure
that would roll back the 85 percent tax on Social Security
benefits for recipients with higher incomes.
In 1993, as part of the budget reconciliation process, a
provision raised the tax from 50 percent to 85 percent,
effective January 1, 1994. The tax revenues under this
provision were expected to raise $25 billion over 5 years. The
revenues were specified to be transferred to the Medicare
Hospital Insurance Trust Fund. During action on the budget
resolution in May 1996, Senator Gramm offered a Sense of the
Senate amendment that the increase should be repealed. His
amendment was successfully passed but had no practical impact.
In addition, the budget package was vetoed by President
Clinton, nullifying any action in the Senate on the issue.
Pressure to repeal or mitigate the effects of the taxation
of Social Security benefits has continued. In the 106th
Congress, 15 bills were introduced to liberalize the taxation
provision. Ten bills (H.R. 48, H.R. 107, H.R. 688, H.R. 3438,
H.R. 4865, S. 137, S. 286, S. 482, S. 488, S. 2180) would
repeal the provision enacted in 1993 subjecting up to 85
percent of Social Security benefits to income taxes, returning
the maximum amount that can be subject to taxation to 50
percent of benefits. Two bills (H.R. 761, S. 2304) would also
repeal the 1983 provision, and thus restore the original tax-
free status of Social Security benefits. Two bills would remove
certain income from the computation of how much of the benefit
is taxable. H.R. 291 would exclude income from municipal bonds,
and H.R. 3857 would exclude income from workers' compensation.
One bill, H.R. 3437, would index the $25,000, $32,000, $34,000
and $44,000 thresholds so that they would rise each year in
proportion to the rate of inflation.
On July 13, 2000, during consideration of H.R. 8, the Death
Tax Elimination Act, the Senate adopted by a vote of 58-41 an
amendment by Senator Grams that would have repealed the 1993
provision effective in 2001. However, this amendment was later
dropped in order to make the Senate version of the bill
identical to the House-passed version.
On July 19, 2000, the House Committee on Ways and Means
approved H.R. 4865, a bill that, effective in 2001, would have
repealed the 1993 provision, thus restoring the maximum amount
of benefits subject to taxation to 50 percent, by a vote of 22-
15. For nonresident aliens, the percentage of benefits subject
to income tax withholding likewise would have dropped gradually
to 50 percent. According to preliminary estimates, about 20
percent of Social Security recipients (about 9 million
recipients) would have been affected by the measure. The
resulting loss of revenue to the Medicare trust funds was
estimated to be $44.6 billion over 5 years. To compensate, an
amount equal to what the 1993 provision would have generated
would have been calculated by the Treasury Department and such
amount would have been credited to the HI trust fund through a
permanent appropriation from the general fund. The Committee
also approved an amendment that would have required the
Treasury Department to report to Congress annually the amount
and timing of such transfers. On July 27, 2000, the House of
Representatives approved H.R. 4865 by a vote of 265 to 159. A
Democratic alternative, which would have raised the thresholds
at which the 85 percent taxation applies to $80,000 (single)
and $100,000 (couple), with the general fund reimbursing the HI
trust fund for the resulting foregone revenue, was rejected by
a vote of 169-256. Under the Democratic proposal, the tax
reductions would have applied only in years when the portion of
the budget surplus excluding Social Security and Medicare was
adequate to cover the general fund reimbursement of the HI
trust fund. The Senate did not take up H.R. 4865 before
adjournment of the 106th Congress.
(B) Social Security Earnings Test
The earnings test is a provision in the law that reduces
the Social Security benefits of recipients who earn income from
work above specified amounts (these ``exempt'' amounts are
adjusted each year to rise in proportion to average wages in
the economy). The earnings test is among the least popular
features of the Social Security program. Consequently,
proposals to liberalize or eliminate the earnings test are
perennial. This benefit reduction is widely viewed as a
disincentive to continued work efforts by older workers.
Indeed, many believe that the earnings test penalizes those who
wish to remain in the work force. Opponents maintain that it
discriminates against the skilled, and therefore, more highly
paid, worker and that it can hurt elderly individuals who need
to work to supplement meager Social Security benefits. They
argue that although the test reduces Federal budget outlays, it
also denies to the Nation valuable potential contributions of
older, more experienced workers. Some point out that no such
limit exists when the additional income is from pensions,
interest, dividends, or capital gains, and that it is unfair to
single out those who wish to continue working. Finally, some
object because it is very complex and costly to administer.
Defenders of the earnings test say it reasonably executes
the purpose of the Social Security program. Because the system
is a form of social insurance that protects workers from loss
of income due to the retirement, death, or disability of the
worker, they consider it appropriate to withhold benefits from
workers who show by their substantial earnings that they have
not in fact ``retired.'' They also argue that eliminating or
liberalizing the test would primarily help relatively better-
off individuals who need the help least. Furthermore, they
point out that eliminating the earnings test would be extremely
expensive. Proponents of elimination counter that older
Americans who remain in the work force persist in making
contributions to the national economy and continue paying
Social Security taxes.
In March 1996, Congress enacted H.R. 3136 (the Contract
with America Advancement Act, P.L. 104-121), which raised the
earnings limit according to the following timetable: $12,500 in
1996; $13,500 in 1997; $14,500 in 1998; $15,500 in 1999;
$17,000 in 2000; $25,000 in 2001; and $30,000 in 2002.
The cost of the provision (an estimated $5.6 billion) was
offset by other provisions in the bill. Social Security
disability benefits to drug addicts and alcoholics were
eliminated, as were benefits to non-dependent stepchildren. An
estimated 1 million recipients ages 65-69 were affected by the
new earnings test.
In September 1998, Congress took up legislation making
further changes to the Social Security earnings test. The House
of Representatives approved H.R. 4579 (the Taxpayer Relief Act
of 1998) which included a provision that would have increased
the earnings test exempt amount for recipients at or above the
full retirement age according to the following timetable:
$14,500 in 1998; $17,000 in 1999; $18,500 in 2000; $26,000 in
2001; $30,000 in 2002; $31,300 in 2003; $34,000 in 2004;
$35,400 in 2005; $36,800 in 2006; $38,350 in 2007; and $39,750
in 2008. After 2008, the exempt amount once again would be
indexed to average wage growth. The Senate did not take up the
bill, and the measure was not included in any legislation
passed by the 105th Congress.
During the 106th Congress, the Senior Citizens' Freedom to
Work Act (P.L. 106-182, signed April 7, 2000) was enacted
eliminating the earnings test for persons at the full
retirement age through age 69 (the earnings test did not apply
to persons age 70 and older). Under the new law, recipients are
no longer subject to a Social Security benefit reduction due to
post-retirement earnings beginning with the month in which they
reach the full retirement age. (Under the old law, Social
Security benefits for recipients ages 65-69 would have been
reduced $1 for every $3 of earnings above $25,000 in 2001.)
During the year in which a person attains the full retirement
age, the earnings test applicable to persons ages 65-69 under
the old law ($25,000 in 2001) still applies for months
preceding the attainment of the full retirement age.
P.L. 106-182 does not affect persons below the full
retirement age (currently ages 62 to 64). In 2001, recipients
below the full retirement age may earn up to $10,680 with no
reduction in benefits. If they earn more than $10,680, their
benefits are reduced $1 for every $2 of earnings above that
amount.
(C) The Social Security ``Notch''
The Social Security ``notch'' refers to the difference in
monthly Social Security benefits between some of those born
before 1916 and those born in the 5- to 10-year period
thereafter. The controversy surrounding the Social Security
``notch'' stems from a series of legislative changes made in
the Social Security benefit formula, beginning in 1972. That
year, Congress first mandated automatic annual indexing of both
the formula to compute initial benefits at retirement, and of
benefit amounts after retirement, known as cost-of-living
adjustments (or COLAs). The intent was to eliminate the need
for ad hoc benefit increases and to adjust benefit levels in
relation to changes in the cost of living. However, the method
of indexing the formula was flawed in that initial benefit
levels were being indexed twice, for increases in both prices
and wages. Consequently, initial benefit levels were rising
rapidly in relation to the pre-retirement earnings of
recipients.
Prior to the effective date of the 1972 amendments, Social
Security replaced 38 percent of pre-retirement earnings for an
average worker retiring at age 65. The error in the 1972
amendments, however, caused an escalation of the replacement
rate to 55 percent for that same worker. Without a change in
the law, by the turn of the century, benefits would have
exceeded a recipient's pre-retirement earnings. Financing this
increase rather than correcting the overindexing of benefits
would have entailed doubling the Social Security tax rate.
Concern over the program's solvency provided a major impetus
for the 1977 Social Security amendments, which substantially
changed the benefit computation for those born after 1916. To
remedy the problem, Congress chose to partially scale back the
increase in relative benefits for those born from 1917 to 1921
and to finance the remaining benefit increase with a series of
scheduled tax increases. Future benefits for the average worker
under the new formula were set at 42 percent of pre-retirement
earnings.
The intent of the 1977 legislation was to create a
relatively smooth transition between those retiring under the
old method and those retiring under the new method.
Unfortunately, high inflation in the late 1970's and early
1980's caused an exaggerated difference between the benefit
levels of many of those born prior to 1917 and those born
later. The difference has been perceived as a benefit reduction
by those affected. Those born from 1917 to 1921, the so-called
notch babies, have been the most vocal supporters of a
``correction,'' yet these recipients fare as well as those born
later.
The Senate adopted an amendment to set up a Notch Study
Commission. In subsequent conference with the House, an
agreement was reached to establish a 12-member bipartisan
commission with the President and the leadership of the Senate
and the House each appointing 4 members. The measure was signed
into law when the President signed H.R. 5488 (P.L. 102-393).
The Commission was required to report to Congress by
December 31, 1993. However, in 1993, Congress extended the due
date for the final report until December 31, 1994, as part of
the Treasury Department appropriations legislation (P.L. 103-
123).
The Commission met seven times, including three public
hearings, between April and December 1994. In late December
1994, the Notch Commission reported that ``benefits paid to
those in the ``notch'' years are equitable and no remedial
legislation is in order.'' The Commission's report notes that
``when displayed on a vertical bar graph, those benefit levels
form a kind of v-shaped notch, dropping sharply from 1917 to
1921, and then rising again . . . To the extent that
disparities in benefit levels exist, they exist not because
those born in the Notch years received less than their due;
they exist because those born before the notch babies receive
substantially inflated benefits.''
Despite the Commission's findings, a number of notch bills
have been introduced in Congress over the years. Thus far in
the 107th Congress, six bills have been introduced that would
provide additional cash benefits to workers born in the notch
years (and their dependents and survivors). There has been no
legislative action on these measures.
(D) Financing of Social Security Trust Funds
Focus on the long-term solvency of the Social Security
trust funds has nullified proposals to increase benefits or cut
payroll taxes. Despite the emergence of Federal budget
surpluses, concern persists over the expected future growth in
expenditures for entitlement programs, including Social
Security. Recent congressional proposals to shore up the
financing of the Social Security trust funds range from
relatively conservative adjustments within the current program
to wholesale restructuring of the system.
(1) Raising the Retirement Age
To help solve Social Security's long-range financing
problems, proposals have been made to increase the retirement
age. Bills introduced in the last four Congresses would, among
other things, accelerate the phase-in of the increase in the
full retirement age to 67, raise the early retirement age to 65
or 67, and raise the full retirement age to 69 or 70.
Originally, the minimum age of retirement for Social Security
was 65. In 1956, Congress lowered the minimum age to age 62 for
women, but also provided that benefits taken before age 65
would be permanently reduced to account for the longer period
over which benefits would be paid. In 1983, Congress enacted
legislation to address the financing problems of Social
Security. Under that legislation, the full retirement age will
increase by 2 months each year beginning in 2000 until it
reaches age 66 for those who attain age 62 in 2005. It will
increase again by 2 months for each year after 2016 that a
person reaches age 62, until it reaches age 67 for those who
attain age 62 in 2022 or later. Since the Social Security
financial picture has worsened, this solution has been the
target of renewed interest. In January 1997, the 1994-1996
Advisory Council on Social Security issued a report on
recommendations to solve Social Security's long-range financial
problems. Although it split into three factions because it
could not agree on a single set of proposals, two of the
factions recommended that the increase in the full retirement
age to 67 under current law be accelerated, so that it would be
fully effective in 2016 (instead of 2027), and indexed
thereafter to increases in longevity. One of these two factions
also recommended that the early retirement age be raised in
tandem with the full retirement age until it reaches age 65,
where it would remain, but with increased actuarial reductions
as the full retirement age continues to increase.
During the 106th Congress, a number of proposals to raise
the retirement age were introduced. Representative Sanford
introduced a bill (H.R. 251) that would raise the full
retirement age (FRA) by 2 months per year that a person was
born after 1937, reaching age 70 for those born in 1967, and
thereafter by 1 month every 2 years. The early retirement age
would likewise rise, reaching age 65 for those born in 1954,
and rising again beginning with those born in 1968 by 1 month
every 2 years. Representative Porter, et al., introduced a bill
(H.R. 874) that would raise the FRA by 2 months for each year
that a person was born after 1937, until it reaches age 70 for
those born in 1967 or later. It would gradually increase the
reduction for early retirement, reaching 53 percent for persons
born after 1966. Representatives Kolbe and Stenholm introduced
a bill (H.R. 1793) that would raise the FRA by 2 months per
year for persons born from 1938 to 1949, and increase the early
and full retirement ages by one-half month per year thereafter.
From 2001 to 2005, it would gradually increase the actuarial
reduction for persons retiring at the early retirement age,
reaching 37 percent for persons born in 1943 and later.
Representative Nick Smith introduced a bill (H.R. 3206) that
would raise the FRA by 2 months per year for persons born from
1938 to 1949, and increase it by one-half month per year
thereafter. Senator Moynihan introduced a bill (S. 21) that
would restore the FRA to 65. Senator Gregg, et al., introduced
a bill (S. 1383) that is similar to H.R. 1793, but would not
change the early retirement age and would increase the
reduction for early retirement beginning in 2000. None of these
bills were enacted in the 106th Congress.
(2) ``Means Testing'' Social Security Benefits
Social Security benefits are paid regardless of the
recipient's economic status. Since the financing of Social
Security has relied on the use of a mandatory tax on a worker's
earnings and the amount of those earnings are used to determine
the amount of the eventual benefit, a tie has been established
between the taxes paid and benefits received. This link has
promoted the perception that benefits are an earned right, and
not a transfer payment. With the crisis in the financing of
Social Security, interest in the issue of whether high-income
recipients should receive a full benefit surfaced. As a result,
the 1983 reforms included a tax of 50 percent on benefits for
higher income recipients (an indirect means test).
Some policymakers have recommended that the growth of
entitlements be slowed. Some entitlement programs are means
tested eligibility is dependent on a person's income and
assets. Means testing Social Security, the largest entitlement
program, could reap substantial savings. The proposal that
received the most attention in 1994 was offered by the Concord
Coalition, a non-profit organization created with the backing
of former Senators Rudman and Tsongas. Their proposal would
have reduced benefits by up to 85 percent on a graduated scale
for families with incomes above $40,000 (the 85 percent rate
would apply to families with incomes above $120,000).
Supporters of a means test for Social Security argue that
all spending must be examined for ways to cut costs. Although
the program is perceived as an annuity program, that is not the
case. Recipients receive substantially more in benefits than
the value of the Social Security taxes paid. Means testing
benefits for high income recipients is a fair way to impose
sacrifice. They point to data from the Congressional Budget
Office which show that the number of Social Security recipients
with annual incomes over $50,000 is estimated to be 6.6 million
(estimate for 1997). Those who support a means test contend
that these individuals could afford a cut in benefits.
Opponents of means testing believe that such a move would
be the ultimate breach of the principle of Social Security.
They believe that a means test would align the program with
other welfare programs, a move that would weaken public support
for the program. Opponents also believe that means testing is
wrong on other grounds. They argue that Social Security is not
contributing to deficits, it is currently creating a surplus.
It would discourage people from saving because additional
resources could disqualify them from receiving full benefits.
Also, from a retiree's perspective, individuals should be able
to maintain a certain level of income.
As Congress addresses Social Security's long-range
financing problems, means testing Social Security benefits may
once again be raised as a cost-saving option.
(3) Bipartisan Panel to Design Long-Range Social Security Reform
In April 1998, the House of Representatives passed H.R.
3546 (the National Dialogue on Social Security Act of 1998).
The measure would direct the President, the Speaker of the
House of Representatives, and the Majority Leader of the Senate
to convene a national dialog on Social Security through
regional conferences and Internet exchanges. The dialog would
serve both to educate the public regarding the Social Security
program and generate comments and recommendations for reform.
The measure also would establish the Bipartisan Panel to Design
Long-Range Social Security Reform which would be required to
report a single set of recommendations for restoring long-range
solvency to the system. The Senate did not act on the measure
prior to adjournment of the 105th Congress.
(4) Use of Projected Federal Budget Surpluses
While Social Security is by law considered ``off budget''
for many key aspects of developing and enforcing budget goals,
it is still a Federal program and its income and outgo help to
shape the year-to-year financial condition of the government.
As a result, fiscal policymakers often focus on ``unified'' or
overall budget figures that include Social Security. With
former President Clinton's urging that future budget surpluses
be reserved until Social Security's problems were resolved, and
his various proposals to use a portion of the projected
surpluses (or the interest thereon) to shore up the system,
Social Security's treatment in the budget became a major policy
issue in the past two Congresses. In his State of the Union
message in 1998 he had urged setting the entire amount of
future budget surpluses aside for debt reduction. Later in the
year, the House Republican leadership attempted to set
alternative parameters with passage of a tax cut bill, H.R.
4579, and a companion measure, H.R. 4578, that would have
created a new Treasury account to which 90 percent of the next
11 years' surpluses would have been credited. The underlying
principle was that 10 percent of the surpluses be used for tax
cuts and the remainder used for debt reduction until Social
Security reform was enacted. Both bills, however, were opposed
by Democratic Members, who argued for setting all of the budget
surpluses aside. The Senate did not take up either measure
before the 105th Congress adjourned.
The idea re-emerged, however, in the 106th Congress with
substantial support shown by both parties for setting aside a
portion of the budget surpluses equal to the Social Security
and, in some instances, Medicare Hospital Insurance (HI) trust
fund surpluses. Budget resolutions for both FY2000 and FY2001
incorporated budget totals setting aside an amount equal to the
Social Security surpluses for those years, as well as reserving
funds for Medicare reform. By setting them aside, they in
effect dedicated these amounts to debt reduction. The 106th
Congress went on to consider other so-called ``lock box''
measures, intended to create additional procedural obstacles
for bills that would have caused the budget surpluses to fall
below a level equal to the Social Security (and in some cases
Medicare) surpluses if not used for Social Security or Medicare
reform. Among them were measures to create new points of order
that could be lodged against bills that would cause budget
surpluses to be less than Social Security and Medicare HI
surpluses, to require new limits on Federal debt that would
decline by the amount of annual Social Security surpluses, and
to amend the Constitution to require a balanced Federal budget
without counting Social Security. While the House approved
three specific ``lock box'' bills consisting primarily of
procedural points of order (H.R. 3859, H.R. 5173, and H.R.
5203), the Senate could not reach a consensus on them and none
were ultimately passed.
The 107th Congress has considered similar legislation with
House passage of H.R. 2 on February 13, 2001. H.R. 2 again
attempts to create points or order against measures that would
cause the budget surpluses to be less than Social Security and
Medicare HI surpluses. In the Senate, similar Democratic and
Republican provisions were offered as amendments to S. 420, the
Bankruptcy Reform Act of 2001. One offered by Senator Conrad
would have taken Medicare HI off-budget and enhanced procedural
points of order for Social Security. Another offered by Senator
Sessions contained provisions similar to H.R. 2. Neither
amendment was adopted having been set aside due to procedural
points of order raised during Senate debate on March 13, 2001.
(5) Privatization
The 1994-1996 Advisory Council on Social Security issued a
report in January 1997 on ways to solve the program's long-
range financing problems. The Council could not reach a
consensus on a single approach, so the report contains three
different proposals that are intended to restore long-range
solvency to the Social Security system. The first proposal,
labeled the ``maintain benefits'' plan, keeps the program's
benefit structure essentially the same by addressing most of
the long-range deficit through revenue increases, including an
eventual rise in the payroll tax, and minor benefit cuts. To
close the remaining gap, it recommends that investing part of
the Social Security trust funds in the stock market be
considered. The second, labeled the ``individual account''
plan, restores financial solvency mostly with reductions in
benefits, and in addition imposes mandatory employee
contributions to individual savings accounts. The third,
labeled the ``personal security account'' plan, achieves long-
range financial balance through a major redesign of the system
that gradually replaces a major portion of the Social Security
retirement benefit with individual private savings accounts.
Elements of the Council's recommendations were reflected in
a number of bills introduced during the past two Congresses. A
number of financing reform bills were introduced, most of which
would permit or require the creation of personal savings
accounts to supplement or replace Social Security benefits for
future retirees. Some of the bills would allow or require the
investment of Social Security trust funds in the financial
markets. Although none of these measures have been acted upon,
Congress will likely consider similar measures in the future.
On May 2, 2001, President George W. Bush signed Executive
Order 13210 establishing the President's Commission to
Strengthen Social Security. Under the Executive Order, the
Commission is directed to submit recommendations to ``modernize
and restore fiscal soundness to the Social Security system'' in
accordance with 6 guiding principles: (1) modernization must
not change Social Security benefits for retirees or near-
retirees; (2) the entire Social Security surplus must be
dedicated to Social Security only; (3) Social Security payroll
taxes must not be increased; (4) government must not invest
Social Security funds in the stock market; (5) modernization
must preserve Social Security's disability and survivors
components; and (6) modernization must include individually
controlled, voluntary personal retirement accounts, which will
augment the Social Security safety net. On July 24, 2001, the
Commission appointed by President Bush held its second public
meeting. At that time, the Commission unanimously approved an
interim report describing its views on the nature of Social
Security's long-range financing problems and, in general terms,
a range of options for restoring long-range solvency to the
system and improving Social Security benefits, especially for
low-income individuals, women, minorities, and younger workers.
The Commission will make specific recommendations on program
changes in its final report due in the fall of 2001.
B. SOCIAL SECURITY DISABILITY INSURANCE
1. Background
In recent years, Congress has raised concern over SSA's
administration of the largest national disability program,
Social Security Disability Insurance (SSDI). In particular,
there was concern that some SSDI recipients were using the
benefit to purchase drugs and alcohol. As a result of extensive
investigation, Congress responded to these concerns by placing
a 3-year time limit on program benefits to drug addicts and
alcoholics, extending requirements for treatment to SSDI
recipients, and requiring SSDI recipients to have a
representative payee.
Action was also taken to shore up the financing of the DI
trust fund. The Social Security trustees, in the annual report
to Congress, uttered an explicit warning that the DI trust fund
would be depleted in 1995. Congress acted in late 1994 to take
steps that would keep the DI trust fund solvent. The latest
projections by the Social Security trustees show that the DI
trust fund will remain solvent until 2026.
More recently, Congress has addressed concerns about the
small number of disability recipients who leave the benefit
rolls because they return to work. During the 106th Congress,
legislation was enacted designed to improve work incentives for
disabled recipients. The Ticket to Work and Work Incentives
Improvement Act of 1999 (P.L. 106-170, signed December 17,
1999) created the Ticket to Work and Self-Sufficiency Program
which provides a disabled recipient with a ``ticket to work''
that can be used to obtain employment, vocational
rehabilitation, or other support services from approved
providers. The service provider, in turn, is entitled to a
share of the cash benefit savings that result from the
recipient's return to work.
(A) Recent History
Since the inception of SSDI, SSA has determined the
eligibility of recipients. In response to the concern that SSA
was not adequately monitoring continued eligibility, Congress
included a requirement in the 1980 Social Security amendments
that SSA review the eligibility of nonpermanently disabled
recipients at least once every 3 years. The purpose of the
continuing disability reviews (CDRs) was to terminate benefits
to recipients who were no longer disabled.
SSA had drastically cut back on CDRs partly due to budget
shortfalls that left it unable to meet the mandated
requirements for the number of CDRs it must perform. In
addition, Congress continued to encounter evidence of a
deterioration in the quality and timeliness of disability
determinations being conducted by SSA, even as the Agency was
undertaking a system-wide disability redesign, intended to
address backlogs and improve decisionmaking.
2. Issues and Legislative Response
(A) Financial Status of Disability Insurance Trust Fund
The Social Security trustees warned in 1993 that the SSDI
program was in financial trouble and projected that the trust
fund would be depleted by 1995. Their forecast reflected rapid
enrollment increases over the past few years and tax revenues
constrained by a stagnant economy.
The SSDI trust fund's looming insolvency prompted proposals
to reallocate taxes to it from Social Security's retirement
program. Because the trustees projected that the Old Age and
Survivors trust fund would be solvent until 2044, many proposed
to allocate a greater portion to SSDI. Projections issued in
1993 indicated that the two programs could still be kept
solvent until 2036. Such a reallocation would eventually shift
about 3 percent of the retirement programs' taxes to SSDI.
Most advocates of reallocation favored quick action to
allay fears that the program was in danger and to provide time
to assess whether an improving economy would alter the outlook.
Others favored only a temporary reallocation to force a careful
assessment of the factors driving up enrollment and whether
there were feasible ways to constrain it.
In 1993, the House of Representatives approved a provision
to deal with this issue, but it was dropped from the final
version of the Omnibus Budget Reconciliation Act of 1993 along
with other Social Security provisions for procedural reasons.
Specifically, 0.275 percent of the employer and employee Social
Security payroll tax rate, each, and 0.55 percent of the self-
employment tax would have been reallocated from the OASI trust
fund to the DI trust fund. The total OASDI tax rate of 6.2
percent for employers and employees each and 12.4 percent for
the self-employed would remain unchanged.
Although the House provision was dropped, this was done for
procedural reasons, not policy reasons. Widespread agreement
existed in the House and the Senate to address this issue again
as soon as possible. Congress acted in late 1994 by enacting a
reallocation as part of P.L. 103-387.
According to the 2001 trustees' report, the DI trust fund
is projected to remain solvent until 2026 and the OASI fund is
projected to remain solvent until 2040 (on a combined basis,
the trust funds are projected to remain solvent until 2038).
(B) Rules for Disability Benefits
Concern over DI recipients who are drug addicts and
alcoholics (DA&As) and how their benefits are sometimes used
resulted in swift action in 1994 to curb abuse. Since the
inception of Supplemental Security Income (SSI), a program
financed with general fund revenues and administered by SSA,
the law has required that the SSI payments to individuals who
have been diagnosed and classified as drug addicts or
alcoholics must be made to another individual, or an
appropriate public or private organization. The representative
payee is responsible for managing the recipient's finances.
Federal law did not require the use of representative payees
for drug addicts and alcoholics enrolled in the DI program.
Criticism was also targeted at SSA's failure to monitor
DA&A recipients in the SSI program who were required to undergo
treatment. A report issued by the General Accounting Office
revealed that SSA had established monitoring agencies in only
18 states even though the monitoring requirement had been in
effect since the inception of the program.
The Social Security Independence and Program Improvements
Act (P.L. 103-296) addressed these issues. The new law required
that DI recipients whose drug addiction or alcoholism was a
contributing factor material to their disability receive DI
payments through a representative payee. The representative
payee requirements were strengthened by creating a preference
list for payees. SSA now selects the payee, with preference
given to nonprofit social services agencies. Qualified
organizations may charge DA&As a monthly fee equal to 10
percent of the monthly payment or $50, whichever is less.
Prior to the enactment of P.L. 103-296, only the SSI
recipients were required to undergo appropriate treatment.
There were no parallel requirements for DI recipients. With the
new legislation, DI recipients were required to undergo
substance abuse treatment. Benefits could be suspended for
those recipients who failed to undergo or comply with required
treatment for drug addiction or alcoholism.
Before enactment of P.L. 103-296, DA&As in both the SSI and
DI programs received program benefits as long as they remained
disabled. The new law required that recipients whose drug
addiction or alcoholism was a contributing factor material to
SSA's determination that they were disabled be dropped from the
rolls after receiving 36 months of benefits. The 36-month limit
applies to DI substance abusers only for months when
appropriate treatment was available.
With the Republican party gaining a majority in the 1994
elections, the issue of drug addicts and alcoholics in the
Federal disability programs received renewed attention. The
Personal Responsibility Act (part of the House Republican
Contract With America) contained a provision which would wipe
out benefits for DA&As in the SSI program. As the welfare
reform debate evolved, proposals to raise the earnings limit
for receipt of Social Security benefits were rejected because
there were no offsets to ``pay for'' the desired increase in
the earnings limit. Senator McCain and Representative Bunning
sponsored legislation to increase the earnings limit and
included specific offsets to finance the change. H.R. 3136,
signed by President Clinton, increased the earnings limit to
$30,000 by 2002. One of the offsets included in the bill was
the elimination of drug addiction and alcoholism as a basis for
disability in both the SSDI program and the SSI program.
This change in policy was enacted despite warnings that
approximately 75 percent of the people in the DA&A program
could requalify for benefits based on another disabling
condition, such as a mental illness. Opponents warned that such
a move would result in fewer people in treatment and increased
abuse of benefits because of the relaxation of the
representative payee requirements enacted in 1994. Early
reports of the implementation of the law seem to bear out these
predictions; however, more information will be needed as the
provision's requirements are fully implemented.
(C) Disability Determination Process
In 1994, SSA began to respond to congressional concern over
problems in the administration of its disability determination
system. The problems were first identified at hearings in 1990.
Congressional investigations found growing backlogs, delays,
and mistakes. The issues raised in those investigations
continued to worsen thereafter largely because SSA lacked
adequate resources to process its workload.
Acknowledging that the problem must be addressed with or
without additional staff, SSA set up a ``Disability Process
Reengineering Project'' in 1993. A series of committees were
established to review the entire process, beginning with the
initial claim and continuing through the disability allowance
or the final administrative appeal. The effort targeted the
SSDI program and the disability component of SSI.
The project began in October 1993 when a special team of 18
Federal and State Disability Determination Services (DDS)
employees was assembled at SSA headquarters in Baltimore, MD.
The SSA effort does not attempt to change the statutory
definition of disability, or affect in any way the amount of
disability benefits for which individuals are eligible, or to
make it more difficult for individuals to file for and receive
benefits. Rather, SSA plans to reengineer the process in a way
that makes it easier for individuals to file for and, if
eligible, to receive disability benefits promptly and
efficiently, and that minimizes the need for multiple appeals.
In September 1994, SSA released a report describing the new
process. As proposed, the new process would offer claimants a
range of options for filing a claim, and claimants who are able
to do so would play a more active role in developing their
claims. In addition, claimants would have the opportunity to
have a personal interview with decisionmakers at each level of
the process. The redesigned process would include two basic
steps, instead of a four-level process. The success of the new
process would depend on SSA's ability to implement the
simplified decision method and provide consistent direction and
training to all adjudicators. Also, its success would depend on
better collection of medical evidence, and the development of
an automated claims processing system.
Between 1994 and 1997, SSA tested many of the 83
initiatives included in the original redesign plan. In February
1997, the Agency reassessed its plan and decided to focus on a
smaller number of initiatives. On October 1, 1999, SSA began
testing a prototype plan, which combines several initiatives
tested by the Agency over the last few years, in 10 States:
Alabama, Alaska, Colorado, Louisiana, Michigan, Missouri, New
Hampshire, Pennsylvania, and parts of California and New York.
An evaluation of the redesigned disability determination
process in these States will allow SSA to ``further analyze and
refine its improvements to the disability process'' prior to
national implementation (SSA Performance and Accountability
Report for Fiscal Year 2000).
In addition, SSA is currently implementing a Hearings
Process Improvement Plan nationwide with the goal of reducing
the time it takes to process a typical case from request for
hearing through final hearing disposition to 180 days or less.
SSA expects to reach its goal by 2004.
(D) Continuing Disability Reviews
As concern over program growth has mounted, the need to
protect the integrity of the program has moved to the
forefront. This movement has been demonstrated by the inquiries
into the payment of disability benefits to drug addicts and
alcoholics, as well as concerns over the small number of people
who are rehabilitated through the efforts of SSA. Another
important duty of SSA which has been the target of
congressional interest is the continuing disability review
(CDR) process.
In recent years, SSA has had difficulty ensuring that
people receiving disability benefits under the DI program are
still eligible for benefits. By law, SSA is required to conduct
CDRs to determine whether recipients have medically improved to
the extent that the person is no longer disabled. A GAO study
was commissioned to report on the CDR backlog, analyze whether
there are sufficient resources to conduct CDRs, and how to
improve the CDR process.
GAO released its findings in October 1996. The study found
that about 4.3 million DI and SSI recipients were due or
overdue for CDRs in fiscal year 1996. GAO found that SSA had
already embarked on reforms that would improve the CDR process,
although the Agency found that the proposal would not address
all of the problems.
In March 1996, Congress enacted H.R. 3136 (the Contract
with America Advancement Act, P.L. 104-121) which provided a
substantial increase in the funding for CDRs (more than $4
billion over 7 years). With this new funding, SSA developed a
plan to conduct 8.2 million CDRs during fiscal years 1996
through 2002.
In September 1998, GAO released its findings that SSA is
making progress in conducting CDRs, with 1.2 million processed
during the first 2 years of the initiative. In its Performance
and Accountability Report for Fiscal Year 2000, SSA reports
that it has exceeded its CDR completion goals for each fiscal
year 1998 through 2000.
(E) Return to Work and Rehabilitation
In fiscal year 1998, 10.3 million individuals received
either Social Security or SSI disability benefits. Together
they represent the two largest disability programs in the
nation, with estimated expenditures of $66 billion in fiscal
year 1998. While both Social Security and SSI currently include
a number of work incentives and offer rehabilitation services
to the working disabled, the number of people who leave the
rolls to return to work is very small. Currently, less than
one-half of 1 percent of Social Security recipients and about 1
percent of SSI recipients leave the SSA disability rolls each
year by returning to work.
The small incidence of return to work on the part of
disabled recipients may be due in part to the Social Security
and SSI requirements that a worker's impairment make him or her
unable to engage in any substantial work activity. Since
eligibility depends upon proving inability to work, recipients
risk losing both cash benefits and health insurance coverage if
they attempt to work. While existing incentives in the Social
Security disability and SSI programs attempt to lessen this
risk, proponents of greater work opportunity argued that more
focused efforts were needed to resolve the conflict between
choosing work or continued health insurance coverage for
disabled recipients.
During the 106th Congress, the Ticket to Work and Work
Incentives Improvement Act of 1999 (P.L. 106-170, signed
December 17, 1999) was enacted creating the Ticket to Work and
Self- Sufficiency Program. The purpose of this new program is
to help persons leave the Social Security disability and SSI
rolls through greater accessibility to a broader pool of
vocational rehabilitation (VR) providers. Under the new law,
the Commissioner of Social Security will provide ``tickets to
work'' to disabled Social Security and SSI recipients that can
be used as vouchers to obtain employment services, case
management, vocational rehabilitation, and support services
from providers of their choice, including state VR agencies.
The legislation also provides for up to 54 additional months of
Medicare coverage for Social Security disability recipients who
return to work and prevents work activity from triggering an
unscheduled CDR.
As revenue raising measures, P.L. 106-170 expanded the
restriction on Social Security benefits for prisoners to
include certain sex offenders and prisoners jailed for under 1
year and required the Commissioner of Social Security to impose
an assessment on direct fee payments to attorneys representing
Social Security disability claimants to recover related
administrative costs.
C. THE 107th CONGRESS
The Social Security reform debate continues as policymakers
address ways to resolve Social Security's long-range financing
problems. The options being considered range from relatively
minor adjustments to the current program to major changes in
the structure of the program such as the creation of personal
savings accounts. The President's Commission to Strengthen
Social Security will make specific recommendations on program
changes in its final report scheduled to be released in the
fall of 2001.
CHAPTER 2
EMPLOYEE PENSIONS
BACKGROUND
Many employees receive retirement income from sources other
than Social Security. About half of all workers in the United
States participate in pension plans sponsored by employers or
unions.
In June of 2001, the President signed H.R. 1836, the
Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L.
107-16). Title VI of the bill deals with pension plans and
retirement savings accounts. P.L. 107-16 will increase the
maximum allowable annual contributions to individual retirement
accounts (IRAs), Sec. 401(k) plans, Sec. 403(b) annuities, and
Sec. 457 deferred compensation plans for employees of state and
local governments. Other measures are intended to encourage
employers to offer pensions, increase participation by eligible
employees, raise limits on benefits, improve asset portability,
strengthen legal protections for plan participants, and reduce
regulatory burdens on plan sponsors.
A. PRIVATE PENSIONS
1. Background
Employer-sponsored pension plans provide many retirees with
a needed supplement to their Social Security income. Most of
these plans are sponsored by a single employer and provide
employees credit only for service performed for the sponsoring
employer. Other private plan participants are covered by
``multi-employer'' plans that provide members of a union with
continued benefit accrual while working for any number of
employers within the same industry and/or region. In 1999,
approximately 57 percent of private-sector workers between the
ages of 21 and 64, who worked 35 hours or more per week for the
full year participated in an employer-sponsored pension or
retirement savings plan. In firms with more than 500 employees,
78 percent of workers participated in a retirement plan, while
just 45 percent of workers in firms of less than 500 employees
participated in such plans.
Assets of retirement plans of all types totaled $3.5
trillion in 1997. Defined benefit plans had total assets of
$1.7 trillion, while defined contribution plans had assets
totaling $1.8 trillion. In 1997, nearly half of private plan
participants (an estimated 46 percent) were covered under a
defined-benefit pension plan. Defined-benefit plans generally
base the benefit paid in retirement either on the employee's
length of service or on a combination pay and length of
service. In the private sector, defined-benefit plans are
typically funded entirely by the employer. Defined-contribution
plans, on the other hand, specify a rate at which annual or
periodic contributions are made to an account. Benefits are not
specified but are a function of the account balance, including
accrued interest, at the time of retirement.
Many large employers supplement their defined-benefit plan
with one or more defined-contribution plans. When supplemental
plans are offered, the defined-benefit plan is usually funded
entirely by the employer, and the supplemental defined-
contribution plans are jointly funded by employer and employee
contributions. Defined-benefit plans occasionally accept
voluntary employee contributions or require employee
contributions. However, only about 3 percent of defined-benefit
plans in the private sector require contributions from
employees. Since the 1920's, Congress has granted special tax
treatment to pension plans to encourage pension coverage.
Private pensions are provided voluntarily by employers;
however, the Internal Revenue Code requires that pension trusts
receiving favorable tax treatment must benefit all participants
without discriminating in favor of the highly paid. Pension
trusts receive favorable tax treatment in three ways: (1)
Employers can deduct their current contributions even though
they do not provide immediate compensation for employees; (2)
income earned by the trust fund is tax-exempt; and (3) employer
contributions and trust earnings are not taxable to the
employee until received as a benefit. The major tax advantages,
however, are the tax-free accumulation of trust interest
(inside buildup) and the likelihood that benefits may be taxed
at a lower rate in retirement.
In the Employee Retirement Income Security Act (ERISA) of
1974, Congress established minimum standards for pension plans
to ensure a broad distribution of benefits and to limit the tax
benefits of pensions provided to highly compensated company
officers and employees. ERISA also established standards for
funding and administering pension trusts and created the
Pension Benefit Guaranty Corporation, an employer-financed
insurance program for pension benefits promised by private
employers.
Title XI of the Tax Reform Act of 1986 made major changes
in pension and deferred compensation plans in four general
areas.
The Act:
(1) limited an employer's ability to ``integrate'' or
reduce pension benefits to account for Social Security
contributions;
(2) reformed coverage, vesting, and nondiscrimination
rules;
(3) changed the rules governing distribution of
benefits; and
(4) modified limits on the maximum amount of benefits
and contributions in tax-favored plans.
In 1987, Congress strengthened pension plan funding rules.
These rules were tightened further by the Retirement Protection
Act of 1994, and insurance premiums were increased for under-
funded plans.
The increased oversight of pension administration and
funding was revisited in 1996 with the passage of the Small
Business Job Protection Act. Legislative and regulatory actions
over the last 20 years had improved pensions, but the resulting
complexity of the rules were blamed for the stagnation in the
number of plans being offered. For example, these rules
resulted in higher administrative costs to the plans which
reduced the assets available to fund benefits. In addition, a
plan administrator who failed to accurately apply the rules
could be penalized by the failure to comply with legal
requirements.
The Small Business Job Protection Act of 1996 was intended
to begin rectifying some of the perceived over-regulation of
pension plans. While commentators seem to agree that the Act
will not result in an increase in defined benefit plans, it may
increase the number of defined contribution plans offered,
particularly by small businesses.
2. Issues and Legislative Responses
(a) Coverage
Employers who offer pension plans do not have to cover
every employee. ERISA permits employers to exclude part-time
employees, newly hired employees, and workers under age 21 from
the pension plan. The ability to exclude certain workers from
participation in the pension plan led to the enactment of
safeguards to prevent an employer from tailoring a plan to only
the highly compensated employees. The Tax Reform Act of 1986
increased the proportion of an employer's work force that must
be covered under a company pension plan. Employers who were
unwilling to meet the straightforward percentage test found
substantial latitude under the classification test to exclude a
large percentage of lower paid workers from participating in
the pension plan. Under the percentage test, the plan(s) had to
benefit 70 percent of the workers meeting minimum age and
service requirements (56 percent of the workers if the plan
made participation contingent upon employee contributions). A
plan could avoid this test if it could show that it benefited a
classification of employees that did not discriminate in favor
of highly compensated employees. The classifications actually
approved by the Internal Revenue Service, however, permitted
employers to structure plans benefiting almost exclusively
highly compensated employees.
While Congress and the IRS have sought to restrict the
abuse that can stem from allowing certain employees to defer
taxation on ``benefits'' in a pension plan, these tests have
become confusing and difficult to administer. Many pension fund
managers have claimed that this confusion has led to the
tapering off in the growth of pension plan coverage,
particularly in smaller companies. The Small Business Job
Protection Act of 1996 was enacted to combat some of these
problems.
Since 1999, salary deferral plans have been exempted from
these coverage rules if the plan adopts a ``safe-harbor''
design authorized under the new law. In addition, the coverage
rules will apply only to defined-benefit plans. Another
important change is the repeal of the family aggregation rules.
Under current law, related employees are required to be treated
as a single employee. Congress also addressed another complaint
of pension plan administrators in the Act by changing the
definition of ``highly compensated employee'' (HCE).
Being covered by a pension plan does not insure that a
worker will receive retirement benefits. To receive retirement
benefits, a worker must vest under the plan. Vesting requires
an employee to remain with a firm for a requisite number of
years and thereby earning the right to receive a pension. To
enable more employees to vest either partially or fully in a
pension plan, the 1986 Tax Reform Act required more rapid
vesting. The new provision, which applied to all employees
working as of January 1, 1989, requires that, if no part of the
benefit is vested prior to 5 years of service, then benefits
fully vest at the end of 5 years. If a plan provides for
partial vesting before 5 years of service, then full vesting is
required at the end of 7 years of service. Under the Economic
Growth and Tax relief Reconciliation Act of 2001, the maximum
vesting schedule for defined contribution plans was further
reduced. DC plans that use cliff vesting must now vest
participants after no more than 3 years, and those that use
graded vesting will have to vest participants in no more than 6
years.
(1) Access
Most non-covered workers work for employers who do not
sponsor a pension plan. Nearly three-quarters of the noncovered
employees work for small employers. Small firms often do not
provide pensions because pension plans can be administratively
complex and costly. Often these firms have low profit margins
and uncertain futures, and the tax benefits of a pension plan
for the company are not as great for small firms.
Projected trends in future pension coverage have been hotly
debated. The expansion of pension coverage has slowed over the
last decade. The most rapid growth in coverage occurred in the
1940's and 1950's when the largest employers adopted pension
plans. One of the goals of the Small Business Job Protection
Act was to increase the number of employers who offer defined
contribution plans to their employees. This reflects the
preference for defined contribution plans by small employers
because of their low cost and flexibility. This preference is
demonstrated by the growth in the number of DC plans. The 1993
Current Population Survey (CPS) shows that the percentage of
private-sector workers reporting that they were offered a
401(k) plan increased from 7 percent in 1983 to 35 percent in
1993.
The Act will increase access to DC plans by restoring to
nonprofit organizations the right to sponsor 401(k) plans. (The
Tax Reform Act of 1986 had ended the ability of nonprofits to
offer these plans.) State and local government entities will
still be prohibited from offering 401(k) plans, however.
The new law also authorized a ``savings incentive match
plan for employees'' or SIMPLE. This authority replaced the
salary reduction simplified employee pension (SARSEP) plans.
The SIMPLE plan can be adopted by firms with 100 or fewer
employees that have no other pension plan in place. An employer
offering SIMPLE can choose to use a SIMPLE retirement account
or a 401(k) plan. These plans will not be subject to
nondiscrimination rules for tax-qualified plans. In a SIMPLE
plan, an employee can contribute up to $6,000 a year, indexed
yearly for inflation in $500 increments. Beginning in 2002,
this limit will rise incrementally until it reaches $10,000.
The employer must meet a matching requirement and vest all
contributions at once.
(2) Benefit Distribution and Deferrals
Vested workers who leave an employer before retirement age
generally have the right to receive vested deferred benefits
from the plan when they reach retirement age. Benefits that can
only be paid this way are not ``portable'' because the
departing worker may not transfer the benefits to his or her
next plan or to a savings account. Many pension plans, however,
allow a departing worker to take a lump-sum cash distribution
of his or her accrued benefits. Federal policy regarding lump-
sum distributions has been inconsistent. On the one hand,
Congress formerly encouraged the consumption of lump-sum
distributions by permitting employers to make distributions
without the consent of the employee on amounts of $5,000 or
less, and by providing favorable tax treatment through the use
of the unique ``10-year forward averaging'' rule. On the other
hand, Congress has tried to encourage departing workers to save
their distributions by deferring taxes if the amount is rolled
into an individual retirement account (IRA) within 60 days. IRA
rollovers, however, have attracted only a minority of lump-sum
distributions.
According to data collected by the Bureau of the Census, of
those who had received at least one lump-sum distribution
between 1975 and 1995, 33 percent reported that they had rolled
over the entire amount of the most recent distribution,
accounting for 48 percent of the total dollar value of these
distributions. Another 35 percent of recipients reported that
they saved at least part of the distribution, and the remainder
spent the entire amount. Thus, distributions appear to reduce
retirement income rather than increase it. The Small Business
Job Protection Act eliminated the 5-year averaging of lump-sum
pension distributions. The 10-year averaging for the
``grandfathered'' class was maintained, however.
(b) Tax Equity
Private pensions are encouraged through preferential tax
treatment. The revenue lost from the exemptions for pension
plans is the largest tax expenditure in the Federal budget,
greater than either the mortgage interest deduction or the
deduction for employer-sponsored health insurance. In return,
Congress regulates private plans to prevent over-accumulation
of benefits by the highly paid. Congressional efforts to
prevent the discriminatory provision of benefits have focused
on voluntary savings plans and on the effectiveness of current
coverage and discrimination rules.
(1) Limitations on Tax-Favored Voluntary Savings
The Tax Reform Act of 1986 tightened the limits on
voluntary tax-favored savings plans by repealing the
deductibility of contributions to an IRA for participants in
pension plans with adjusted gross incomes (AGIs) in excess of
$35,000 (individuals) or $50,000 (joint), with a phased-out
reduction in the amount deductible for those with AGIs above
$25,000 or $40,000, respectively. These limits were relaxed
somewhat by the Taxpayer Relief Act of 1997 (P.L. 105-34). The
$35,000 limit will rise gradually, reaching $60,000 in 2005.
The $50,000 limit will reach $100,000 in 2007. Furthermore, the
Roth IRA, which was authorized by The Taxpayer Relief Act of
1997, allows individuals to save after-tax income and make tax-
free withdrawals if certain conditions are met. Roth IRAs are
allowed for taxpayers with AGI no greater than $110,000
($160,000 for joint filers).
The Small Business Job Protection Act included a major
expansion of IRAs. The Act allows a non-working spouse of an
employed person to contribute up to the $2,000 annual limit on
IRA contributions. Prior law applied a combined limit of $2,250
to the annual contribution of a worker and non-working spouse.
The Tax Reform Act of 1986 reduced the dollar limit on the
amount employees can elect to contribute through salary
reduction to an employer plan from $30,000 to $7,000 per year
for private-sector 401(k) plans and to $9,500 per year for
public sector and nonprofit 403(b) plans. In 1999, the limit on
contributions to 401(k) and 403(b) plans is $10,000. These
limits are subject to annual inflation adjustments rounded down
to the next lowest multiple of $500.
P.L. 107-16 will incrementally raise the annual limit on
IRA contributions. From 2002 to 2004, the limit will be $3,000.
In 2005, 2006, and 2007, the limit will be $4,000, and in 2008
the limit will be $5,000. In years after 2008, the limit will
be indexed to the CPI.
(c) Pension Funding
The contributions that plan sponsors set aside in pension
trusts are invested to build sufficient assets to pay benefits
to workers throughout their retirement. The Federal Government,
through the Employee Retirement Income Security Act of 1974
(ERISA), regulates the level of funding and the management and
investment of pension trusts. Under ERISA, plans that promise a
specified level of benefits (defined-benefit plans) must either
have assets adequate to meet benefit obligations earned to date
under the plan or must make additional annual contributions to
reach full funding in the future. Under ERISA, all pension
plans are required to diversify their assets, are prohibited
from buying, selling, exchanging, or leasing property with a
``party-in-interest,'' and are prohibited from using the assets
or income of the trust for any purpose other than the payment
of benefits or reasonable administrative costs.
Prior to ERISA, participants in underfunded pension plans
lost some or all of their benefits when employers went out of
business. To correct this problem, ERISA established a program
of termination insurance to guarantee the vested benefits of
participants in single-employer defined-benefit plans. This
program guaranteed benefits up to $34,568 a year in 1998
(adjusted annually). The single-employer program is funded
through annual premiums paid by employers to the Pension
Benefit Guaranty Corporation (PBGC), a Federal Government
agency established in 1974 by title IV of ERISA to protect the
retirement income of participants and beneficiaries covered by
private sector, defined-benefit pension plans. When an employer
terminates an underfunded plan, the employer is liable to the
PBGC for up to 30 percent of the employer's net worth. A
similar termination insurance program was enacted in 1980 for
multi-employer defined-benefit plans, using a lower annual
premium, but guaranteeing only a portion of the participant's
benefits.
Over time, concern grew that the single-employer
termination insurance program was inadequately funded. A major
cause of the PBGC's problem was the ease with which
economically viable companies could terminate underfunded plans
and unload their pension liabilities on the termination
insurance program. Employers unable to make required
contributions to the pension plan requested funding waivers
from the IRS, permitting them to withhold their contributions,
and thus increase their unfunded liabilities. As the
underfunding grew, the company terminated the plan and
transferred the liability to the PBGC. The PBGC was helpless to
prevent the termination and was also limited in the amount of
assets that it could collect from the company to help pay for
underfunding to 30 percent of the company's net worth. PBGC was
unable to collect much from the financially troubled companies
because they were likely to have little or no net worth.
During 1986, several important changes were enacted to
improve PBGC's financial position. First, the premium paid to
the PBGC by employers was increased per participant. In
addition, the circumstances under which employers could
terminate underfunded pension plans and dump them on the PBGC
were tightened considerably. A distinction is now made between
``standard'' and ``distress'' terminations. In a standard
termination, the employer has adequate assets to meet plan
obligations and must pay all benefit commitments under the
plan, including benefits in excess of the amounts guaranteed by
the PBGC that were vested prior to termination of the plan. A
``distress'' termination allows a sponsor that is in serious
financial trouble to terminate a plan that may be less than
fully funded.
While significant accomplishments were made in 1986, these
changes did not solve the PBGC's financing problems. As a
remedy, a provision in the Omnibus Budget Reconciliation Act of
1987 (OBRA 87) (P.L. 100-203) called for a PBGC premium
increase in 1989 and an additional ``variable-rate premium''
based on the amount that the plan is underfunded.
In OBRA 90, Congress increased the flat premium rate to $19
a participant. Additionally, it increased the variable rate to
$9 per $1,000 of unfunded vested benefits. Also, the Act
increased the per participant cap on the additional premium to
$53.
The financial viability of the PBGC continued to be an
issue in 1991. This concern was demonstrated in the Senate's
refusal to pass the Pension Restoration Act of 1991, a bill
that would have extended PBGC's pension guarantee protection to
individuals who had lost their pension benefits before the
enactment of ERISA in 1974.
The Retirement Protection Act of 1994 (RPA) was implemented
in response to PBGC's growing accumulated deficit of $2.9
billion and because pension underfunding continued to grow
despite previous legislative changes. While private sector
pension plans are generally well funded, the gap between assets
and benefit liabilities in underfunded plans had grown steadily
until 1994, when PBGC estimated a shortfall of about $71
billion in assets, concentrated in the steel, airline, tire,
and automobile industries. While three-quarters of the
underfunding was in plans sponsored by financially healthy
firms and did not necessarily pose a risk to PBGC or plan
participants, the remaining plans were sponsored by financially
troubled companies covering an estimated 1.2 million
participants. In 1995, PBGC estimated a reduction in the asset
shortfall to $64 billion, and the agency believes that further
reductions have occurred since 1995.
The RPA was expected to improve funding of underfunded
single-employer pension plans, with the fastest funding by
those plans that were less than 60 percent funded for vested
benefits to more than 85 percent. The agency also expected its
accumulated deficit to be erased within 10 years.
(d) Current Issues
The percentage of workers participating in employer-
sponsored retirement plans has remained level at about 50
percent of the work force since the late 1970's. Since then,
there has been shift away from traditional defined benefit
plans toward discretionary employee retirement savings
arrangements, which may lessen retirement income security for
some workers. Some analysts think that the decline in defined
benefit plans reflects the highly regulated nature of the
voluntary pension system. Others feel that it reflects changes
in the economy and worker preferences.
The issue of pension portability also promises to receive
some attention. Pension benefit portability involves the
ability to preserve the value of an employee's benefits upon a
change in employment. Proponents argue that the mobility of
today's work force demands greater benefit portability than
current law permits.
Sweeping demographic changes have led many experts to
question whether our nation can provide retirement income and
medical benefits to the future elderly at levels comparable to
those of today. There is concern that the baby boom is not
saving adequately for retirement, yet it is unlikely that
Social Security benefits will be increased. To the contrary,
the age for unreduced benefits will rise to 67 early in the
21st century, amounting to a benefit reduction, and further
cuts are being contemplated. Thus, lawmakers, economists,
consultants, and others concerned about retirement income
security will likely continue to seek reforms in the private
pension system.
Finally, the role that pension funds can play in improving
the economy and public infrastructure is often debated because
of the huge amount of money accumulated in pension funds and
the budgetary constraints that limit the ability of Federal and
State governments to address their economic problems. Proposals
to attract public and private pension fund investment in
financing the rebuilding of roads, bridges, highways and other
public infrastructure have aroused concerns that pension funds
may be placed at risk by those who advocate that pension
managers engage in ``economically targeted investing'' (ETI).
B. STATE AND LOCAL PUBLIC EMPLOYEE PENSION PLANS
1. Background
Pension funds covering 13.3 million State and local
government workers and retirees held assets that were worth
$1.4 trillion at the end of 1995. Although some public plans
are not adequately funded, most State plans and large municipal
plans have substantial assets to back up their benefit
obligations. At the same time, State and local governments face
other fiscal demands and sometimes seek relief by reducing or
deferring contributions to their pension plans in order to free
up cash for other purposes. Those who are concerned that these
actions may jeopardize future pension benefits suggest that the
Federal Government should regulate State and local government
pension fund operations to ensure adequate funding.
State and local pension plans intentionally were left
outside the scope of Federal regulation under ERISA in 1974,
even though there was concern at the time about large unfunded
liabilities and the need for greater protection for
participants. Although unions representing State and municipal
employees have supported the application of ERISA-like
standards to these plans, opposition from local officials and
interest groups thus far have successfully counteracted these
efforts, arguing that the extension of such standards would be
unwarranted and unconstitutional interference with the right of
State and local governments to set the terms and conditions of
employment for their workers. In the Taxpayer Relief Act of
1997 (P.L. 105-34), Congress permanently exempted public plans
from Federal tax code rules regarding nondiscrimination among
participants and minimum participation standards.
(a) Tax Reform Act of 1986
Public employee retirement plans were affected directly by
several provisions of the Tax Reform Act of 1986. The Act made
two changes that apply specifically to public plans: (1) The
maximum employee elective contributions to voluntary savings
plans (401(k), 403(b), and 457 plans) were substantially
reduced, and (2) an especially favorable tax treatment of
distributions from contributory pension plans was eliminated.
(b) Elective Deferrals
The Tax Reform Act set lower limits for employee elective
deferrals to savings vehicles, coordinated the limits for
contributions to multiple plans, and prevented State and local
governments from establishing new 401(k) plans. The maximum
contribution permitted to an existing 401(k) plan was reduced
from $30,000 to $7,000 a year and the nondiscrimination rule
that limits the average contribution of highly compensated
employees to a ratio of the average contribution of employees
who do not earn as much was tightened. With inflation
adjustments, this has since increased to $10,000 (in 1999). The
maximum contribution to a 403(b) plan (tax-sheltered annuity
for public school employees) was reduced to $9,500 a year (now
also $10,000), and employer contributions for the first time
were made subject to nondiscrimination rules. In addition, pre-
retirement withdrawals were restricted unless due to hardship.
The maximum contribution to a 457 plan (unfunded deferred
compensation plan for a State or local government) remained at
$7,500, but is coordinated with contributions to a 401(k) or
403(b) plan. (It has since been indexed for inflation and is
$8,000 in 1999.) In addition, 457 plans are required to
commence distributions under uniform rules that apply to all
pension plans. The lower limits were effective for deferrals
made on or after January 1, 1987, while the other changes
generally were effective January 1, 1989.
(c) Taxation of Distributions
The tax treatment of distributions from public employee
pension plans also was modified by the Tax Reform Act of 1986
to develop consistent treatment for employees in contributory
and noncontributory pension plans. Before 1986, public
employees who had made after-tax contributions to their pension
plans could receive their own contributions first (tax-free)
after the annuity starting date if the entire contribution
could be recovered within 3 years, and then pay taxes on the
full amount of the annuity. Alternately, employees could
receive annuities in which the portions of nontaxable
contributions and taxable pensions were fixed over time. The
Tax Reform Act repealed the 3-year basis recovery rule that
permitted tax-free portions of the retirement annuity to be
paid first. Under the new law, retirees from public plans must
receive annuities that are a combination of taxable and
nontaxable amounts.
The tax treatment of pre-retirement distributions was
changed for all retirement plans in an effort to discourage the
use of retirement money for purposes other than retirement. A
10-percent penalty tax applies to any distribution before age
59.5 other than distributions in the form of a life annuity at
early retirement at or after age 55, in the event of the death
of the employee, or in the event of medical hardship. In
addition, refunds of after-tax employee contributions and
payments from 457 plans are not subject to the 10 percent
penalty tax. The Tax Reform Act of 1986 also repealed the use
of the advantageous 10-year forward-averaging tax treatment for
lump-sum distributions received prior to age 59.5, and provided
for a one-time use of 5-year forward-averaging after age 59.5.
However, 5-year averaging was later repealed, effective in
2000.
2. Issues and Legislative Response
Issues surrounding Federal regulation of public pension
plans have changed little in the past 25 years. A 1978 report
to Congress by the Pension Task Force on Public Employee
Retirement Systems concluded that State and local plans often
were deficient in funding, disclosure, and benefit adequacy.
The Task Force reported many deficiencies that still exist
today.
Government retirement plans, particularly smaller plans,
frequently were operated without regard to generally accepted
financial and accounting procedures applicable to private plans
and other financial enterprises. There was a general lack of
consistent standards of conduct.
Open opportunities existed for conflict-of-interest
transactions, and poor plan investment performance was often a
problem. Many plans were not funded on the basis of sound
actuarial principles and assumptions, resulting in funding
levels that could place future beneficiaries at risk of losing
benefits altogether. There was a lack of standardized and
effective disclosure, creating a significant potential for
abuse due to the lack of independent and external reviews of
plan operations.
Although most plans effectively met ERISA minimum
participation and benefit accrual standards, two of every three
plans, covering 20 percent of plan participants, did not meet
ERISA's minimum vesting standard. There has been considerable
variation and uncertainty in the interpretation and application
of provisions pertaining to State and local retirement plans,
including the nondiscrimination and tax qualification
requirements of the Internal Revenue Code. While most
administrators seem to follow the broad outlines of ERISA
benefit standards, they are not required to do so. Congress
acted in 1996 to exempt public employee plans from the
nondiscrimination and minimum participation rules of the
Federal tax code.
The issue of Federal standards has been tested partially in
the courts. In National League of Cities v. Usery, the U.S.
Supreme Court held that extension of Federal wage and maximum
hour standards to State and local employees was an
unconstitutional interference with State sovereignty reserved
under the 10th Amendment. State and local governments have
argued that any extension of ERISA standards would be subject
to court challenge on similar grounds. However, the Supreme
Court's decision in 1985 in Garcia v. San Antonio Metropolitan
Transit Authority overruling National League of Cities largely
resolved this issue in favor of Federal regulation.
Perhaps in part because of the lingering question of
constitutionality, the focus of Congress has been fixed on
regulation of public pensions with respect to financial
disclosure only. Some experts have testified that much of what
is wrong with State and local pension plans could be improved
by greater disclosure.
A definitive statement on financial disclosure standards
for public plans was issued in 1986 by the Government
Accounting Standards Board (GASB). Statement No. 5 on
``Disclosure of Pension Information by Public Employee
Retirement Systems and State and Local Governmental Employers''
established standards for disclosure of pension information by
public employers and public employee retirement systems (PERS)
in notes in financial statements and in required supplementary
information. The disclosures are intended to provide
information needed to assess the funding status of PERS, the
progress made in accumulating sufficient assets to pay
benefits, and the extent to which the employer is making
actuarially determined contributions. In addition, the
statement requires the computation and disclosure of a
standardized measure of the pension benefit obligation. The
statement further suggests that 10-year trends on assets,
unfunded obligations, and revenues be presented as
supplementary information.
Some observers have suggested that the sheer size of the
public fund asset pool will lead to its inevitable regulation.
There is also concern about cash-strapped governments
``raiding'' pension plan assets and tinkering with the
assumptions used in determining plan contributions. Critics of
this position generally believe that the diversity of plan
design and regulation is necessary to meet divergent priorities
of different localities and is the strength, not weakness, of
what is collectively referred to as the State and local pension
system. While State and local governments consistently opposed
Federal action, increased pressures to improve investment
performance, coupled with the call for investing in public
infrastructure and economically targeted investments (ETIs),
may lessen some of the opposition of State and local plan
administrators to some degree of Federal regulation.
C. FEDERAL CIVILIAN EMPLOYEE RETIREMENT
1. Background
From 1920 until 1984 the Civil Service Retirement System
(CSRS) was the retirement plan covering most civilian Federal
employees. In 1935 Congress enacted the Social Security system
for private sector workers. Congress extended the opportunity
for state and local governments to opt into Social Security
coverage in the early to mid 1950's, and in 1983, when the
Social Security system was faced with insolvency, the National
Commission on Social Security Reform recommended, among other
things, that the Federal civil service be brought into the
Social Security system in order to raise revenues by imposing
the Social Security payroll tax on Federal wages. Following the
National Commission's recommendation, Congress enacted the
Social Security amendments of 1983 (P.L. 98-21) which mandated
that all workers hired into permanent Federal positions on or
after January 1, 1984, be covered by Social Security.
Because Social Security duplicated some existing CSRS
benefits, and because the combined employee contribution rates
for Social Security and CSRS were scheduled to reach more than
13 percent of pay, it was necessary to design an entirely new
retirement system using Social Security as the base. (See
Chapter 1 for a description of Social Security eligibility and
benefit rules.) The new system was crafted over a period of 2
years, during which time Congress studied the design elements
of good pension plans maintained by medium and large private
sector employers. An important objective was to model the new
Federal system after prevailing practice in the private sector.
In Public Law 99-335, enacted June 6, 1986, Congress created
the Federal Employees' Retirement System (FERS). FERS now
covers all Federal employees hired on or after January 1, 1984,
and those who voluntarily switched from CSRS to FERS during
``open seasons'' in 1987 and 1998. The CSRS will cease to exist
when the last employee or survivor in the system dies.
CSRS and the pension component of FERS are ``defined
benefit'' pension plans; that is, retirement benefits are
determined by a formula established in law that bases benefits
on years of service and salary. Although employees are required
to pay into the system, the amounts workers pay are not
directly related to the size of their retirement benefits.
Civil service retirement is classified in the Federal budget as
an entitlement, and, in terms of budget outlays, represents the
fourth largest Federal entitlement program.
(a) Financing CSRS and FERS
The Federal retirement systems are employer-provided
pension plans similar to plans provided by private employers
for their employees. Like other employer-provided defined
benefit plans, the Federal civil service plans are financed
mostly by the employer. Thus, tax revenues finance most of the
cost of Federal pensions.
The Government maintains an accounting system for keeping
track of ongoing retirement benefit obligations, revenues
earmarked for the retirement system, benefit payments, and
other expenditures. This system operates through the Civil
Service Retirement and Disability Fund, which is a Federal
trust fund. However, this trust fund system is different from
private trust funds in that no cash is deposited in the fund
for investment outside the Federal Government. The trust fund
consists of special nonmarketable interest-bearing securities
of the U.S. Government. These special securities are sometimes
characterized as ``IOUs'' the Government writes to itself. The
cash to pay benefits to current retirees and other costs come
from general revenues and mandatory contributions paid by
employees enrolled in the retirement systems. Executive branch
employee contributions are 7 percent of pay for CSRS enrollees
and 0.8 percent of pay for FERS enrollees. The trust fund
provides automatic budget authority for the payment of benefits
to retirees and survivors without the Congress having to enact
annual appropriations.
The trust fund has no effect on the annual Federal budget
surplus or deficit. The only costs of the Federal retirement
system that show up as outlays in the budget, and which
therefore contribute to a deficit or reduce a surplus, are
payments to retirees, survivors, separating employees who
withdraw their contributions, plus certain administrative
expenses. Any future increase in the cost of the retirement
program will result from: (a) a net increase in the number of
retirees (new and existing retirees and survivors minus
decedents); (b) increases in Federal pay, which affect the
final pay on which pensions for new retirees are determined;
and (c) cost-of-living adjustments to retirement benefits.
Also, as the number of workers covered under CSRS declines, a
growing portion of the Federal workforce will be covered under
FERS, and, because FERS employee contributions are
substantially lower than those from CSRS enrollees, employee
contributions will, over time, offset less of the annual costs.
The special securities held in the fund represent money the
Government owes for current and future benefits. The securities
represent an indebtedness of the U.S. Government and constitute
part of the national debt. However, this is a debt the
Government owes itself. Thus, it will never have to be paid off
by the Treasury, as must other U.S. Government securities such
as bonds or Treasury bills, which must be paid, with interest,
to the private individuals who purchased them. In summary, the
trust fund is an accounting ledger used to keep track of
revenues earmarked for the retirement programs, benefits paid
under those programs, and money that is owed by the Government
for estimated future benefit costs.
(b) Civil Service Retirement System
CSRS Retirement Eligibility and Benefit Criteria.--Workers
enrolled in CSRS may retire and receive an immediate, unreduced
annuity at the following minimum ages: age 55 with 30 years of
service; age 60 with 20 years of service; age 62 with 5 years
of service. Workers who separate from service before reaching
these age and service thresholds may leave their contributions
in the system and draw a ``deferred annuity'' at age 62.
CSRS benefits are determined according to a formula that
pays retirees a certain percentage of their preretirement
Federal salary. The preretirement salary benchmark is a
worker's annual pay averaged over the highest-paid 3
consecutive years, the ``high 3''. Under the CSRS formula, a
worker retiring with 30 years of service receives an initial
annuity of 56.25 percent of high-3; at 20 years the annuity is
36.25 percent; at 10 years it is 16.25 percent. The maximum
initial benefit of 80 percent of high-3 is reached after 42
years of service.
Employee Contributions.--All executive branch CSRS
enrollees pay into the system 7 percent of their gross Federal
pay. (As mentioned above, contribution rates are temporarily
higher.) This amount is automatically withheld from workers'
paychecks but is included in an employee's taxable income.
Employees who separate before retirement may withdraw their
contributions (no interest is paid if the worker completed more
than 1 year of service), but by doing so the individual
relinquishes all rights to retirement benefits. If the
individual returns to Federal service, the withdrawn sums may
be redeposited with interest, and retirement credit is restored
for service preceding the separation. Alternatively, workers
may accept a reduced annuity in lieu of repayment of withdrawn
amounts.
Survivor Benefits.--Surviving spouses (and certain former
spouses) of Federal employees who die while still working in a
Federal job may receive an annuity of 55 percent of the annuity
the worker would have received had he or she retired rather
than died, with a minimum survivor benefit of 22 percent of the
worker's high-3 pay. This monthly annuity is paid for life
unless the survivor remarries before age 55.
Spouse survivors of deceased retirees receive a benefit of
55 percent of the retiree's annuity at the time of death,
unless the couple waives this coverage at the time of
retirement or elects a lesser amount; it is paid as a monthly
annuity unless the survivor remarries before age 55. (Certain
former spouses may be eligible for survivor benefits if the
couple's divorce decree so specifies.) To partially pay for the
cost of a survivor annuity, a retiree's annuity is reduced by
2.5 percent of the first $3,600 of his or her annual annuity
plus 10 percent of the annuity in excess of that amount.
Unmarried children under the age of 18 (age 22 if a full-
time student) of a deceased worker or retiree receive an
annuity of no more than $4,128 per year in 1998 ($4,944 if
there is no surviving parent). Certain unmarried, incapacitated
children may receive a survivor annuity for life.
CSRS Disability Retirement.--The only long-term disability
program for Federal workers is disability retirement.
Eligibility for CSRS disability retirement requires that the
individual be (a) a Federal employee for at least 5 years, and
(b) unable, because of disease or injury, to render useful and
efficient service in the employee's position and not qualified
for reassignment to a vacant position in the agency at the same
grade or pay level and in the same commuting area. Thus, the
worker need not be totally disabled for any employment. This
determination is made by the Office of Personnel Management
(OPM).
Unless OPM determines that the disability is permanent, a
disability annuitant must undergo periodic medical reevaluation
until reaching age 60. A disability retiree is considered
restored to earning capacity and benefits cease if, in any
calender year, the income of the annuitant from wages or self-
employment, or both, equal at least 80 percent of the current
rate of pay of the position occupied immediately before
retirement.
A disabled worker is eligible for the greater of: (1) the
accrued annuity under the regular retirement formula, or (2) a
``minimum benefit.'' The minimum benefit is the lesser of: (a)
40 percent of the high-3, or (b) the annuity that would be paid
if the worker continued working until age 60 at the same high 3
pay, thereby including in the annuity computation formula the
number of years between the onset of disability and the date on
which the individual will reach age 60.
Cost-of-Living Adjustments.--Permanent law provides annual
retiree cost-of-living adjustments (COLAs) payable in the month
of January. COLAs are based on the Consumer Price Index for
Urban Wage Earners and Clerical Workers (CPI-W). The adjustment
is made by computing the average monthly CPI-W for the third
quarter of the current calender year (July, August, and
September) and comparing it with that of the previous year.
(c) Federal Employees' Retirement System
FERS has three components: Social Security, a defined-
benefit plan, and a Thrift Savings Plan. Congress designed FERS
to replicate retirement systems typically available to
employees of medium and large private firms.
(1) FERS Retirement Eligibility and Benefit Criteria
Workers enrolled in FERS may retire with an immediate,
unreduced annuity under the same rules that apply under CSRS:
that is, age 55 with 30 years of service; age 60 with 20 years
of service; age 62 with 5 years of service. In addition, FERS
enrollees may retire and receive an immediate reduced annuity
at age 55 with 10 through 29 years of service. The annuity is
reduced by 5 percent for each year the worker is under age 62
at the time of separation. The ``minimum retirement age'' of 55
will gradually increase to 57 for workers born in 1970 and
later. Like the CSRS, a deferred benefit is payable at age 62
for workers who voluntarily separate before eligibility for an
immediate benefit, provided they leave their contributions in
the system. An employee separating from service under FERS may
withdraw his or her FERS contributions, but such a withdrawal
permanently cancels all retirement credit for the years
preceding the separation with no option for repayment.
FERS retirees under age 62 who are eligible for unreduced
benefits are paid a pension supplement approximately equal to
the amount of the Social Security benefit to which they will
become entitled at age 62 as a result of Federal employment.
This supplement is also paid to involuntarily retired workers
between ages 55 and 62. The supplement is subject to the Social
Security earnings test.
Benefits from the pension component of FERS are based on
high-3 pay, as are CSRS benefits. A FERS annuity is 1 percent
of high-3 pay for each year of service if the worker retires
before age 62 and 1.1 percent of high-3 for workers retiring at
age 62 or over with at least 20 years of service. Thus, for
example, the benefit for a worker retiring at age 62 with 30
years of service would be 33 percent of the worker's high-3
pay; for a worker retiring at age 60 with 20 years of service
the benefit would be 20 percent of high-3 pay plus the
supplement until age 62.
(2) Employee Contributions
Unlike CSRS participants, employees participating in FERS
are required to contribute to Social Security. The tax rate for
Social Security is 6.2 percent of gross pay up to the taxable
wage base ($80,400 in 2001). The wage base is indexed to the
annual growth of wages in the national economy. Executive
branch employees enrolled in FERS contribute the difference
between 7 percent of gross pay and the Social Security tax
rate. Thus, in 2001, FERS participants contribute 0.8 percent
of wages to the Civil Service Retirement and Disability Fund.
This contribution rate applies to all wages, including wages
about the Social Security taxable wage base.
(3) Survivor Benefits
If an employee participating in FERS dies while still
working in a Federal job and after completing at least 18
months of service but fewer than 10 years, spouse survivor
benefits are payable in two lump sums: $21,783 (in 1998,
indexed annually by inflation) plus one-half of the employee's
annual pay at the time of death. This benefit can be paid in a
single lump sum or in equal installments (with interest) over
36 months, at the option of the survivor. However, if the
employee had at least 10 years of service, an annuity is paid
in addition to the lump sums. The spouse survivor annuity is
equal to 50 percent of the employee's earned annuity.
Spouse survivors of deceased FERS annuitants are not
eligible for the lump-sum payments but are eligible for an
annuity of 50 percent of the deceased retiree's annuity at the
time of death unless, at the time of retirement, the couple
jointly waives the survivor benefit or elects a lesser amount.
FERS retiree annuities are reduced by 10 percent to pay
partially for the cost of the survivor benefit.
Dependent children (defined the same as under the CSRS) of
deceased FERS employees or retirees may receive Social Security
child survivor benefits, or, if greater, the children's
benefits payable under the CSRS.
(4) FERS Disability Retirement
FERS disability benefits are substantially different from
CSRS disability benefits because FERS is integrated with Social
Security. Eligibility for Social Security disability benefits
requires that the worker be determined by the Social Security
Administration to have an impairment that is so severe he or
she is unable to perform any job in the national economy. Thus,
a FERS enrollee who is disabled for purposes of carrying out
his or her Federal job but who is capable of other employment
would receive a FERS disability annuity alone. A disabled
worker who meets Social Security's definition of disability
might receive both a FERS annuity and Social Security
disability benefits subject to the rules integrating the two
benefits.
For workers under age 62, the disability retirement benefit
payable from FERS in the first year of disability is 60 percent
of the worker's high-3 pay, minus 100 percent of Social
Security benefits received, if any. In the second year and
thereafter, FERS benefits are 40 percent of high-3 pay, minus
60 percent of Social Security disability payments, if any. FERS
benefits remain at that level (increased by COLAs) until age
62.
At age 62, the FERS disability benefit is recalculated to
be the amount the individual would have received as a regular
FERS retirement annuity had the individual not become disabled
but continued to work until age 62. The annuity is 1 percent of
high-3 pay (increased by COLAs) for each year of service before
the onset of the disability, plus the years during which
disability was received. The 1 percent rate applies only if
there are fewer than 20 years of creditable service. If the
total years of creditable service equal 20 or more, the annuity
is 1.1 percent of high-3 for each year of service. At age 62
and thereafter, there is no offset of Social Security benefits.
If a worker becomes disabled at age 62 or later, only regular
retirement benefits apply.
(5) FERS Cost-of-Living Adjustments
COLAs for FERS annuities are calculated according to the
CSRS formula, with this exception: the FERS COLA is reduced by
1 percentage point if the CSRS COLA is 3 percent or more; it is
limited to 2 percent if the CSRS COLA falls between 2 and 3
percent. FERS COLAs are payable only to regular retirees age 62
or over, to disabled retirees of any age (after the first year
of disability), and to survivors of any age. Thus, unlike CSRS,
FERS nondisability retirees are ineligible for a COLA so long
as they are under age 62.
(6) Thrift Savings Plan (TSP)
FERS supplements the defined benefits plan and Social
Security with a defined contribution plan that is similar to
the 401(k) plans used by private employers. Employees
accumulate assets in the TSP in the form of a savings account
that either can be withdrawn in a lump sum, received through
several periodic payments, or converted to an annuity when the
employee retires. One percent of pay is automatically
contributed to the TSP by the employing agency. Employees can
contribute up to 10 percent of their salaries to the TSP, not
to exceed $10,500 in 2001. The employing agency matches the
first 3 percent of pay contributed on a dollar-for-dollar basis
and the next 2 percent of pay contributed at the rate of 50
cents per dollar. The maximum matching contribution to the TSP
by the Federal agency equals 4 percent of pay plus the 1
percent automatic contribution. Therefore, employees
contributing 5 percent or more of pay will receive the maximum
employer match. An open season is held every 6 months to permit
employees to change levels of contributions and direction of
investments. Employees are allowed to borrow from their TSP
accounts. Originally, loans were restricted to those for the
purchase of a primary residence, educational or medical
expenses, or financial hardship. However, P.L. 104-208 removed
this restriction effective October 1, 1996.
The TSP allows investment in one or more of three funds: a
stock index fund, an index fund that tracks fixed-income
securities such as corporate bonds, and a fund that pays
interest based on the yields on certain Treasury securities. In
1996, Congress authorized the TSP to initiate two additional
funds: an international fund, and a fund that invests in small-
capitalization stocks. These new funds became available to TSP
participants in May 2001.
2. Issues and Legislative Response
(a) Cost-of-Living Adjustments
The full and automatic COLAs generally payable to CSRS
retirees has long been the target of criticisms by those who
contend that, because private pension plan benefits are
generally not fully and automatically indexed to inflation,
Federal pension benefits should follow that precedent. Indeed,
Congress limited COLAs for FERS pensions in order to achieve
comparability with private plans. Nevertheless, Social Security
benefits are fully and automatically indexed and are a basic
component of private pension plans and FERS. CSRS retirees do
not receive Social Security for their Federal service. In 1995,
Congress directed the Bureau of Labor Statistics to improve its
measurement of inflation. These improvements are expected to
result in slightly lower retirement benefit COLAs each year
than would otherwise have occurred.
(b) Retirement Age
The age at which an employer permits workers to retire
voluntarily with an immediate pension is generally established
to achieve workforce management objectives. There are many
factors to consider in establishing a retirement age. An
employer's major concern is to encourage retirement at the
point where the employer would benefit by retiring an older
worker and replacing him or her with a younger one. For
example, if the job is one for which initial training is
minimal but physical stamina is required, an early retirement
age would be appropriate. Such a design would result in a
younger, lower-paid workforce. If the job requires substantial
training and experience but not physical stamina, the employer
would want to retain employees to a later age, thereby
minimizing training costs and turnover and maintaining
expertise.
The Federal Government employs individuals over an
extremely wide range of occupations and skills, from janitors
to brain surgeons. Therefore, when Congress carried out a
thorough review of Federal retirement while designing FERS, it
concluded that a flexible pension system would best suit this
diverse workforce. As a result, the FERS system allows workers
to leave with an immediate (but reduced) annuity as early as
age 55 with 10 years of service, but it also provides higher
benefits to those who remain in Federal careers until age 62.
Allowing workers to retire at younger ages with immediate, but
reduced benefits is common in private pension plan design. By
including such a provision in FERS, Congress addressed the
problem of the CSRS, sometimes called the ``golden handcuffs,''
created by requiring CSRS workers to stay in their Federal jobs
until age 60 unless they have a full 30 years of Federal
service before that age. Nevertheless, recognizing the
increasing longevity of the population, the FERS system raised
the minimum retirement age from 55 to 57, gradually phasing-in
the higher age; workers born in 1970 and later will have a
minimum FERS retirement age of 57. In addition, the age of full
Social Security benefits is scheduled to rise gradually from 65
to 67, with the higher age for full benefits effective for
workers born in 1955 and later.
In general, although retirement ages and benefit designs
applicable under non-Federal plans are important reference
points in designing a Federal plan, the unusual nature of the
Federal workforce and appropriate management of turnover and
retention are equally important considerations.
(c) Social Security Government Pension Offset (GPO)
Social Security benefits payable to spouses of retired,
disabled, or deceased workers generally are reduced to take
into account any public pension the spouse receives from
government work not covered by Social Security. The amount of
the reduction equals two-thirds of the government pension. In
other words, $2 of the Social Security benefit is reduced for
every $3 of pension income received. Workers with at least 5
years of FERS coverage are not subject to the offset.
According to a 1988 General Accounting Office report
entitled: ``Federal Workforce--Effects of Public Pension Offset
on Social Security Benefits of Federal Retirees,'' 95 percent
of Federal retirees had their Social Security spousal or
survivor benefits totally eliminated by the offset.
The GPO is intended to place retirees whose government
employment was not covered by Social Security and who are
eligible for a Social Security spousal benefit in approximately
the same position as other retirees whose jobs were covered by
Social Security. Social Security retirees are subject to an
offset of spousal benefits according to that program's ``dual
entitlement'' rule. That rule requires that a Social Security
retirement benefit earned by a worker be subtracted from his or
her Social Security spousal benefit, and the resulting
difference, if any, is the amount of the spousal benefit paid.
Thus, workers retired under Social Security may not collect
their own Social Security retirement benefit as well as a full
spousal benefit.
The GPO replicates the Social Security dual entitlement
rule by assuming that two-thirds of the government pension is
approximately equivalent to the Social Security retirement
benefit a worker would receive if his or her job had been
covered by Social Security.
(d) Social Security Windfall Elimination Provision
Workers who have less than 30 years of Social Security
coverage and a pension from non-Social Security covered
employment are subject to the windfall penalty formula when
their Social Security benefit is computed. The windfall penalty
was enacted as part of the Social Security Amendments of 1983
in order to reduce the disproportionately high benefit
``windfall'' that such workers would otherwise receive from
Social Security. Because the Social Security benefits formula
is weighted, low-income workers and workers with fewer years of
covered service receive a higher rate of return on their
contributions than high-income workers who are more likely also
to have private pension or other retirement income. However,
the formula did not distinguish between workers with low-income
earnings and workers with fewer years of covered service, which
resulted in a windfall to the latter group. To eliminate this
windfall, Congress adopted the windfall benefit formula but
modified the formula before it was phased in completely.
Under the regular Social Security benefit formula, the
basic benefit is determined by applying three factors (90
percent, 32 percent, and 15 percent) to three different
brackets of a person's average indexed monthly earnings (AIME).
These dollar amounts increase each year to reflect rising wage
levels. The formula for a worker who turns age 62 in 1999 is 90
percent of the first $505 in average monthly earnings, plus 32
percent of the amount between $505 and $3,043, and 15 percent
of the amount over $3,043.
Under the original 1983 windfall benefit formula, the first
factor in the formula was 40 percent rather than 90 percent,
with the 32 percent and 15 percent factors remaining the same.
With the passage of the Technical Corrections and Miscellaneous
Revenue Act of 1988, Congress modified the windfall reduction
formula and created the following schedule:
Years of Social Security coverage:
Percent
20 or fewer............................................... 40
21........................................................ 45
22........................................................ 50
23........................................................ 55
24........................................................ 60
25........................................................ 65
26........................................................ 70
27........................................................ 75
28........................................................ 80
29........................................................ 85
30 or more................................................ 90
Under the windfall benefit provision, the windfall formula
will reduce the Social Security benefit by no more than 50
percent of the pension resulting from noncovered service.
D. MILITARY RETIREMENT
1. Background
For more than 30 years, the military retirement system has
been the object of intense criticism and equally intense
support among military personnel, politicians, and defense
manpower analysts. Critics of the military retirement system
have periodically alleged, since its basic tenets were
established by legislation enacted in the late 1940's, that it
costs too much, has lavish benefits, and contributes to
inefficient military personnel management. Others have strongly
defended the existing system in particular, its central feature
of allowing career personnel to retire at any age with
immediate retired pay upon completing 20 years of service, and
providing no vesting in the system before the 20-year point as
essential to recruiting and retaining sufficient high-quality
career military personnel who can withstand the rigors of
wartime service when necessary. Major cuts in retired pay for
future retirees were enacted in the Military Retirement Reform
Act of 1986 (P.L. 99-348, July 1, 1986; 100 Stat. 682; the
``1986 Act;'' now referred to frequently as the ``Redux''
military retirement computation system). Although enactment of
Redux in 1986 represented a success for those who argued that
the pre-1986 system was too generous, the repeal of compulsory
Redux in late 1999 in the FY2000 National Defense Authorization
Act (Secs 641-644, P.L. 106-65, October 5, 1999; 113 Stat. 512
at 662) just as clearly repudiated congressional endorsement of
this point of view 13 years later.
The Congress began taking notice publicly of potential
problems related to Redux in 1997, well before the executive
branch addressed the issue. During the fall of 1998, the
Clinton Administration announced that it supported repeal of
Redux. Eventually, the FY2000 National Defense Authorization
Act repealed compulsory Redux; it allows post-August 1, 1986
entrants to the armed forces to retire under the pre-Redux
system or opt for Redux plus an immediate $30,000 cash payment.
In fiscal year 2000, 2.0 million retirees and survivors
received military retirement benefits, with total Federal
military retirement outlays of an estimated $32.9 billion.
Three broad types of benefits are provided under the system:
Nondisability retirement benefits (retirement for length of
service after a career), disability retirement benefits, and
survivor benefits under the military Survivor Benefit Plan
(SBP). With the exception of the SBP, all benefits are paid by
contributions from the military services, without contributions
from participants.
A servicemember becomes entitled to retired pay upon
completion of 20 years of service, regardless of age. (The
average nondisabled enlisted member retiring from an active
duty military career in FY2000 was 42 years old and had 22
years of service; the average officer was 47 and had 24 years
of service.) Servicemembers who retire from active duty receive
monthly payments based on a percentage of their retired pay
computation base. For persons who entered military service
before September 8, 1980, the retired pay computation base is
the final monthly basic pay being received at the time of
retirement. For those who entered service on or after September
8, 1980, the retired pay computation base is the average of the
highest 3 years (36 months) of basic pay. Basic pay is the one
element of military compensation that all military personnel in
the same pay grade and with the same number of years of
military service receive. Basic pay; basic allowance for
housing, or BAH (received by military personnel not living in
military housing); basic allowance for subsistence, or BAS
(cost of meals; all officers receive the same BAS; enlisted BAS
varies considerably based on the nature and place of duty); and
the Federal income tax advantage that accrues because the BAH
and BAS are not subject to Federal income tax all comprise what
is known as Regular Military Compensation, or RMC. RMC is that
index of military pay which tends to be used most often in
comparing military with civilian compensation; analyzing the
standards of living of military personnel; and studying
military compensation trends over time, by service, by
geographical area, or by occupational skill. RMC excludes all
special pays and bonuses, reimbursements, educational
assistance, deferred compensation (i.e., an economic valuation
of the present value of future military retired pay), or any
kind of attempt to estimate the cash value of non-monetary
benefits such as health care or military retail stores. Basic
pay generally comprises about 70 percent of the total military
compensation, RMC and other components, being received by
active duty personnel at the time they retire.
Retirement benefits are computed using a percentage of the
retired pay computation base. Because the FY2000 National
Defense Authorization Act gives each military member the option
of choosing the pre-Redux or the Redux formulae to compute his
or her retired pay, an accurate description of the retired pay
computation formula is lengthy and complex. All military
personnel who first entered military service before August 1,
1986 have their retired pay computed at the rate of 2.5 percent
of the retired pay computation base for each year of service.
The minimum amount of retired pay to which a member entitled to
compute his or her retired pay under this formula is therefore
50 percent of the computation base. A 25-year retiree receives
62.5 percent. The maximum, reached at the 30-year mark, is 75
percent.
Military personnel who first enter service on or after
August 1, 1986 are required to select one of two options in
calculating their future retired pay, within 180 days of
reaching 15 years of service:
Option 1: Pre-Redux.--They can opt to have their retired
pay computed in accordance with the pre-Redux formula,
described above, but with a slightly modified COLA formula
which is less generous than that of the pre-Redux formula.
Option 2: Redux.--They can opt to have their retired pay
computed in accordance with the Redux formula and receive an
immediate (pre-tax) $30,000 cash bonus.
The Redux formula has different features for retirees who
are under age 62 and those who are 62 and older:
The Redux formula: under-62 retirees.--For under-62
retirees, retired pay is computed at the rate of 2.0 percent of
the computation base for each year of service through 20, and
3.5 percent for each year of service from 21 through 30. Under
this new formula, therefore, a 20-year retiree will receive 40
percent of his or her retired pay computation base upon
retirement, and a 25-year retiree will receive 57.5 percent. A
30-year retiree will continue to receive the maximum of 75
percent of the computation base. This Redux formula, therefore,
is ``skewed'' sharply in favor of the longer-serving
individual.
The Redux formula: retirees 62 and over.--When a Redux
retiree reaches age 62, his or her retired pay will be
recomputed based on the pre-Redux ``old'' formula a straight
2.5 percent of the retired pay computation base for each year
of service. Thus, beginning at age 62, the 20-year Redux
retiree who began receiving 40 percent of his or her
computation base upon retirement will begin receiving 50
percent of the original computation base; the 25-year retiree's
benefit will jump from 57.5 percent to 62.5 percent; and the
30-year retiree's benefit, already at 75 percent, will not
change.
Benefits are payable immediately upon retirement from
military service (except for reserve retirees, who cannot begin
receiving their retired pay until age 60), regardless of age,
and without taking into account any other sources of income,
including Social Security. By statute, all pre-Redux benefits
receive cost-of-living-adjustments (COLASs) which are fully
indexed for changes in the CPI; however, retirees who elect to
retire under Redux will have their COLAs held to one percentage
point below that mandated by the CPI.
2. Issues and Legislative Response
(A) Concurrent Receipt of Military Retired Pay and VA Disability
Compensation
Many would argue that the military retirement issue
currently receiving the greatest amount of congressional
interest is that involving the interaction of military retired
pay and Department of Veterans' Affairs (VA) disability
compensation. Current law requires that military retired pay be
reduced by the amount of any VA disability compensation
received. For several years, some military retirees have sought
a change in law to permit receipt of all or some of both, and
legislation to allow this has been introduced in the past
several Congresses. The issue is usually referred to as
``concurrent receipt,'' because it involves the simultaneous
receipt of two different benefits.
Concurrent receipt's proponents have generally argued that
because military retired pay is earned for length of military
service entitling one to retirement, and the VA compensation is
for disability, they are provided for two completely different
reasons and thus need not be offset on grounds of duplication.
They also allege that people receiving VA disability
compensation who are eligible for a wide range of other
benefits do not have the compensation offset against their
other Federal payments, and therefore military retirees should
not be so targeted. Those who argue against concurrent receipt
usually cite its cost estimated by the Congressional Budget
Office as, for full concurrent receipt, as almost $3 billion in
FY2002 and, if implemented, almost $40 billion for the FY2002-
FY2011 timeframe. They also are concerned that eliminating this
offset could be the ``camel's nose in the tent,'' leading to
pressure to eliminate other offsets which could cost the
Federal Government tens of billions of dollars yearly.
Interestingly, some analysts also assert that the reason there
is no analogous offset for VA disability compensation and
civilian benefits is that, in fact, the military retiree
situation is unique. They note that the combinations of
benefits other than the simultaneous receipt of military
retirement and VA disability compensation involve receiving two
separate benefits from the same Federal agency, unlike the
military retirement-VA compensation situation, where benefits
from two separate Federal agencies are involved.
Congress acted in 1999 and 2000, in the FY2000 National
Defense Authorization Act (Sec. 658, P.L. 106-65, October 5,
1999; 113 Stat. 512 at 668) and FY2001 National Defense
Authorization Act (Sec. 657, P.L. 106-398; 114 Stat. 1654 at
1654A-166) respectively, to award a special payment to severely
disabled military retirees who are also receiving VA
compensation. This left both the existing prohibition on
concurrent receipt and the offset requirement intact. However,
it had the effect of providing a de facto partial concurrent
receipt for the affected retirees (persons receiving military
nondisability or disability retirement and at least 70 percent
disabled; a total of about 20,000 retirees).
Numerous bills have been introduced throughout the 1990's
and into the current decade to allow either partial or full
concurrent receipt. None have been enacted. In the 1st session,
107th Congress, the House version of the FY2002 budget
resolution directed DOD to prepare a study of concurrent
receipt and report its recommendations. The Senate version,
however, would have authorized $2.9 billion in new budget
authority in FY2002 to ``fund the payment of retired pay and
compensation to disabled military retirees,'' which implies
full concurrent receipt and is consonant with full concurrent
receipt's costs as computed by CBO. However, the House
provision calling for a study only prevailed in conference. Any
further action in 2001 will almost certainly come in as
provisions in the FY2002 National Defense Authorization Act,
which has not yet been reported out of either of the Armed
Services Committees as of this writing.
(B) Changing the 20-Year Retirement Norm
As noted above, the defining paradigm of the military
retirement system since the late 1940's has been allowing
career personnel to retire at any age with immediate retired
pay upon completing 20 years of service, and providing no
vesting in the system before the 20-year point. This was
originally enacted, and has been defended, as essential to
recruiting and retaining sufficient high-quality career
military personnel who can withstand the rigors of wartime
service when necessary. The lack of vesting before the 20-year
mark, it is asserted, keeps people in who might otherwise leave
the military much earlier. Once the career member reaches the
point roughly of 8-12 years of service, the ``pull'' of 20-year
retirement termed by some the ``pot of gold at the end of the
rainbow'' is enough to keep people in to the 20-year point.
When the 20-year mark is reached, the opportunity for immediate
retirement prevents the services from being saddled with too
many people in their 40's and 50's who cannot stand the stress
of military life, including, but not limited to, field
training, overseas deployments, and combat. These supporting
comments have been matched by those highly critical of existing
20-year retirement, who say that it fails to assist personnel
managers at all in retaining servicemembers in the junior part
of the career force, because the 20-year retirement point is
too far away to have any influence on their decisions; that it
leads too many people with between 10 and 20 years of service
to stay in to reach the 20-year point; and that it leads to a
wholesale hemorrhage of personnel once they reach 20 years. It
has also been criticized on cost grounds; allowing large
numbers of people to begin drawing retired pay beginning in
their early 40's generates very substantial retired pay outlays
for the Federal Government.
These sets of pros and cons have dueled for the allegiance
of policymakers in both the executive and legislative branches
since the 1960's, with little change until quite recently.
However, two factors are leading to interest in changing the
way 20-year retirement has worked. First, most analysts have
come to feel that a variety of developments in officer
personnel management, some resulting from statutes in the
Goldwater-Nichols DOD Reorganization Act of 1986 dealing with
joint duty requirements, have combined to make it virtually
impossible for officers to receive a reasonable range of
assignments, giving them the right kinds of experience, within
the timeframe of a roughly 20-year career. This results in
officers separating or retiring before they can get the
requisite experience or requires the promotion of officers into
senior positions without having had the breadth and depth of
experience needed to best do their jobs. Eliminating near-
automatic entitlement to 20-year retirement, it is felt, would
do much to deal with these problems. Second, the difficulties
the services are experiencing in retaining trained specialists
and matching civilian salaries in high-demand occupational
skills has led many to urge that military personnel should be
vested in their retirement after, say, 5 to 7 years of service,
perhaps with a deferred retirement benefit, so that the
services can compete with the lucrative benefits offered by the
private sector.
(c) CURRENT MILITARY RETIREMENT ISSUES
(1) Should the 1986 military retirement cuts be repealed?
The cost and benefit reductions in military retirement
enacted in the Military Retirement Reform Act of 1986 were
adopted with the stated purpose of bringing military retirement
more in line with civilian systems; saving money; creating an
incentive for longer military careers, thereby creating a more
experienced and capable career force; and enabling the military
to manage their career force better. However, concern is
growing that their prospective effective date (the 1986 Act's
reductions will first be effective for those retiring 20 years
later, in mid-2006) is contributing to the departure of too
many career people, by reducing the incentive to remain on
active duty until retirement, and thereby hampering the ability
of retirees to compensate for reduced civilian salaries in
their second careers.
The services are experiencing considerable problems in
recruiting and retaining sufficient career personnel, due to
competition from a booming civilian economy where skilled labor
shortages are widespread; frequent moves for which the
reimbursements are never complete; a military health care
system adjusting to managed-care problems; and a high frequency
of family separation. Dissatisfaction with the 1986 Act is
frequently cited by active duty military personnel in press
accounts of military retention problems. Although some economic
analysts have suggested that there are better ways to inject
more money into the compensation package (such as those
proposed by the Rand Corporation, well-known for its extensive
experience in application of economic analysis to military
personnel and compensation programs), the very negative
psychological effect of the 1986 Act's cuts among ``the
troops'' and the presumed positive effect of their repeal may
well carry the day in 1999. Secretary of Defense Cohen and
Joint Chiefs of Staff Chairman General Hugh Shelton have
recommended restoration of the cuts made by the 1986 Act, and
the individual members of the JCS have recommended its complete
repeal. A proposal to restore the cuts in the benefit formula
made by the 1986 Act (but not its reductions in the COLA
formula) were on the table during discussions on the FY1999
supplemental appropriations bill, but were rejected before
actually being introduced. It seems certain that attempts will
be made again when the 106th Congress convenes.
(2) Should a military Thrift Savings Plan (TSP) be created?
There has been considerable discussion about whether a
Thrift Savings Plan for military personnel, analogous to the
TSP for the Federal civil service, or to so-called ``401k''
programs in the private sector, should be established. Under
such a plan, a portion of an active duty military member's pay
would be deposited into a tax-deferred individual account where
the funds are held in trust and invested, to be withdrawn in
retirement. Adopting such a plan would give military personnel
a retirement benefit now widely available to civilians, and
would enable military personnel to share in the long-term rise
in equity markets (especially because frequent moves usually
make it difficult for military families to obtain long-term
investment growth through home ownership over a long period of
time). Some suggest that adopting a thrift savings plant would
provide an excuse for DOD and/or the Congress to cut other
aspects of military retirement, and would have enormous
problems of design and administration; the unofficial Retired
Officers Association is perhaps the best-known skeptic.
However, partisans of current active duty personnel and future
retirees, rather than advocates for those already retired,
appear to be much more supportive.
(D) THE MILITARY SURVIVOR BENEFIT PLAN
The Military Survivor Benefit Plan (SBP) was created in
1972 by Public Law 92-425. Under the plan, a military retiree
can have a portion of his or her retired pay withheld to
provide a survivor benefit to a spouse, spouse and child(ren),
child(ren) only, a former spouse, or a former spouse and
child(ren). Under the SBP, a military retiree can provide a
benefit of up to 55 percent of his or her own military retired
pay at the time of death to a designated beneficiary. A retiree
is automatically enrolled in the SBP at the maximum rate unless
he or she (with spousal or former spousal written consent) opts
not to participate or to participate at a reduced rate. SBP
benefits are protected by inflation under the same formula used
to determine cost-of-living adjustments for military retired
pay.
The benefit payable to a spouse or a former spouse may be
modified when a perspective survivor reaches age 62 under one
of two circumstances.
(1) Survivor Social Security Offset
Coverage of military service under Social Security entitles
the surviving spouse of a military retiree to receive Social
Security survivor benefits based on contributions made to
Social Security during the member's/retiree's military service.
For certain surviving spouses, military SBP is integrated with
Social Security. For those survivors subject to those
provisions, military SBP benefits are offset by the amount of
Social Security survivor benefits earned as a result of the
retiree's military service. This offset occurs when the
survivor reaches age 62 and is limited to 40 percent of the
military survivor benefit. Taken together, the post-62 SBP
benefit and the offsetting Social Security benefit must be no
less than 55 percent of base military retired pay. In essence,
this offset recognizes the Government's/taxpayer's
contributions to both Social Security and the military SBP and
thereby prevents duplication of benefits based on the same
period of military service.
(2) The Two-Tiered SBP
For retirees who decide to participate in the SBP, the
amount of Social Security at the time of death (i.e., the
amount available for offset purposes) is unknown. Thus,
retirees must decide to provide a benefit at a certain level
subject to an unknown offset level. For this reason (and the
fact that the offset formula is terribly complicated) Congress
modified SBP provisions. Under these modified provisions, known
as the ``two-tier'' SBP, a surviving spouse is eligible to
receive 55 percent of base retired pay. When this survivor
reaches age 62, the benefit is reduced to 35 percent of base
retired pay. This reduction occurs regardless of any benefits
received under Social Security and thereby eliminates the
integration of Social Security and any subsequent offset. With
the elimination of the Social Security offset, a military
retiree will know the exact amount of SBP benefits he/she is
chooses at the time of retirement.
Under the rules established by Congress, three selected
groups will have their SBP payments calculated under either the
pre-two-tier plan (including the Social Security offset) or the
two-tier plan, depending upon which is more financially
advantageous to the survivor. The first group includes those
beneficiaries (widows or widowers) who were receiving SBP
Benefits on October 1, 1985. The second group includes the
spouse or former spouse of military personnel who were
qualified for or were already receiving military retired pay on
October 1, 1985. The third group includes reservists who were
eligible for retired pay except for the fact that they had not
yet reached 60 years of age. The spouses or former spouses of
military personnel who were not qualified to receive military
retired pay on October 1, 1985 (i.e., those who had not been an
active duty with 20 or more years of creditable service) will
have their SBP benefits calculated using the two-tier method.
Levels of participation in the SBP have increased since the
introduction of the two-tier method.
(3) Survivor Benefit Plan: Supplemental Coverage
Beneficiary dissatisfaction with both the Social Security
offset and the two-tier method prompted Congress to modify the
military SBP. In so doing, Congress created a supplement
coverage option. Under this option, certain retirees and
retirement-eligible members of the armed services can opt to
increase withholdings from military retired pay to reduce or
eliminate any reduction occurring when the survivor reaches age
62. (Retirees must be under the two-tier plan in order to
provide the Supplemental coverage.) The costs of these
additional benefits are actuarially neutral participants will
pay the full cost of this option. Thus, under the Supplemental
coverge option, eligible participants can insure that limited
or no reductions to SBP benefits occur when the survivor
reaches age 62.
(4) Cost-of-Living Adjustment
Military retirees and survivor benefit recipients received
a 2.1 percent COLA effective January, 1, 1998, a 1.3 percent
COLA effective January 1, 1999, a 2.4 percent COLA effective
January 1, 2000, and a 3.5 percent COLA effective January 1,
2001.
3. Recent Issues and Legislative Response
In 1997, Congress enacted legislation that would provide a
monthly annuity of $165 to so-called ``forgotten widows.'' Two
groups were deemed eligible for this annuity. The first
consists of survivors of retired service members who died
before March 21, 1974 and who were drawing military retired pay
at the time of death. The second group consists of survivors of
a Reserve member who had 20 years of qualified service at the
time of death (but less than 20 years of active duty) and who
died between September 21, 1972 and October 1, 1978. Survivors
who are receiving Dependency and Indemnity Compensation from
the VA are ineligible. Subsequent remarriage by the survivor
may also affect eligibility. This amount is subject to cost-of-
living adjustments.
Starting on May 17, 1998, participating retirees who
retired on or before May 17, 1996 were given an opportunity to
drop their coverage. These retirees had 1 year to make this
decision. In addition, those who have retired since May 17,
1996, including future retirees, were provided with a 1-year
open season to terminate their participation in SBP, beginning
on the second anniversary of their retirement date.
In 1998, Congress created the so-called ``paid up''
provision that would retain coverage but discontinue retired
pay withholdings for retirees who paid for this coverage for
thirty years or reached age 70, whichever came later. These
provisions are not scheduled to become effective until 2008.
In 2000, a conference committee rejected Senate language
that would increase the SBP benefit by ``reducing the amount of
the offset from a survivor benefit annuity when the surviving
spouse becomes eligible for social security benefits based on
the contributions of the deceased service member.'' However, an
amendment was included that expressed the sense of the Congress
that legislation should be enacted that increases the minimum
basic annuities for surviving spouses who are 62 years of age
or older.
E. RAILROAD RETIREMENT
1. Background
The Railroad Retirement program is a federally managed
retirement system covering employees in the rail industry, with
benefits and financing coordinated with Social Security. The
system was first established during the period 1934-37,
independent of the creation of Social Security, and remains the
only Federal pension program for a private industry. It covers
all railroad firms and distributes retirement and disability
benefits to employees, their spouses, and survivors. Benefits
are financed through a combination of employee and employer
payments to a trust fund, with the exception of vested so-
called ``dual'' or ``windfall'' benefits, which are paid with
annually appropriated Federal general revenue funds through a
special account.
In FY2001, $8.3 billion in retirement, disability, and
survivor benefits were paid to 673,000 beneficiaries of the
rail industry program. As of January 2001, the Railroad
Retirement equivalent of Social Security (Tier I) is increased
by 3.5 percent as a result of the Cost-of-Living Adjustment
(COLA) applied to those benefits. The industry pension
component (Tier II) is increased by 1.1 percent because of an
automatic adjustment (32.5 percent of the Tier I COLA) to that
benefit. As of September 2001, the regular Railroad Retirement
annuities average $1,381 per month, and combined benefits for
an employee and spouse average $1,911. Aged survivors average
$826 per month.
2. Issues and Legislative Response
(a) the evolution of Railroad Retirement
In the final quarter of the 19th century, railroad
companies were among the largest commercial enterprises in the
Nation and were marked by a high degree of centralization and
integration. As outlined by the 1937 legislation, the Railroad
Retirement system was designed to provide annuities to retirees
based on all rail earnings and length of service in the
railroads. The present Railroad Retirement program dates to the
Railroad Retirement Act of 1974 (the 1974 Act), which
fundamentally reorganized the program. Most significantly, the
Act created a two-tier benefit structure in which Tier I was
intended to serve as an equivalent to Social Security and Tier
II as a private pension.
Under current law, workers are eligible for benefits from
Railroad Retirement, only if they have completed 10 years of
railroad service. Tier I benefits of the Railroad Retirement
System are computed on credits earned in both rail and nonrail
work, while Tier II is based solely on railroad employment. The
1974 Act continued the previous practice of a separate system
for railroad employees, but eliminated the opportunity to
qualify for separate Railroad Retirement and Social Security
benefits, based on mixed careers with periods of nonrail and
rail employment.
In its initial report, the National Performance Review
(NPR), a special study group created in the early days of the
Clinton Administration, proposed to disperse the Railroad
Retirement Board (RRB) functions to other agencies. The NPR
proposal was not new. Similar proposals had been advanced by
several previous Administrations, but none had success in
persuading Congress to consider them. Aside from heavy
political opposition engendered by efforts to end the board
system, there are other impediments to enactment of such a
proposal. First, the problems are complex, and substantial
investments of legislative time and resources would be required
by several committees in order to complete congressional
action. Second, the rail industry portion of the benefits would
become insecure, given that the benefits are primarily funded
from current revenues. Third, the unemployment program
described below is designed as a daily benefit, consistent with
the industry's intermittent employment practices evolving over
the past century (state programs are based on unemployment
measured by weeks instead of days). Fourth, costs of the
programs' benefits and administration are borne by the industry
through payroll taxes, and dismantling the Federal
administration would not save taxpayers money. Finally, in the
face of these obstacles, there is no clear constituency
exhibiting a consistent and persistent interest in ending
Federal administration of Railroad Retirement.
(b) financing railroad retirement, and the railroad unemployment/
sickness insurance benefits
The railroad industry is responsible for the financing of
(1) all Tier II benefits, (2) any Tier I benefits paid under
different criteria from those of Social Security (unrecompensed
benefits), (3) supplemental annuities paid to long-service
workers, and (4) benefits payable under the Unemployment/
Sickness Insurance program.
The Federal Government finances windfall benefits under an
arrangement established by the 1974 Act, the legislation by
which the current structure of Railroad Retirement was created.
The principle of Federal financing of the windfall through the
attrition of the closed group of eligible persons has been
reaffirmed by Congress on several occasions since that date.
With the exception of the dual benefit windfalls, the
principle guiding Railroad Retirement and Railroad
Unemployment/Sickness Insurance benefits financing is that the
rail industry is responsible for a level of taxation upon
industry payroll sufficient to pay all benefits earned in
industry employment. Rail industry management and labor
officials participate in shaping legislation that establishes
the system's benefits and taxes. In this process, Congress
weighs the relative interests of railroads, their current and
former employees, and Federal taxpayers. Then it guides,
reviews, and to some extent instructs a collective bargaining
activity, the results of which are reflected in new law. Thus,
Railroad Retirement benefits are earned in and paid by the
railroad industry, established and modified by Congress, and
administered by the Federal Government.
(1) Retirement Benefits
Tier I benefits are financed by a combination of payroll
taxes and financial payments from the Social Security Trust
Funds, a balance established through congressional legislation.
The payroll tax for Tier I is exactly the same as collected for
the Old Age, Survivors, and Disability Insurance (OASDI) Social
Security program. In 2001, the tax is 6.2 percent of pay for
both employers and employees up to a maximum taxable wage of
$80,400.
Tier II benefits are also financed by a payroll tax. In
2001, the payroll tax is 16.10 percent for employers and 4.90
percent for employees on the first $59,700 of a worker's
covered railroad wages. The relative share of employer and
employee financing of Tier II benefits is collectively
bargained.
Financial ``interchange'' with Social Security.--A common
cause of confusion about the Federal Government's involvement
in the financing of Railroad Retirement benefits is the
system's complex relationship with Social Security. Each year
since 1951, the two programs--Railroad Retirement and Social
Security--have determined what taxes and benefits would have
been collected and paid by Social Security had railroad
employees been covered by Social Security rather than Railroad
Retirement. When the calculations have been performed and
verified after the end of a fiscal year, transfers are made
between the two accounts, called the ``financial interchange.
''The principle of the financial interchange is that Social
Security should be in the same financial position it would have
occupied had railroad employment been covered at the beginning
of Social Security. The net interchange has been in the
direction of Railroad Retirement in every year since 1957,
primarily because of a steady decline in the number of rail
industry jobs.
When Congress, with rail labor and management support,
eliminated future opportunities to qualify for windfall
benefits in 1974, it also agreed to use general revenues to
finance the cost of phasing out the dual entitlement values
already held by a specific and limited group of workers. The
historical record suggests that the Congress accepted a Federal
obligation for the costs of phasing out windfalls because no
alternative was satisfactory. Congress determined that railroad
employers should not be required to pay for phasing out dual
entitlements, because those benefit rights were earned by
employees who had left the rail industry, and rail employees
should not be expected to pick up the costs of a benefit to
which they could not become entitled. For FY2001, Congress has
appropriated $156 million (down from $430 million in FY 1983).
Supplemental annuities are financed on a current-cost basis, by
a cents-per-hour tax on employers, adjusted quarterly to
reflect payment experience. Some railroad employers (most
railroads owned by steel companies) have a negotiated
supplemental benefit paid directly from a company pension. In
such cases, the company is exempt from the cents-per-hour tax
for such amounts as it pays to the private pension, and the
retiree's supplemental annuity is reduced for private pension
payments paid for by those employer contributions to the
private pension fund.
(2) Unemployment and Sickness Benefits
The benefits for eligible railroad workers when they are
sick or unemployed are paid through the Railroad Unemployment
Insurance Account (RUIA). The RUIA is financed by taxes on
railroad employers. Employers pay a tax rate based on their
employees' use of the program funds, up to a maximum.
(c) taxation of Railroad Retirement benefits
Tier I benefits are subject to the same Federal income tax
treatment as Social Security. Under those rules, up to 85
percent of the Tier I benefit is subject to income taxes if the
adjusted gross income (AGI) of an individual exceeds $34,000
($44,000 for a married couple). Proceeds from this tax are
transferred from the general revenue fund to the Social
Security Trust Funds to help finance Social Security and
railroad retirement Tier I benefits.
Unrecompensed Tier I benefits (Tier I benefits paid in
circumstances not paid under Social Security) and Tier II
benefits are taxed as ordinary income, on the same basis as all
other private pensions. Under legislation to strengthen
Railroad Retirement financing in 1983, the proceeds from this
tax are transferred to the railroad retirement Tier II account
to help defray its costs. This transfer is a direct general
fund subsidy to the Tier II account, a unique taxpayer subsidy
for a private industry pension. Because the financial outlook
for the Tier II account is optimistic for the next decade at
least, these transferred taxes on Tier II benefits do not
actually result in immediate Federal budget outlays; they
remain on the account balances as unspent budget authority. As
such, there is no immediate impact of this transfer on Federal
taxpayers or on the Federal budget.
(d) the outlook for financing future benefits
The Omnibus Budget Reconciliation Act of 1987 (P.L. 100-
203) created the Commission on Railroad Retirement Reform to
examine and review perceived problems in the railroad benefit
programs. The Commission reported its findings in September
1990. In addition to several technical recommendations, the
Commission concluded that railroad retirement financing is
sound for the intermediate term and probably sound for the 75
years of the actuarial valuation. The most recent actuarial
valuation also concluded that the system's financing is sound
for the intermediate term and probably sound for the 75 years
of the actuarial valuation. Only the most pessimistic
assumption resulted in cash flow problems arising between 2035
and 2068. No cash flow problems exist after 2068.
The combinations of RUIA and retirement taxes projected by
the RRB, the Federal agency responsible for administering the
Railroad Retirement and Unemployment/Sickness Insurance
programs, exceed the industry's obligations for total payments
from these programs over the next decade. If the Board's
assumptions are a reasonably dependable yardstick of the future
economic position of the rail industry, then it would follow
that the current benefit/tax relationship of the two programs
considered together is adequate.
Because revenue to support industry benefits is raised
through taxes on industry payroll, there is a direct link
between Railroad Retirement financing and the actual number of
railroad employees. Thus, when the number of industry employees
falls, retirement program revenue drops as well. It should be
kept in mind, however, that a decline in employment may result
from improvements in efficiency as well as diminished demands
for railroad services. Thus, the industry's capacity to
generate adequate revenues to the program cannot be determined
solely by reference to industry employment levels.
The program, in spite of the direct relationship between
benefit payments and money raised through a tax on worker
payroll, is not a transfer between generations, at least not in
the same sense that current Social Security benefits are
financed by taxes on today's workers. Since the burden for
generating sufficient revenue to support rail industry benefits
is upon the industry as a whole, the payroll tax is primarily a
method for distributing through the industry the operating
expense of retirement benefits incurred by individual rail
carriers. The industry could adopt some other method for
distributing the costs among its components and, indeed, from
time-to-time alternatives are proposed. Yet, inevitably there
exists an ongoing bargaining tension over the amount of
industry revenue to be claimed by competing labor sectors--the
active, unemployed, and retired workers--and the amount to be
claimed by the railroad companies themselves.
3. Prognosis
The 105th Congress passed concurrent resolutions that urged
rail labor, management, and retirees to negotiate an
improvement to Railroad Retirement widow(er)ss benefits.
Legislation (H.R. 4844) based on this agreement was introduced
in the 106th Congress. H.R. 4844 was much broader than
modification to widow(er)s' benefits. Though it was passed by
the House of Representative, it was not considered by the
Senate as a whole. Legislation containing the same provisions
as those in the House-passed version of H.R. 4844 was
introduced in the 107th Congress. The Railroad Retirement and
Survivors' Improvement Act of 2001 (H.R. 1140, S. 697) would
expand benefits for the widow(er)s of rail employees, lower the
minimum retirement age at which employees with 30 years of
experience are eligible for full retirement benefits, reduce
the number of years required to be fully vested for tier II
benefits, repeal a maximum limitation on benefits, expand the
system's investment authority, and phase in changes to the tier
II tax structure. H.R. 1140 has been passed by the House of
Representative and referred to the Senate Committee on Finance.
S. 697 has also been referred to the Senate Committee on
Finance.
CHAPTER 3
TAXES AND SAVINGS
OVERVIEW
The Federal tax code recognizes the special needs of older
Americans. The code, through special tax provisions designed
for use by elderly American taxpayers, helps to preserve a
standard of living threatened by reduced income and increased
nondiscretionary expenditures such as those for health care.
Until 1984, both Social Security and Railroad Retirement
benefits, like veterans' pensions, were fully exempt from
Federal taxation. To help restore financial stability to Social
Security, up to one-half of Social Security and Railroad
Retirement Tier I benefits of taxpayers with higher incomes
became taxable under a formula contained in the Social Security
Act Amendments of 1983 (P.L. 98-21). Under a provision included
in the Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66)
up to 85 percent of Social Security benefits are taxable when a
single taxpayer's provisional income exceeds $34,000 or in the
case of married taxpayers with provisional income in excess of
$44,000. Those Federal taxes collected on Social Security
income are returned to the Social Security trust funds.
The Tax Reform Act of 1986 (TRA86) (P.L. 99-514) resulted
in a number of changes to tax laws affecting older men and
women. For example, the TRA86 repealed the extra personal
exemption for the aged but replaced it with an extra standard
deduction amount. This additional standard deduction amount is
combined with an increased standard deduction available to all
taxpayers with both indexed for inflation. The effect was to
target the tax benefits to lower and moderate income elderly
taxpayers through the substitution.
The Omnibus Budget Reconciliation Act of 1990 (OBRA90)
(P.L. 101-508) made changes to individual, corporate, excise,
and employment provisions of the tax laws. In general, the
individual income tax changes that were made affected the tax
burden of the population at large but did not include
provisions specifically targeting the elderly. However, this
Act did provide a tax credit to small businesses for
expenditures they make for removal of architectural,
communication, physical, or transportation barriers that
prevent a business from being accessible to, or usable by,
those either elderly or with disabilities.
The Congress passed the Taxpayer Relief Act of 1997 (TRA97)
(P.L. 105-34) to provide a modest size tax cut that in the
aggregate consisted of a variety of measures applying to
particular types of taxpayers, income, and activities. Included
among its most prominent features and of interest to many older
Americans were a cut in the tax rates that apply to capital
gains, a reduction of estate taxes, and the expansion of
Individual Retirement Accounts.
The Economic Growth and Tax Relief Reconciliation Act of
2001 (P.L. 107-16) included broad-based tax cuts and some
targeted provisions. The new law reduces tax rates and expands
exemptions for the estate and gift tax over time, and
eventually repeals the estate tax (retaining a gift tax and
providing for carry-over basis for assets, both with large
exemptions). Pension provisions have been liberalized, limits
on IRAs are increased, and special catch-up contributions to
IRAs are allowed for those age fifty and over.
A. TAXES
1. Background
A number of longstanding provisions in the tax code are of
special significance to older men and women. Examples include
the exclusion of Social Security and Railroad Retirement Tier I
benefits in the case of low and moderate income beneficiaries,
the tax credit for the elderly and permanently and totally
disabled, and the tax treatment of below-market interest loans
to continuing care facilities.
The Tax Reform Act of 1986 altered many provisions of the
Internal Revenue Code including tax provisions of importance to
older persons. As an example, the extra personal exemption for
the aged was repealed. However the personal exemption amount
for taxpayers in general was substantially increased under the
act and is now annually adjusted for inflation. In addition,
the Act provides elderly and/or blind taxpayers who do not
itemize an additional standard deduction amount. Like the
personal exemption amount and the standard deduction, the
additional standard deduction for the elderly is adjusted
annually for inflation.
(a) Taxation of Social Security and Railroad Retirement Benefits
For more than four decades following the establishment of
Social Security, benefits were completely exempt from Federal
income tax. Congress did not explicitly exclude those benefits
from taxation. Rather, their tax-free status arose from a
series of rulings in 1938 and 1941 from what was then called
the Bureau of Internal Revenue. These rulings were based on the
determination that Congress did not intend for Social Security
benefits to be taxed, as implied by the lack of an explicit
provision to tax them, and that the benefits were intended to
be in the form of gifts and gratuities, not annuities which
replace earnings, and therefore were not to be included in
income for tax purposes.
In 1983, the National Commission on Social Security Reform
recommended that up to one-half of the Social Security benefits
of higher income beneficiaries be taxed, with the revenues
returned to the Social Security trust funds. This proposal was
one part of a larger set of recommendations entailing financial
concessions by employees, employers, and retirees alike to
rescue Social Security from insolvency.
Congress acted on this recommendation with the passage of
the Social Security Act Amendments of 1983. As a result of that
Act, up to one-half of Social Security and Tier 1 Railroad
Retirement benefits for beneficiaries whose other income plus
one-half their Social Security benefits exceed $25,000 ($32,000
for joint filers) became subject to taxation. (Tier 1 Railroad
Retirement benefits are those provided by the railroad
retirement system that are equivalent to the Social Security
benefit that would be received by the railroad worker were he
or she covered by Social Security.)
The limited application of the tax on Social Security and
Tier 1 Railroad Retirement benefits reflects the congressional
concern that lower and moderate income taxpayers not be subject
to tax when their income falls below the thresholds. Because
the tax thresholds are not indexed, however, with time,
beneficiaries of more modest means will also be affected.
In computing the amount of Social Security income subject
to tax, otherwise tax-exempt interest (such as from municipal
bonds) is included in determining by how much the combination
of one-half of benefits plus other income exceeds the income
thresholds. Thus, while the tax-exempt interest itself remains
free from taxation, it can have the effect of making the Social
Security benefit subject to taxation.
In the Omnibus Budget Reconciliation Act of 1993, Congress
subjected up to 85 percent of Social Security benefits to tax
in the case of higher income beneficiaries. Thus, up to 85
percent of benefits are taxable for recipients whose other
income plus one-half their Social Security benefits exceed
$34,000 ($44,000 for joint filers). Social Security benefits of
recipients with combined incomes over $25,000 ($32,000 for
joint filers) but not over $34,000 ($44,000 for joint filers)
continue to be taxable only on up to one-half of their
benefits. Taxes collected on Social Security benefits are
returned to the Social Security trust funds.
Revenues from the taxation of Social Security benefits have
risen in every year since the tax was first imposed. Thus,
these revenues are a continuing source of funding for Social
Security. In 1997, $7.9 billion was contributed to the trust
fund. That contribution in funding rose to $9.7 billion in
1998, $11.6 billion in 1999, and $12.3 billion for calendar
year 2000.
(b) The Tax Credit for the Elderly and Permanently and Totally Disabled
This credit was formerly called the retirement income
credit and the tax credit for the elderly. Congress established
the credit to correct inequities in the taxation of different
types of retirement income. Prior to 1954, retirement income
generally was taxable, but Social Security and Railroad
Retirement (Tier I) benefits were tax-free. The congressional
rationale for this credit was to provide similar treatment to
all forms of retirement income.
The credit has changed over the years with the current
version enacted as part of the Social Security Amendments of
1983. Individuals who are age 65 or older are provided a tax
credit of 15 percent their taxable income up to the initial
amount, described below. Individuals under age 65 are eligible
only if they are retired because of a permanent or total
disability and have disability income from either a public or
private employer based upon that disability. The 15 percent
credit for the disabled is limited only to disability income up
to the initial amount.
For those persons age 65 or older and retired, all types of
taxable income are eligible for the credit, including not only
retirement income but all investment income. The initial amount
for computing the credit is $5,000 for a single taxpayer age 65
or older, $5,000 for a married couple filing a joint return
where only one spouse is age 65 or older filing separate
return. In the case of a married couple filing a joint return
where both spouses are qualified individuals the initial amount
is $7,500. A married individual filing a separate return has an
initial amount of $3,750. The initial amount must be reduced by
tax-exempt retirement income, such as Social Security. The
initial amount must also be reduced by $1 for each $2 if the
taxpayer's adjusted gross income exceeds the following levels:
$7,500 for single taxpayers, $10,000 for married couples filing
a joint return, and $5,000 for a married individual filing a
separate return.
Although the tax credit for the elderly does afford some
elderly taxpayers receiving taxable retirement income some
measure of comparability with those receiving tax-exempt (or
partially tax-exempt) Social Security benefits, because of the
adjusted gross income phaseout feature, it does so only at low
income levels. Social Security recipients with higher levels of
income always continue to receive at least a portion of their
Social Security income tax free. Such is not the case for those
who must use the tax credit for the elderly and permanently and
totally disabled. In addition, since the initial amounts have
not been adjusted for inflation since enactment, the levels of
tax free benefits are no longer similar when Social Security
and other forms of taxable retirement income are compared.
(c) Below Market Interest Loans to Continuing Care Facilities
Special rules exempt loans made by elderly taxpayers to
continuing care facilities from the imputed interest provisions
of the Code. Thus, the special exemption is relevant to elderly
persons who lend their assets to facilities and receive care
and other services in return instead of cash interest payments.
The imputed interest rules require taxpayers to report interest
income on loans even if interest is not explicitly stated or is
received in noncash benefits. In order to qualify for this
exception to the rules, either the taxpayer or the taxpayer's
spouse must be 65 years of age or older. The loan must be made
to a qualified continuing care facility. The law provides that
a qualified facility must own or operate substantially all of
the facilities used to provide care by the continuing care
facility and that substantially all of the residents must have
entered into continuing care contracts. Thus, qualified
facilities hold the proceeds of the loans and in turn provide
care under a continuing care contract.
Under a continuing care contract the individual and/or
spouse must be entitled to use the facility for the remainder
of their life/lives. Initially, the taxpayer must be capable of
independent living with the facility obligated to provide
personal care services. Long-term nursing care services must be
provided if the resident(s) is no longer able to live
independently. Further, the facility must provide personal care
services and long-term nursing care services without
substantial additions in cost.
The amount that may be lent to a continuing care facility
is inflation adjusted. In 2001 a taxpayer may lend up to
$144,100 before being subject to the imputed interest rules.
(d) Tax Reform Act of 1986
The Tax Reform Act of 1986 made such sweeping changes to
the Internal Revenue Code that the Congress chose to issue the
Code as a completely new edition, the first recodification
since 1954. As a result of the 1986 Act, the elderly like other
taxpayers saw many changes in their taxes. The following is a
brief summary of some of the tax changes which had particular
significance to aged taxpayers.
(1) Extra Personal Exemption for the Elderly
The extra personal exemption for elderly persons was
enacted in 1948. The Senate Finance Committee report stated the
reason for the additional exemption was that ``The heavy
concentration of small incomes among such persons reflects the
fact that, as a group, they are handicapped at least in an
economic sense. They have suffered unusually as a result of the
rise in the cost-of-living and the changes in the tax system
which occurred since the beginning of the war. Unlike younger
persons, they have been unable to compensate for these changes
by accepting full-time jobs at prevailing high wages.
Furthermore, this general extension appears to be a better
method of bringing relief than a piecemeal extension of the
system of exclusions for the benefit of particular types of
income received primarily by aged persons.'' At that time, this
provision removed an estimated 1.4 million elderly taxpayers
and others (blind persons also were provided the extra personal
exemption) from the tax rolls, and reduced the tax burden for
another 3.7 million.
With the passage of the 1986 Act, the extra personal
exemption was eliminated due to a dramatic increase in the
personal exemption amount available to all taxpayers as
provided by the Act, the provision of future inflation
adjustments, and the addition to the Internal Revenue Code of
an extra standard deduction amount for those elderly (or blind)
taxpayers who do not itemize deductions.
(2) Deduction of Medical and Dental Expenses
The Medicare program has grown from 19 million to 40
million today. Older Americans now enjoy better health, longer
lives, and improved quality of life, in part because of
Medicare. Over the last 3 decades, life expectancy at age 65
has increased by nearly 3 years for both men and women. The
elderly over age 80 also have a longer life expectancy in the
U.S. than in other industrialized countries. Medicare's per
enrollee rate of spending growth compares favorably to the
private sector. From 1970 to 1996 Medicare's average annual per
enrollee spending growth was similar to that of the private
sector (10.8 percent Medicare versus 11.3 percent for the
private sector). Furthermore, Medicare's administrative
expenses are very low--2 percent--compared to private sector
administrative expenses of 10 percent or more.
The elderly spend a greater proportion of their total
household after-tax income on health than do the non-elderly.
As a group, the non-elderly spend 5 percent of income on health
whereas the elderly spend 13 percent. In 1999 it was found that
elderly households with less than $10,000 in after-tax income
spent 27 percent for health expenditures. Shares continue to
fall with incomes: 21 percent for the $10,000 to $20,000 class,
14 percent for the $20,000 to $30,000 class, 12 percent for the
$30,000 to $40,000 class, 9 percent for the $40,000 to $50,000
class, 8 percent for the $50,000 to $70,000 class. Elderly
households with after-tax incomes greater than $70,000 spend
just 4 percent for health expenditures.
Under prior law, medical and dental expenses, including
insurance premiums, co-payments, and other direct out-of-pocket
costs were deductible to the extent that they exceeded 5
percent of a taxpayer's adjusted gross income. The 1986 Act
raised the threshold to 7.5 percent. The determination of what
constitutes medical care for purposes of the medical expense
deduction is of special importance to the elderly. Two special
categories are enumerated below.
(a) Residence in a Sanitarium or Nursing Home
If an individual is in a sanitarium or nursing home because
of physical or mental disability, and the availability of
medical care is a principal reason for him being there, the
entire cost of maintenance (including meals and lodging) may be
included in medical expenses for purposes of the medical
expense deduction.
(b) Capital Expenditures
Capital expenditures incurred by an aged individual for
structural changes to his personal residence (made to
accommodate a handicapping condition) are fully deductible as a
medical expense. The General Explanation of the Tax Reform Act
of 1986 prepared by the Joint Committee on Taxation states that
examples of qualifying expenditures are construction of
entrance and exit ramps, enlarging doorways or hallways to
accommodate wheelchairs, installment of railings and support
bars, the modification of kitchen cabinets and bathroom
fixtures, and the adjustments of electric switches or outlets.
(3) Contributory Pension Plans
Prior to 1986, retirees from contributory pension plans
(meaning plans requiring that participants make after-tax
contributions to the plan during their working years) generally
had the benefit of the so-called 3-year rule. The Federal Civil
Service Retirement System and most State and local retirement
plans are contributory plans. The effect of this rule was to
exempt, up to a maximum 3 year period, pension payments from
taxation until the amount of previously taxed employee
contributions made during the working years was recouped. Once
the employee's share was recouped, the entire pension became
taxable.
Under the 1986 Act, the employer's contribution and
previously untaxed investment earnings of the payment are
calculated each month on the basis of the worker's life
expectancy, and taxes are paid on the annual total of that
portion. Retirees who live beyond their estimated lifetime then
must begin paying taxes on the entire annuity. The rationale is
that the retiree's contribution has been recouped and the
remaining payments represent only the employer's contribution.
For those who die before this point is reached, the law allows
the last tax return filed on behalf of the estate of the
deceased to treat the unrecouped portion of the pension as a
deduction.
As a result of repeal of the 3-year rule, workers retiring
from contributory pension plans are in higher tax brackets in
the first years after retirement. However, any initial tax
increases are likely to be offset over the long run because
they have lower taxable incomes in the later years.
(4) Personal Exemptions, Standard Deductions, and Additional Standard
Deduction Amounts
The Treasury Department annually adjusts personal
exemptions, standard deductions, and additional standard
deduction amounts for inflation. The personal exemption a
taxpayer may claim on a return for 2001 is $2,900. The standard
deduction is $4,550 for a single person, $6,650 for a head of
household, $7,600 for a married couple filing jointly, and
$3,800 for a married person filing separately. The additional
standard deduction amount for an elderly single taxpayer is
$1,100 while married individuals (whether filing jointly or
separately) may each receive an additional standard deduction
amount of $900.
(5) Filing Requirements and Exemptions
The 1986 Act and indexation of various tax provisions has
raised the levels below which persons are exempted from filing
Federal income tax forms. For tax year 2001, single persons age
65 or older do not have to file a return if their income is
below $8,550. For married couples filing jointly, the limit is
$14,300 if one spouse is age 65 or older and $15,200 if both
are 65 or older. Single persons who are age 65 or older or
blind and who are claimed as dependents on another individual's
tax return do not have to file a tax return unless their
unearned income exceeds $1,850 ($2,950 if 65 or older and
blind), or their gross income exceeds the larger of $750 or the
filer's earned income (up to $4,300) plus $250, plus $1,100
($2,200 in the case of being 65 or older and blind). Married
persons who are age 65 or older or blind and who are claimed as
dependents on another individual's tax return must file a
return if their earned income exceeds $4,700 ($5,600 if 65 or
older and blind), their unearned income exceeds $1,650 ($2,550
if 65 or older and blind), or their gross income was more than
the larger of $750 or their earned income (up to $3,550) plus
$250, plus $900 ($1,800 if 65 or older and blind). All these
amount's may rise for tax year 2002 since they are subject to
an inflation adjustment.
(6) The Impact of Tax Reform of 1986
Jane G. Gravelle, a Senior Specialist in Economic Policy at
CRS wrote in the Journal of Economic Perspectives an article
entitled the ``Equity Effects of the Tax Reform Act of 1986''
(Vol. 6, No. 1, Winter 1992). In discussing life cycle incomes
and intergenerational equity she found that little change was
made in the intergenerational tax distribution from passage of
this act. Her findings suggest that the Tax Reform Act reduced
taxes on wage incomes which tends to benefit younger workers
relative to older individuals. Thus, younger workers ``gained
slightly more than the average'' since older individuals'
income involves a smaller share of earned income. However,
older individuals also were found to have ``gained slightly
more than average because of the gains in the value of existing
capital.'' The implications of these findings were that the Act
results in ``a long-run revenue loss'' and how this ``revenue
loss is recouped will also affect the distribution among
generations.''
(e) The Omnibus Budget Reconciliation Act of 1990
The Omnibus Budget Reconciliation Act of 1990 (OBRA90) made
a number of substantial changes to the Internal Revenue Code.
It replaced the previous two rates with a 3-tiered statutory
rate structure: 15 percent, 28 percent, and 31 percent. In
2001, the 31 percent rate applies to single individuals with
taxable income (not gross income) between $65,550 and $136,750.
It applies to joint filers with taxable income between $109,250
and $166,550, and to heads of households with taxable income
between $93,650 and $151,650. The Act set a maximum tax rate of
28 percent (which has since been reduced to 20 percent) on the
sale of capital assets held for more than 1 year.
The Act also repealed the so-called ``bubble'' from the Tax
Reform Act of 1986 whereby middle income taxpayers paid higher
marginal tax rates on certain income as personal exemptions and
the lower 15 percent rate were phased out. However, in place of
the ``bubble,'' OBRA90 provided for the phasing out of personal
exemptions and limiting itemized deductions for high income
taxpayers. The phaseout of personal exemptions for 2001 begins
at $132,500 for single filers, $199,450 for joint filers, and
$166,200 for heads of households. OBRA90 also provided a
limitation on itemized deductions. Allowable deductions for
2001 were reduced by 3 percent of the amount by which a
taxpayer's adjusted gross income exceeds $132,950. Deductions
for medical expenses, casualty and theft losses, and investment
interest are not subject to this limitation. (These phase-outs
are scheduled to be repealed over a number of years by the 2001
tax legislation).
Additionally, the Act raised excise taxes on alcoholic
beverages, tobacco products, and gasoline, and imposed new
excise taxes on luxury items such as expensive airplanes,
yachts, cars, furs, and jewelry. With the exception of the tax
on luxury cars, all of the other luxury taxes have since been
repealed. The luxury tax on cars is being phased out.
The Act provided a tax credit to help small businesses
attempting to comply with the Americans With Disabilities Act
of 1990. The provision, sponsored by Senators Pryor, Kohl, and
Hatch, allows small businesses a nonrefundable 50 percent
credit for expenditures of between $250 and $10,250 in a year
to make their businesses more accessible to disabled persons.
Such expenditures can include amounts spent to remove physical
barriers and to provide interpreters, readers, or equipment
that make materials more available to the hearing or visually
impaired. To be eligible, a small business must have grossed
less than $1 million in the preceding year or have no more than
30 full-time employees. Full-time employees are those who work
at least 30 hours per week for 20 or more calendar weeks during
the tax year.
At the time of passage, estimates made by the Congressional
Budget Office, found that most elderly persons should be for
the most part untouched by the changes made by the OBRA90.
However, as might be expected, some high-income elderly will
pay higher Federal taxes. Some of the excise taxes were found
to have a negative effect on the elderly, in particular the 5
cents a gallon increase on gasoline. Like all changes of the
tax laws, certain individuals may be negatively affected, but
as a class, the elderly will probably pay the same in Federal
income taxes as a result of the passage of OBRA90.
(f) Unemployment Compensation Amendments of 1992
While the main purpose of this Act was to extend the
emergency unemployment compensation program it contained a
number of tax related provisions. The Act extended the
temporary phaseout of the personal exemption deduction for high
income taxpayers as well as revised the estimated tax payment
rules for large corporations. This Act changed rules on pension
benefit distributions and included the requirement that
qualified plans must include optional trustee-to-trustee
transfers of eligible rollover distributions.
(g) The Omnibus Budget Reconciliation Act of 1993
The Omnibus Budget Reconciliation Act of 1993, added a new
36 percent tax rate. In 2001, this rate applies to single
individuals with taxable incomes between $136,750 and $297,350
($166,500/$297,350 for joint filers), and an additional 10
percent surtax for a top rate of 39.6 percent applicable to
individuals or joint filers with taxable incomes in excess of
$297,350. It also made permanent the 3 percent limitation on
itemized deductions and the phaseout of personal exemptions for
higher income taxpayers. This Act also increased the
alternative minimum tax rate for individuals and repealed the
Medicare health insurance tax wage cap. As mentioned earlier in
this print, an increase was provided in the taxation of Social
Security benefits for higher income taxpayers. Changes were
also enacted to energy taxes, including adding 4.3 cents per
gallon on most transportation fuel and the temporary extension
of a 2.5 cents per gallon motor fuels tax enacted under OBRA90.
(h) Social Security Domestic Employment Reform Act of 1994
Changes were made in this Act (P.L. 103-387) to the Social
Security program. The Act simplified and increased the
threshold above which domestic workers are liable for Social
Security taxes from $50 per quarter to $1,000 per year. Also, a
reallocation of a portion of the Social Security tax was
provided to the Disability Insurance Trust Fund. Finally, the
Act extended a limitation for payments of Social Security
benefits to felons and the criminally insane who are confined
to institutions by court order.
(i) State Taxation of Pension Income Act of 1995
This Act (P.L. 104-95) amended Federal law to prohibit a
State from levying its income tax on retirement income
previously earned in the State but now received by people who
are retired in other States. For purposes of the Act, ``State''
includes the District of Columbia, U.S. possessions, and any
political subdivision of a State. Thus, the prohibition against
taxing nonresident pension income also applies to income taxes
levied by cities or counties. The new law protects most forms
of retirement income and covers both private and public sector
employees. The law does not restrict a State's ability to tax
its own residents on their retirement income.
(j) Health Insurance Portability and Accountability Act of 1996
There were several provisions included in this Act (P.L.
104-191) of interest to older Americans. In general, the Act
provides for the same tax treatment for long-term care
contracts as for accident and health insurance contracts. The
Act also provides that employer-provided long-term care
insurance be treated as a tax free fringe benefit. However,
long-term care coverage cannot be provided through a flexible
spending arrangement and to the extent such coverage is
provided under a cafeteria plan the amounts are included in the
employee's income. Payments from long-term care plans which pay
or reimburse actual expense are tax free. The law provides for
a $175 per day tax-free benefits payment with inflation
adjustments in future years. Amounts above the $175 per day
amount may also be received tax free to the extent of actual
costs. Premiums qualify as medical expenses for those that
itemized deductions (although this amount is limited depending
on the insured age). In addition to this provision, the Act
provides that accelerated life insurance benefits can be tax-
free. Accelerated death benefits are exempt from income tax in
the case of a terminally or chronically ill individual. Also
excluded from taxation are amounts received from viatical
settlement companies for amounts received on the sale of a
life-insurance contract. In the case of chronically ill
individuals, the maximum exclusion is $175 per day in the case
of per diem policies. Indemnity policies are not included under
this provision.
(k) The Taxpayer Relief Act of 1997
This Act (P.L. 105-34) provided a modest aggregate tax
reduction consisting of several major tax cut measures aimed at
particular categories of taxpayers, income, and activities
(e.g., capital gains, saving and investment) along with a host
of smaller, more narrowly focused provisions. In targeting the
tax reductions to certain activities and types of income, the
bill was also intended to stimulate and encourage activities
that were argued to be economically or socially beneficial. The
tax cut for capital gains and liberalized IRA rules, for
example, were supported on the grounds that they would
stimulate saving and investment.
(1) Capital Gains Provisions
The Act contains several provisions that reduce taxes on
capital gains. The Act applies two reduced maximum rates: a
maximum 10 percent rate to gains that would be taxed at 15
percent if ordinary income tax rates applied; and a maximum 20
percent rate to gains that would be subject to rates higher
than 15 percent if they were ordinary income. Beginning in
2001, the Act reduces its 20 percent and 10 percent maximum
rates to 18 percent and 8 percent for assets held more than 5
years. The Act also replaces prior law's benefits for gains
from the sale of homes. The Act provides, instead, a $250,000
exclusion from gain from the sale of a principal residence
($500,000 for joint returns) that is not contingent on
rollovers and is not restricted to those over 55.
(2) Individual Retirement Accounts
Prior law provided that participants and/or their spouses
who were in retirement plans had contributions phased out
beginning at AGIs of $25,000 ($40,000 for couples). Under the
Act the phase-out thresholds for deductions is increased. The
Act also created two new types of IRAs. A ``back loaded'' or
Roth IRA provides that the contributions are not deductible but
neither are the earnings on those accounts taxable. The Act
also created education IRAs which allow contributions of up to
$500 per student for secondary education expenses. Additional
detail on the IRA provisions is provided later in this chapter.
(3) Estate and Gift
The Act reduced the estate and gift tax in a number of
ways, but by far the largest reduction was a phased-in increase
of the unified credit, which provided an effective tax
exemption for transfers below a certain level. The 1997 Act
gradually increased the exemption to $1,000,000, as follows:
$625,000 in 1998; $650,000 in 1999; $675,000 in 2000 and 2001.
Further scheduled increases have been superseded by the
Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L.
107-16). That Act provided an additional benefit for estates
comprised of family owned businesses. Under its terms, up to
$1,000,000 of a qualified estate can be excluded from tax.
Among the other estate tax reductions are: indexation of
several existing provisions that have the effect of reducing
estate and gift taxes (e.g., the limit on ``special use''
valuation); reduction of estate tax for land subject to a
conservation easement; and reduction of the interest rate
applicable to installment payments of estate tax. Other
provisions of interest to elderly taxpayers include technical
corrections to medical savings account provisions.
(4) The Impact of the Taxpayer Relief Act of 1997
To assess the Taxpayer Relief Act it helps to put it in
perspective by comparing its policy direction to two landmark
tax acts of the 1980's the Economic Recovery Tax Act of 1981
(ERTA) and the Tax Reform Act of 1986 (TRA86). The 1981 and
1986 Acts are generally recognized to have been guided by
opposing views of the appropriate role of tax policy in the
economy. The 1981 Act was, in part, based on a belief in the
economic efficacy of targeted tax incentives that judiciously
selected and aimed tax reductions could enhance economic
performance. For example, one of ERTA's most prominent measures
was expansion of Individual Retirement Accounts, which were
designed to stimulate savings. Only 5 years later, however, the
Tax Reform Act of 1986 was designed to promote economic
efficiency, equity, and simplicity. It was based, in part, on
the notion that the economy functions best when tax-induced
distortions of behavior are minimized; both this idea and the
Act's goal of horizontal equity led to an emphasis in its
provisions on reducing differences in how different activities
and types of income were taxed.
While we will not attempt a full assessment of the Taxpayer
Relief Act, it is clear that the measure is closer to ERTA's
guiding principles than those of the Tax Reform Act of 1986.
For example, the 1997 Act's liberalized IRAs build on the IRA
concept that was expanded with ERTA. And both the Taxpayer
Relief Act's IRA provisions and its cut for capital gains are
based on the same belief in the efficacy of tax incentives for
saving and investment that underlay much of the 1981 Act.
In contrast to the 1986 Tax Reform Act, there is little
doubt that the 1997 Act added complications to the tax system
as well as likely reducing horizontal equity. An important
difference, however, between the 1997 Act and both ERTA and The
Tax Reform Act is that the 1997 Act is substantially smaller
than ERTA; and while the net revenue impact of the 1986 Act was
quite small, it was substantially broader in scope than the
Taxpayer Relief Act.
(l) Balanced Budget Act of 1997
The Balanced Budget Act of 1997 (BBA97, P.L. 105-33) made
several major changes to underlying Medicare law dealing with
private health plans. It replaces the risk program (and other
Medicare managed-care options, such as plans with cost
contracts) with a program called Medicare+Choice (new Part C of
Medicare). In doing so, it creates a new set of private plan
options for Medicare beneficiaries. Every individual entitled
to Medicare Part A and enrolled in Part B will be able to elect
the existing package of Medicare benefits through either the
existing Medicare fee-for-service program (traditional
Medicare) or Medicare+Choice plan.
Distributions from Medicare+Choice MSAs used to pay
qualified medical expenses are excludable from taxable income.
Excludable amounts cannot be taken into account for purposes of
the itemized deduction for medical expenses. Distributions for
other than qualified medical expenses are includable in taxable
income and a special tax applies to such amounts. This
additional tax does not apply to distributions because of the
disability or death of the account holder. Special provisions
apply upon the death of the account holder.
(m) The Economic Growth and Tax Relief
Reconciliation Act of 2001 (P.L. 107-16) was a major tax
revision, although provisions are phased in over a 9-year
period. It lowers marginal tax rates, create a new bottom 10
percent tax bracket, increases the standard deduction and width
of the 15 percent rate bracket to twice that of single returns
for married taxpayers who file jointly, eliminates phase-outs
of itemized deductions and personal exemptions, expands the
child credit and makes it partially refundable, reduces rates
and expands exemptions for the estate and gift tax (eventually
repealing the estate tax while retaining the gift tax and
providing for a carry-over basis for assets, liberalizes and
expands on IRA, pension, education, and child care benefits and
pensions. Because the bill passed as part of the budget
resolution, it sunsets at the end of 2010, but the following
discussion assumes the provisions will be made permanent. The
discussion focuses on two provisions that may be of special
interest to older taxpayers: the phaseout of the estate and
gift tax and the increase in the individual retirement account
limits.
(1) Estate and Gift Tax
The estate and gift tax revisions gradually reduce the
rates and increase the exemptions for the estate and gift tax
(with rates falling to 45 percent and exclusions rising to $3.5
million by 2009). In 2010 the estate gift tax is repealed. A
gift tax would be retained with the continued annual exclusion
of $10,000 per donee plus a $1 million lifetime exemption. A
rationale for retaining the gift tax is to prevent the
splitting of assets among wealthy families to take advantage of
lower tax rates under a progressive rate structure. In
addition, appreciated assets will be subject to ``carryover
basis'' rules when the estate tax is repealed: thus, when heirs
sell assets they will have to include in gains the appreciation
that occurred during the lifetime of the donor.
(2) Individual Retirement Accounts
The tax cut will gradually increase the limits on IRAs: to
$3,000 in 2002-4, $4,000 in 2005-7, and $5,000 in 2009, with
amounts subsequently indexed in $500 increments. Individuals
over age 50 will be allowed an additional $500 in 2002-5, and
an additional $1,000 in 2006 and thereafter.
(3) Pensions
For pensions, the bill contains provisions designed to
expand coverage by increasing contribution and benefit limits
for qualified plans and by increasing elective deferral limits.
The bill also contains provisions designed to enhance pension
benefits for women, to increase plan portability, to strengthen
pension security and enforcement, and to reduce regulatory
burdens.
(4) The Impact of the Economic Growth and Tax Relief Reconciliation Act
of 2001
This tax bill had general tax cuts that tend to favor
higher income individuals (rate reductions, estate and gift
tax), with more targeted tax cuts for the middle class that
particularly favored married couples and families with
children. Overall, the tax changes increased the disposable
income more for higher income individuals.
B. SAVINGS
1. Background
There has been considerable emphasis on increasing the
amount of resources available for investment. By definition,
increased investment must be accompanied by an increase in
saving and foreign inflows. Total national saving comes from
three sources: individuals saving their personal income,
businesses capital consumption allowances and retained profits,
and Government saving when revenues exceed expenditures. As
part of the trend to increase investment generally, new or
expanded incentives for personal saving and capital
accumulation have been enacted in recent years.
Retirement income experts have suggested that incentives
for personal saving be increased to encourage the accumulation
of greater amounts of retirement income. Many retirees are
dependent primarily on Social Security for their income. Thus,
some analysts favor a better balance between Social Security,
pensions, and personal savings as sources of income for
retirees. The growing financial crisis that faced Social
Security in the early 1980's reinforced the sense that
individuals should be encouraged to increase their pre-
retirement saving efforts.
The life-cycle theory of saving has helped support the
sense that personal saving is primarily saving for retirement.
This theory postulates that individuals save little as young
adults, increase their saving in middle age, then consume those
savings in retirement. Survey data suggests that saving habits
are largely dependent on available income versus current
consumption needs, an equation that changes over the course of
most individuals' lifetimes.
The consequences of the life-cycle saving theory raises
questions for Federal savings policy. Tax incentives may have
their greatest appeal to those who are already saving at above-
average incomes, and subject to relatively high marginal tax
rates. Whether this group presently is responding to these
incentives by saving at higher rates or simply shifting after-
tax savings into tax-deferred vehicles is a continuing subject
of disagreement among many policy analysts.
For taxpayers who are young or have lower incomes, tax
incentives may be of little value. Raising the saving rate in
this group necessitates a tradeoff of increased saving for
current consumption, a behavior which they are not under most
circumstances inclined to pursue. As a result, some observers
have concluded that tax incentives will contribute little to
the adequacy of retirement income for most individuals,
especially for those at the lower end of the income spectrum.
The dual interest of increased capital accumulation and
improved retirement income adequacy has sparked an expansion of
tax incentives for personal retirement saving over the last
decade. However, in recent years, many economists have begun to
question the importance and efficiency of expanded tax
incentives for personal saving as a means to raise capital for
national investment goals, and as a way to create significant
new retirement savings. These issues received attention in 1986
as part of the effort to improve the fairness, simplicity, and
efficiency of Federal tax incentives.
The role of savings in providing for retirement income for
the elderly population is substantial. According to the Census
Bureau's Current Population Reports on Money Income in the
United States, in 1999, about two-thirds of those aged 65 and
over had property income while only about one-third received
income from pensions. Nearly 20 percent of all elderly income
was accounted for by interest, dividends, or other forms of
property income.
Some differences emerge when the elderly population is
broken down by race. Property income accounted for about 20
percent of the total income of white households, but for less
than 10 percent of black and Hispanic household income.
The median net worth of all families in 1998 was $56,400,
according to the Federal Reserve Board's Survey of Consumer
Finances. The median net worth for white families was $94,900,
while the median net worth for other families was $16,400. The
wealthiest age group included those families headed by someone
between the age of 55 and 64, whose median net worth was
$146,500.
The effort to increase national investment springs, in
part, from a perception that governmental, institutional, and
personal saving rates are lower than the level necessary to
support a more rapidly growing economy. Except for a period
during World War II when personal saving approached 25 percent
of income, the personal saving rate in the United States
through the early 1990's ranged between 4 percent and 9.5
percent of disposable income but, recently it has fallen
considerably below that range. Many potential causes for these
variations have been suggested, including demographic shifts in
the age and composition of families and work forces, and
efforts to maintain levels of consumption in the face of
inflation. Most recently, the rise in the stock market was
argued to increase wealth and, because of higher wealth,
consumption. (Indeed, this possible reason illustrates one of
the uncertainties regarding the effects of rates of return on
savings: higher returns can actually discourage savings through
an ``income'' or ``wealth'' effect. When individuals have
higher wealth and income they consume more at every point in
time. Higher returns also provide a substitution of consumption
into the future which increases savings, and the final effect
on savings depends on the magnitude of these income and
substitution effects.) Personal saving rates in the United
States historically have been substantially lower than in other
industrialized countries. In some cases, it is only one-half to
one-third of the saving rates in European countries.
For 2000, Commerce Department figures indicate that the
personal savings rate was 0.2 percent, compared to 2.2 percent
for 1999. For the 1970's and 1980's, the rates averaged 8.3
percent and 7.0 percent respectively.
Even assuming present tax policy creates new personal
savings (and empirical evidence on this issue is mixed),
critics suggest this outcome may not guarantee an increase in
total national savings available for investment. Federal budget
surpluses constitute saving as well; the loss of Federal tax
revenues resulting from tax incentives may offset the new
personal saving being generated. Under this analysis, net
national saving would be increased only when net new personal
saving exceeded the Federal tax revenue foregone as a result of
tax-favored treatment.
Recent studies of national retirement policy have
recommended strengthening individual saving for retirement.
Because historical rates of after-tax saving have been low,
emphasis has frequently been placed on tax incentives to
encourage saving in the form of voluntary tax-deferred capital
accumulation mechanisms.
The final report of the President's Commission on Pension
Policy issued in 1981 recommended several steps to improve the
adequacy of retirement saving, including the creation of a
refundable tax credit for employee contributions to pension
plans and individual retirement savings. Similarly, the final
report of the National Commission on Social Security
recommended increased contribution limits for IRAs. In that
same year, the Committee for Economic Development, an
independent, nonprofit research and educational organization,
issued a report which recommended a strategy to increase
personal retirement savings that included tax-favored
contributions by employees covered by pension plans to IRAs,
Keogh plans, or the pension plan itself.
These recommendations reflected ongoing interest in
increased saving opportunities. In each Congress since the
passage of the Employee Retirement Income Security Act (ERISA)
in 1974, there have been expansions in tax-preferred saving
devices. This continued with the passage of the Economic Tax
Recovery Act of 1981 (ERTA). From the perspective of
retirement-specific savings, the most important provisions were
those expanding the availability of IRAs, simplified employee
pensions, Keogh accounts, and employee stock ownership plans
(ESOP's). ERTA was followed by additional expansion of Keogh
accounts in the Tax Equity and Fiscal Responsibility Act of
1982 (TEFRA), which sought to equalize the treatment of
contributions to Keogh accounts with the treatment of
contributions to employer-sponsored defined contribution plans.
IRA availability was limited in the Tax Reform Act of 1986
(TRA) to those with no employer pensions plans and lower and
moderate income individuals with employer plans. However, the
availability of IRAs was greatly expanded in 1997 and
contribution limits were increased in The Economic Growth and
Tax Relief Reconciliation Act of 2001 (EGTRRA). The 2001 Act
also liberalized pension tax rules in a variety of ways.
The evaluation of Congress' attitude toward expanded use of
tax incentives to achieve socially desirable goals holds
important implications for tax-favored retirement saving. When
there is increasing competition among Federal tax expenditures,
the continued existence of tax incentives depends in part on
whether they can stand scrutiny on the basis of equity,
efficiency in delivering retirement benefits, and their value
to the investment market economy.
2. Issues
(A) Individual Retirement Accounts (IRAs)
(1) Brief History
``Deductible'' IRAs began with the Employee Retirement
Income Security Act of 1974 to offer tax-advantaged retirement
saving for workers not covered by employer retirement plans.
Tax-deferred contributions could be made up to the lesser of 15
percent of pay or $1,500 a year. The Economic Recovery Tax Act
of 1981 hiked this limit to the lesser of 100 percent of pay or
$2,000 and opened deductible contributions to all workers.
However, the Tax Reform Act of 1986 limited deductibility of
contributions by persons with employer coverage (or whose
spouses have such coverage to those with income below certain
limits. Filers ineligible to make deductible contributions can
still make after-tax contributions to ``nondeductible'' IRAs,
which defer income tax on investment earnings. If IRA funds
that are taxable when withdrawn are withdrawn before age 59\1/
2\ , they are also subject to a 10 percent excise tax unless
the withdrawal is: because of death or disability; in the form
of a lifetime annuity; to pay medical expenses in excess of 7.5
percent of adjusted gross income (AGI); or to pay health
insurance premiums while unemployed. Withdrawals must begin by
April 1 of the year following the year in which age 70\1/2\ is
attained in amounts that will consume the IRA over the expected
lifetimes(s) of account holder and beneficiary.
The Taxpayer Relief Act of 1997 changed IRAs in numerous
ways by: expanding the number of tax filers eligible for tax-
deductible contributions; allowing penalty-free early
withdrawals for higher education and qualified home purchase
expenses; and authorizing Roth IRAs (back-loaded . . . i.e, the
contributions are not deductible from income and earnings are
nontaxable upon distribution from the account) and education
IRAs funded by after-tax contributions that provide tax-free
income.
(a) Pre-1986 Tax Reform
The extension of IRAs to pension-covered workers in 1981 by
ERTA resulted in dramatically increased IRA contributions. In
1982, the first year under ERTA, IRS data showed 12 million IRA
accounts, over four times the 1981 number. In 1983, the number
of IRAs rose to 13.6 million, 15.2 million in 1984, and 16.2
million in 1985. In 1986, contributions to IRAs totaled $38.2
billion. The Congress anticipated IRA revenue losses under ERTA
of $980 million for 1982 and $1.35 billion in 1983. However,
according to Treasury Department estimates, revenue losses from
IRA deductions for those years were $4.8 billion and $10
billion, respectively. By 1986, the estimated revenue loss had
risen to $16.8 billion. Clearly, the program had become much
larger than Congress anticipated.
The rapid growth of IRAs posed a dilemma for employers as
well as Federal retirement income policy. The increasingly
important role of IRAs in the retirement planning of employees
began to diminish the importance of the pension bond which
links the interests of employers and employees. Employers began
to face new problems in attempting to provide retirement
benefits to their work forces.
A number of questions arose over the efficiency of the IRA
tax benefit in stimulating new retirement savings. First, does
the tax incentive really attract savings from individuals who
would be unlikely to save for retirement otherwise? Second,
does the IRA tax incentive encourage additional saving or does
it merely redirect existing savings to a tax-favored account?
Third, are IRAs retirement savings or are they tax-favored
saving accounts used for other purposes before retirement?
Evidence indicated that those who used the IRA the most
might otherwise be expected to save without a tax benefit. Low-
wage earners infrequently used IRA's. The participation rate
among those with less than $20,000 income was two-fifths that
of middle-income taxpayers ($20,000 to $50,000 annual income)
and one-fifth that of high-income taxpayers ($50,000 or more
annual income). Also, younger wage earners, as a group, were
not spurred to save by the IRA tax incentive. As the life-cycle
savings hypothesis suggests, employees nearing normal
retirement age are three times more likely to contribute to an
IRA than workers in their twenties. Those without other
retirement benefits also appear to be less likely to use an
IRA. Employees with job tenures greater than 5 years display a
higher propensity toward IRA participation at all income
levels. For those not covered by employer pensions, utilization
generally increases with age, but is lower across all income
groups than for those who are covered by employer pensions. In
fact, 46 percent of IRA accounts are held by individuals with
vested pension rights.
Though a low proportion of low-income taxpayers utilize
IRAs relative to higher income counterparts, those low-income
individuals who do contribute to an IRA are more likely than
their high-income counterparts to make the contributions from
salary rather than pre-existing savings. High-income taxpayers
apparently are more often motivated to contribute to IRAs by a
desire to reduce their tax liability than to save for
retirement.
One of the stated objectives in the creation of IRAs was to
provide a tax incentive for increased saving among those in
greatest need. This need appears to be most pressing among
those with low pension coverage and benefit receipt resulting
from employment instability or low average career compensation.
However, the likelihood that a taxpayer will establish an IRA
increases with job and income stability. Thus, the tax
incentive appears to be most attractive to taxpayers with
relatively less need of a savings incentive. As a matter of tax
policy, IRAs could be an inefficient way of improving the
retirement income of low-income taxpayers.
An additional issue was whether all IRA savings are in fact
retirement savings or whether IRAs were an opportunity for
abuse as a tax shelter. Most IRA savers probably view their
account as retirement savings and are inhibited from tapping
the money by the 10 percent penalty on early withdrawals before
age 59 and a half. However, those who do not intend to use the
IRA to save for retirement, can still receive tax benefits from
an IRA even with early withdrawals. Most analysts agree that
the additional buildup of earnings in the IRA, which occurs
because the earnings are not taxed, will surpass the value of
the 10 percent penalty after only a few years, depending upon
the interest earned. Some advertising for IRA savings
emphasized the weakness of the penalty and promoted IRAs as
short-term tax shelters. Although the tax advantage of an IRA
is greatest for those who can defer their savings until
retirement, they are not limited to savings deferred for
retirement.
(b) Post-1986 Tax Reform Proposals
In the 101st Congress (1989-1990) several proposals to
restore IRA benefits were made: the Super IRA, the IRA-Plus,
and the Family Savings Account (FSA).
The Super-IRA proposal suggested by Senator Bentsen and
approved by the Senate Finance Committee in 1989 (S. 1750)
would have allowed one half of IRA contributions to be deducted
and would have eliminated penalties for ``special purpose''
withdrawals (for first time home purchase, education, and
catastrophic medical expenses). The IRA proposal was advanced
as an alternative to the capital gains tax benefits proposed on
the House side.
The IRA-Plus proposal (S. 1771) sponsored by Senators
Packwood, Roth and others proposed an IRA with the tax benefits
granted in a different fashion from the traditional IRA. Rather
than allowing a deduction for contributions and taxing all
withdrawals similar to the treatment of a pension, this
approach simply eliminated the tax on earnings, like a tax-
exempt bond. This IRA is commonly referred to as a back-loaded
IRA. The IRA-Plus would also be limited to a $2,000
contribution per year. Amounts in current IRAs could be rolled
over and were not subject to tax on earnings (only on original
contributions); there were also special purpose withdrawals
with a 5-year holding period.
The Administration proposal for Family Savings Accounts
(MSAS) in 1990 also used a back-loaded approach with
contributions allowed up to $2,500. No tax would be imposed on
withdrawals if held for 7 years, and no penalty (only a tax on
earnings) if held for 3 years. There was also no penalty if
funds were withdrawn to purchase a home. Those with incomes
below $60,000, $100,000, and $120,000 (single, head of
household, joint) would be eligible.
In 1991, S. 612 (Senators Bentsen, Roth and others) would
have restored deductible IRAs, and also allowed an option for a
nondeductible or back-loaded ``special IRA.'' No tax would be
applied if funds were held for 5 years and no penalties would
apply if used for ``special purpose withdrawals.''
In 1992 the President proposed a new IRA termed a FIRE
(Flexible Individual Retirement Account) which allowed
individuals to establish back-loaded individual retirement
accounts in amounts up to $2,500 ($5,000 for joint returns)
with the same income limits as proposed in the 101st Congress.
No penalty would be applied for funds held for 7 years.
Also in 1992, the House passed a limited provision (in H.R.
4210) to allow penalty-free withdrawals from existing IRAs for
``special purposes.'' The Senate Finance Committee proposed,
for the same bill, an option to choose between back-loaded IRAs
and front-loaded ones, with a 5-year period for the back-loaded
plans to be tax free and allowing ``special purpose''
withdrawals. This provision was included in conference, but the
bill was vetoed by the President for unrelated reasons. A
similar proposal was included in H.R. 11 (the urban aid bill)
but only allowed IRAs to be expanded to those earning $120,000
for married couples and $80,000 for individuals (this was a
Senate floor amendment that modified a Finance Committee
provision). That bill was also vetoed by the President for
other reasons.
Prior to the passage of the Small Business Tax Act in 1996
some were concerned that the IRA was not equally available to
all taxpayers who might want to save for retirement. Before
1997, nonworking spouses of workers saving in an IRA could
contribute only an additional $250 a year. The Small Business
Tax Act modified the rule to allow spousal contributions of up
to $2,000 if the combined compensation of the married couple is
at least equal to the contributed amount. Prior to this change,
some contended that the lower $250 amount created an inequity
between two-earner couples who could contribute $4,000 a year
and one-earner couples who could contribute a maximum of $2,250
in the aggregate. They argued that it arbitrarily reduced the
retirement income of spouses, primarily women, who spent part
or all of their time out of the paid work force. Those who
opposed liberalization of the contribution rules contended that
any increase would primarily advantage middle and upper income
taxpayers, because the small percentage of low-income taxpayers
who utilized IRAs often did not contribute the full $2,000
permitted them each year.
The Contract with America and the 1995 budget
reconciliation proposal included proposed IRA expansions, but
these packages were not adopted. The Health Insurance
Portability and Accountability Act of 1996 allowed penalty-free
withdrawals from IRAs for medical costs. Under this provision,
amounts withdrawn for medical expenses in excess of 7.5 percent
of a taxpayer's adjusted gross income will not be subject to
the 10 percent penalty tax for early withdrawals. In addition,
persons on unemployment for at least 12 weeks may make
withdrawals to pay for medical insurance without being subject
to the 10 percent penalty tax for early withdrawals.
(c) 1997 Revisions and Establishment of Roth IRAs
The Taxpayer Relief Act of 1997 has a number of different
provisions related to IRAs, including both liberalization of
rules and restrictions governing the type of IRAs allowed under
prior law; and creation of 2 new types of IRAs so called ``back
loaded'' IRAs (so called because contributions are not
deductible, but qualified withdrawals are not taxed) and
education IRAs. The 1997 Act gradually doubles the phase-out
threshold for deductions to IRAs to $50,000 by the year 2005
($80,000 for couples). The Act also provides that persons will
not be disqualified from deducting IRA contributions if they,
themselves, do not participate in a pension, but their spouse
does. Finally, withdrawals from IRAs prior to age 59\1/2\ are
subject to a 10 percent early withdrawal tax; the 1997 Act
permits penalty free withdrawals of funds used to pay higher
education expenses or first-time home purchases. In the case of
the new type of ``back loaded'' IRA (also called Roth IRAs) if
a person expects to have the same tax rate upon retirement as
when contributions are made, the back loaded IRAs deliver the
same magnitude of tax benefit, per dollar of contribution, as
deductible IRAs. Somewhat different rules, however, apply to
Roth IRAs: allowable contributions to them are phased out at
higher AGIs than is the deduction between $95,000 and $110,000
for singles (between $150,000 and $160,000 for couples). In
addition contributions to all an individual's IRAs (i.e.,
deductible and Roth IRAs combined) are not permitted to exceed
$2,000 in 1 year. As with deductible IRAs, penalty free
withdrawals are permitted under the Act for first-time home
purchases or higher education expenses. The Act also provides
that funds can generally be shifted from prior-law type IRAs to
Roth IRAs. The shifted amounts are included in taxable income.
The Act permits taxpayers to establish education IRAs with
annual contributions limited to $500 per beneficiary and
allowable contributions phased out for AGIs between $95,000 and
$110,000 ($150,000 and $160,000 for joint returns).
(d) Additional Proposals and The Economic Growth and Taxpayer Relief
and Reconciliation Act of 2001 (EGTRRA)
Proposals to expand IRAs continued following the 1997 tax
cut. The Senate version of the Taxpayer Refund and Relief Act
of 1999, would have increased contribution limits to $5,000,
increased income limits for deductible IRAs and eliminated
income limits for Roth IRAs. The House bill's provisions were
much more limited: Roth IRA limits would have been increased.
The final bill more closely followed the Senate version,
although the income limits for Roth IRAs were to be increased
with no change for deductible IRAs. The President vetoed the
tax cut because of its large revenue cost. Several bills
including IRA provisions saw some legislative action in 2000,
but none were enacted.
EGTRAA expanded both IRAS and benefits for pensions in
general. Under EGTRRA, IRA limits will be increased to $3,000
in 2002-4, $4,000 in 2005-7 and $5,000 in 2008. Thereafter the
limits will be indexed for inflation. EGTRRA increased the
maximum contributions for those 50 and over by an additional
$500 in 2002-5 and $1,000 in 2006 and subsequent years. Some,
but not all, proposals during the 1998-2000 period proposed
increasing the income limits as well, but these increases were
not included in EGTRRA.
EGTRAA also enacted a temporary tax credit for elective
deferrals and IRA contributions for lower income individuals in
2002, beginning at 50 percent and falling to 10 percent, but
this provision is to sunset after 2006.
(2) Tax Benefits of IRAs: Front-Loaded and Back-Loaded
The two types of IRAs front-loaded (deductible) and back-
loaded (nondeductible) are equivalent in one sense, but
different in other ways. They are equivalent in that they both
effectively exempt the return on investment from tax in certain
circumstances.
(a) Equivalence of Types
A back-loaded IRA is just like a tax-exempt bond; no tax is
ever imposed on the earnings. Assuming that tax rates are the
same at the time of contribution and withdrawal, a deductible,
or front-loaded, IRA offers the equivalent of no tax on the
rate of return to savings, just like a back-loaded IRA. The
initial tax benefit from the deduction is offset, in present
value terms, by the payment of taxes on withdrawal. Here is an
illustration. If the interest rate is 10 percent, $100 will
grow to $110 after a year, $100 of principle and $10 of
interest. If the tax rate is 25 percent, $2.50 of taxes will be
paid on the interest, and the after-tax amount will be $107.50,
for an after-tax yield of 7.5 percent. With a front-loaded IRA,
however, the taxpayer will save $25 in taxes initially from
deducting the contribution, for a net investment of $75. At the
end of the year, the $110 will yield $8.25 after payment of 25
percent in taxes, and $8.25 represents a 10 percent rate of
return on the $75 investment. The current treatment for those
not eligible for a deductible IRA--a deferral of tax--results
in a partial tax, depending on period of time the asset is held
and the tax rate on withdrawal. For example, a deferral would
produce an effective tax rate of 18 percent if held in the
account for 10 years, and a tax rate of 13 percent if held for
20 years.
(b) Differences in Treatment
There are, nevertheless, three ways in which these tax
treatments can differ if tax rates vary over time, if the
dollar ceilings are the same, and if premature withdrawals are
made. There are also differences in the timing of tax benefits
that have some implications for individual behavior as well as
revenue costs.
(1) Variation in Tax Rates Over Time
The equivalence of front-loaded and back-loaded IRAs only
holds if the same tax rate applies to the individual at the
time of contribution and the time of withdrawal. If the tax
rate is higher on contribution than on withdrawal, the tax rate
is negative. For example, if the tax rate were zero on
withdrawal in the previous example, the return of $35 on a $75
investment would be 46 percent, indicating a large subsidy to
raise the rate of return from 10 percent to 46 percent.
Conversely, a high tax rate at the time of withdrawal relative
to the rate at the time of contribution would result in a
positive tax rate. If tax rates are uncertain, and especially
if it is possible that the tax rate will be higher in
retirement, the benefits of a front-loaded IRA are unclear.
(2) Dollar Ceilings
A given dollar ceiling that is binding for an individual
for a back-loaded IRA is more generous than for a front-loaded
one. If an individual has $2,000 to invest and the tax rate is
25 percent, all of the earnings will be tax exempt with a back-
loaded IRA, but the front-loaded IRA is equivalent to a tax
free investment of only $1,500; the individual would have to
invest the $500 tax savings in a taxable account to achieve the
same overall savings, but will end up with a smaller amount of
after tax funds on withdrawal.
Another way of explaining this point is to consider a total
savings of $2,000, which, under a back-loaded account with an 8
percent interest rate would yield $9,321 after, say, 20 years.
With a front loaded IRA, an interest rate of 8 percent and a 25
percent tax rate (so $2,000 would be invested in an IRA and the
$500 tax savings invested in a taxable account) the yield would
be $8,595 in 20 years. In order to make a back-loaded IRA
equivalent to a front loaded one, the back-loaded IRA would
need to be 75 percent as large as a front-loaded one. (Since
the relative size depends on the tax rate, the back-loaded IRA
is more beneficial to higher income individuals than a front-
loaded IRA, other things equal, including the total average tax
benefit provided).
(3) Non-Qualified Withdrawals
Front-loaded and back-loaded IRAs differ in the tax burdens
imposed if non-qualified withdrawals are made (generally before
retirement age). This issue is important because it affects
both the willingness of individuals to commit funds to the
account that might be needed before retirement (or other
eligibility) and the willingness to draw out funds already
committed to an account.
The front-loaded IRA provides steep tax burdens for early
year withdrawals which decline dramatically because the penalty
applies to both principal and interest. (Without the penalty,
the effective tax rate is always zero). For example, with a 28
percent tax rate and an 8 percent interest rate, the effective
tax burden is 188 percent if held for only a year, 66 percent
for 3 years and 40 percent for 5 years. At about 7 years, the
tax burden is the same as an investment made in a taxable
account, 28 percent. Thereafter, tax benefits occur, with the
effective tax rate reaching 20 percent after 10 years, 10
percent after 20 years and 7 percent after 30 years. These tax
benefits occur because taxes are deferred and the value of the
deferral exceeds the penalty.
The case of the back-loaded IRA is much more complicated.
First, consider the case where all such IRAs are withdrawn. In
this case, the effective tax burdens are smaller in the early
years. Although premature withdrawals attract both regular tax
and penalty, they apply only to the earnings, which are
initially very small. In the first year, the effective tax rate
is the sum of the ordinary tax rate (28 percent) and the
penalty (10 percent), or 38 percent. Because of deferral, the
tax rate slowly declines (36 percent after 3 years, 34 percent
after 5 years, 30 percent after 10 years). In this case, it
takes 13 years to earn the same return that would have been
earned in a taxable account. These patterns are affected by the
tax rate. For example, with a 15 percent tax rate, it takes
longer for the IRA to yield the same return as a taxable
account 11 years for a front-loaded account and 19 years for a
back- loaded one.
Partial premature withdrawals will be treated more
generously, as they will be considered to be a return of
principal until all original contributions are recovered. This
treatment is more generous than the provisions in the original
Contract with America, where the reverse treatment occurred:
partial premature withdrawals would be treated as income and
fully taxed until the amount remaining in the account is equal
to original investment.
These differences suggest that individuals should be much
more willing to put funds that might be needed in the next year
or two for an emergency in a back-loaded account than in a
front-loaded account, since the penalties relative to a regular
savings account are much smaller. These differences also
suggest that funds might be more easily withdrawn from back-
loaded accounts in the early years even with penalties. This
feature of the back-loaded account along with the special tax-
favored withdrawals make these tax-favored accounts much closer
substitutes for short-term savings not intended for retirement.
It could eventually become more costly to make premature
withdrawals from back-loaded accounts than from front-loaded
accounts. Consider, for example, withdrawal in the year before
retirement for all funds that had been in the account for a
long time. For a front-loaded IRA, the cost is the 10 percent
penalty on the withdrawal plus the payment of regular tax 1
year in advance both amounts applying to the full amount. For a
back-loaded account, where no tax or penalty would be due if
held until retirement, the cost is the penalty plus the regular
tax (since no tax would be paid for a qualified withdrawal) on
the fraction of the withdrawal that represented earnings, which
would be a large fraction of the account if held for many
years.
(4) Timing of Effects
The tax benefit of the front-loaded IRA is received in the
beginning, while the benefit of the back-loaded IRA is spread
over the period of the investment. These differences mean that
the front-loaded IRA is both more costly than the back-loaded
one in the short run (and therefore in the budget window) and
that a front-loaded IRA is more likely to increase savings.
These issues are discussed in the following two sections.
Receiving the tax benefit up front might also make
individuals more willing to participate in IRAs because the
benefit is certain (the government could, in theory, disallow
income exemptions in back-loaded IRAs already in existence). At
the same time, however, the rollover provision makes it much
less likely that the government would be willing to tax the
return to existing IRAs, because a tax must be paid to permit
the rollover.
Some have argued that the attraction of an immediate tax
benefit has played a role in the popularity of IRAs and may
have contributed to increased savings (see the following
discussion of savings).
(3) Savings Effects
There has been an extensive debate about the effect of
individual retirement accounts on savings. For a more complete
discussion of the savings literature, see Jane G. Gravelle's
The Economic Effects of Taxing Capital Income, Cambridge,
Mass., MIT Press, 1994, p. 27 for a discussion of the general
empirical literature on savings and pp. 193-197 for a
discussion of the empirical studies of IRAs. Subsequent to this
survey, a new paper by Orazio P. Attanasio and Thomas C.
DeLeire, IRA's and Household Saving Revisited: Some New
Evidence, National Bureau of Economic Research Working Paper
4900, October 1994 was published. That study found little
evidence that IRAs increased savings. For additional surveys
see the three articles published in the Fall 1996 Journal of
Economic Perspectives, (vol. 10): R. Glenn Hubbard and Jonathan
Skinner, ``Assessing the Effectiveness of Savings Incentives,''
(p. 73-90); James M. Poterba, Steven F. Venti and David A.
Wise, ``How Retirement Savings Programs Increase Saving,'' (p.
91-113): Eric M. Engen, William G. Gale, and John Karl Scholz,
``The Illusory Effects of Savings Incentives on Saving,'' (p.
113-138). An International Monetary Fund working paper by Alun
Thomas and Christopher Towe, ``U.S. Private Saving and the Tax
Treatment of IRA/401(k)s: A Re-examination Using Household
Saving Data'' (August 1996) found that IRAs did not increase
private household saving.
Conventional economic analysis and general empirical
evidence on the effect of tax incentives on savings do not
suggest that IRAs would have a strong effect on savings. In
general, the effect of a tax reduction on savings is ambiguous
because of offsetting income and substitution effects. The
increased rate of return may cause individuals to substitute
future for current consumption and save more (a substitution
effect), but, at the same time, the higher rate of return will
allow individuals to save less and still obtain a larger target
amount (an income effect). The overall consequence for savings
depends on the relative magnitude of these two effects.
Empirical evidence on the relationship of rate of return to
saving rate is mixed, indicating mostly small effects of
uncertain direction. In that case, individual contributions to
IRAs may have resulted from a shifting of existing assets into
IRAs or a diversion of savings that would otherwise have
occurred into IRAs.
The IRA is even less likely to increase savings because
most tax benefits were provided to individuals who contributed
the maximum amount eliminating any substitution effect at all.
(Note that over time, however, one might expect fewer
contributions to be at the limit as individuals run through
their assets). For these individuals, the effect of savings is
unambiguously negative, with one exception. In the case of the
front-loaded, or deductible IRA, savings could increase to
offset part of the up-front tax deduction, as individuals
recognize that their IRA accounts will involve a tax liability
upon withdrawal. The share of IRAs that were new savings would
depend on the tax rate with a 28 percent tax rate, one would
expect that 28 percent would be saved for this reason; with a
15 percent tax rate, 15 percent would be saved for this reason.
This effect does not occur with a back-loaded or nondeductible
IRA. Thus, conventional economic analysis suggests that private
savings would be more likely to increase with a front-loaded
rather than a back-loaded IRA.
Despite this conventional analysis, some economists have
argued that IRA contributions were largely new savings. The
theoretical argument has been made that the IRAs increase
savings because of psychological, ``mental account,'' or
advertising reasons. Individuals may need the attraction of a
large initial tax break; they may need to set aside funds in
accounts that are restricted to discipline themselves to
maintain retirement funds; or they may need the impetus of an
advertising campaign to remind them to save. There has also
been some empirical evidence presented to suggest that IRAs
increase savings. This evidence consists of (1) some simple
observations that individuals who invested in IRAs did not
reduce their non-IRA assets and (2) a statistical estimate by
Venti and Wise that showed that IRA contributions were
primarily new savings. This material has been presented by
Steve Venti and David Wise in several papers; see for example,
Have IRAs Increased U.S. Savings?, Quarterly Journal of
Economics, v. 105, August, 1990, pp. 661-698.
The fact that individuals with IRAs do not decrease their
other assets does not prove that IRA contributions were new
savings; it may simply mean that individuals who were planning
to save in any case chose the tax-favored IRA mechanism. The
Venti and Wise estimate has been criticized on theoretical
grounds and another study by Gale and Scholz using similar data
found no evidence of a savings effect. (See William G. Gale and
John Karl Scholz, IRAs and Household Savings, American Economic
Review, December 1994, pp. 1233-1260.) A study by Manegold and
Joines comparing savings behavior of those newly eligible for
IRAs and those already eligible for IRAs found no evidence of
an overall effect on savings, although increases were found for
some individuals and decreases for others; a study by Attanasio
and DeLeire also using this approach found little evidence of
an overall savings effect. (See Douglas H. Joines and James G.
Manegold, IRAs and Savings: Evidence from a Panel of Taxpayers,
University of Southern California; Orazio P. Attanasio and
Thomas C. DeLeire, IRA's and Household Saving Revisited: Some
New Evidence, National Bureau of Economic Research Work Paper
4900, October 1994.) And, while one must be careful in making
observations from a single episode, there was no overall
increase in the savings rate during the period that IRAs were
universally available, despite large contributions into IRAs.
It is important to recognize that this debate on the
effects of IRAs on savings concerned the effects of front-
loaded, or deductible IRAs. Many of the arguments that suggest
IRAs would increase savings do not apply to back-loaded IRAs
such as those contained in the legislation reported out by the
Ways and Means Committee or allowed as an option in other
proposals. Back-loaded IRAs do not involve the future tax
liability that, in conventional analysis, should cause people
to save for it.
Indeed, based on conventional economic theory, there are
two reasons that the proposal for back-loaded IRAs may decrease
savings. First, those who are newly eligible for the benefits
should, in theory reduce their savings, because these
individuals are higher income individuals who are more likely
to save at the limit. The closer substitutability of IRAs with
savings for other purposes would also increase the possibility
that IRA contributions up to the limit could be made from
existing savings. Second, those who are currently eligible for
IRAs who are switching funds from front-loaded IRAs or who are
now choosing back-loaded IRAs as a substitute for front-loaded
ones should reduce their savings because they are reducing
their future tax liabilities.
Also, many of the ``psychological'' arguments made for IRAs
increasing savings do not apply to the back-loaded IRA. There
is no large initial tax break associated with these provisions,
and the funds are less likely to be locked-up in the first few
years because the penalty applying to withdrawals is much
smaller. In addition, funds are not as tied up because of the
possibility of withdrawing them for special purposes, including
ordinary medical expenses.
Overall, the existing body of economic theory and empirical
research does not make a convincing case that the expansion of
individual retirement accounts, particularly the back-loaded
accounts will increase savings. For three papers that review
the evidence from differing perspectives see the three articles
published in the Fall 1996 issue of the Journal of Economic
Perspectives, pp. 73-90, 91-112, and 113-138: R. Glenn Hubbard
and Jonathan S. Skinner, ``Assessing the Effectiveness of
Savings Incentives,'' James Poterba, Steven F. Venti, and David
A. Wise, ``How Retirement Saving Programs Increase Saving,''
and Eric M. Engen, William G. Gale, and John Karl Scholz, ``The
Illusory Effects of Savings Incentives on Savings.''
(4) Revenue Effects
The revenue loss from IRAs varies considerably over time.
For a back-loaded IRA, the cost grows rapidly over time and the
long-run revenue cost (in constant income levels) is about
eight times as large as in the first 5 years, even if rollovers
from existing accounts were not allowed. Front-loaded IRAs also
have an uneven pattern of revenue cost, although they are
characterized by a rise to a peak (as withdrawals occur) and
then a steady state cost that could be a third or so larger
than in the first 5 years.
The IRA provision allowing a rollover of existing front-
loaded IRAs into back-loaded IRAs over a 4-year period has the
effect of raising tax revenue in the short run although, of
course, the rollover will result in lost revenues (with
interest) in future years. As enacted, the IRA provisions are
projected to ultimately result in a significant annual revenue
loss. It can be expected that the revenue losses in the initial
period understates the losses that will occur in the long run
due to the shift to back-loaded accounts. The long phase-in of
increased limits for deductible IRAs also causes costs to be
lower in the short run.
(5) Distributional Effects
Who benefits from the expansion of IRAs? In general, any
subsidy to savings tends to benefit higher income individuals
who are more likely to save. The benefits of IRAs for high
income individuals are limited, however, compared to many other
savings incentives because of the dollar limits. Nevertheless,
the benefits of IRAs when universally allowed tended to go to
higher income individuals. In 1986, 82 percent of IRA
deductions were taken by the upper third of individuals filing
tax returns (based on adjusted gross income); since these
higher income individuals had higher marginal tax rates, their
share of the tax savings would be larger.
In addition, when universal IRAs were available from 1981-
1986, they were nevertheless not that popular. In 1986, only 15
percent of individuals contributed to IRAs. Participation rates
were lower in the bottom and middle of the income distribution:
only 2 percent of taxpayers in the bottom third of tax returns
and only 9 percent of individuals in the middle third
contributed to IRAs. Participation rose with income: 33 percent
of the upper third contributed, 54 percent of taxpayers in the
top 10 percent contributed, and 70 percent of taxpayers in the
top 1 percent contributed.
The expansion of IRAs is even more likely to benefit higher
income individuals because lower income individuals are already
eligible for front loaded (deductible) IRAs that confer the
same general tax benefit. Less than a quarter of individuals
(1993 data) have incomes too large to be eligible for any IRA
deduction (because they are above $50,000 for married
individuals and $35,000 for singles) and less than a third
exceed the beginning of the phaseout range. Also, those higher
income individuals not already covered by a pension plan are
also eligible. Therefore, only higher income individuals who
did not otherwise have tax benefits from pension coverage were
currently excluded from IRA coverage.
Overall, expansion of IRAs tends to benefit higher income
individuals, although the benefits are constrained for very
high income individuals because of the dollar ceilings and
because of income limits which also apply to back-loaded IRAs.
(6) Administrative Issues
The more types of IRAs that are available, the larger the
administrative costs associated with them. With the
introduction of back-loaded accounts, three types of IRAs exist
the front-loaded that have been available since 1974 (and
universally available in 1981-1986), the non-deductible tax
deferred accounts available in prior law to higher income
individuals and that are now superseded by more tax preferred
plans for all but a very high income group and the new back-
loaded accounts. Treatment on withdrawal will also be more
complex, since some are fully taxable, some partially taxable,
and some not taxable at all.
Another administrative complexity that arises is
withdrawals prior to retirement for special purposes, including
education and first time home purchase.
(7) Advantages of Front-Loaded Vs. Back-Loaded IRAs
Most individuals now have a choice between a front-loaded
and a back-loaded IRA. An earlier section discussed the
relative tax benefits of the alternatives to the individual.
This section discusses the relative advantages and
disadvantages to these different approaches in achieving policy
objectives.
From a budgetary standpoint, the short-run estimated cost
of the front-loaded IRA provides a more realistic picture of
the eventual long-run budgetary costs of IRAs than does the
back-loaded. This issue can be important if there are long run
objectives of balancing the budget, which can be made more
difficult if costs of IRAs are rising. In addition, if
distributional tables are based on cash-flow measures, as in
the case of the Joint Tax Committee distributional estimates, a
more realistic picture of the contribution of IRA provisions to
the total distributional effect of the tax package is likely to
emerge. In that sense, allowing back-loaded IRAs, even as a
choice, has probably made it harder to meet long-run budgetary
goals because the budget targets did not take into account the
out-year costs.
The front-loaded IRA is more likely to result in some
private savings than the back-loaded IRA, from the perspective
of either conventional economic theory or the ``psychological''
theories advanced by some; hence allowing back-loaded IRAs may
have negative effects on national savings objectives. Of
course, a front-loaded IRA also has a larger revenue cost that
overall saving is only different, under conventional analysis,
if the difference in revenue costs is made up in some other way
(and that offsetting policy does not itself affect savings.)
There are, however, some advantages of back-loaded IRAs.
The backloaded IRA avoids one planning problem associated with
front-loaded IRAs: if individuals use a rule-of-thumb of
accumulating a certain amount of assets, they may fail to
recognize the tax burden associated with accumulated IRA
assets. In that case, the front-loaded IRA would leave them
with less after-tax assets in retirement than they had planned,
a problem that would not arise with the back-loaded IRA where
no taxes are paid at retirement. A possible second advantage of
back-loaded IRAs is that the effective tax rate is always known
(zero), unlike the front-loaded IRA where the effective tax
rate depends on the tax rate today vs. the tax rate in
retirement. Yet another advantage is that the effective
contribution limit in a back-loaded IRA is not dependent on the
tax rate (although it would be possible to devise an adjustment
to the IRA contribution ceiling based on tax rate).
(8) Conclusion
Unlike the initial allowance of IRAs in 1974 to extend the
tax advantage allowed to employees with pension plans, the
major focus of universal IRAs has been to encourage savings,
especially for retirement. If the main objective of individual
retirement accounts is to encourage private savings, the
analysis does not suggest that we will necessarily achieve that
objective. Moreover, the back-loaded approach allowed as an
option is, according to many analysts, less likely to induce
savings than the current form of IRAs or the form allowed
during the period of universal availability (1981-1986). In
addition, the ability to withdraw amounts for other purposes
than retirement can dilute the focus of the provision on
preparing for retirement.
This new law may also put some pressure on overall national
savings in the future, as the IRA provisions involve a growing
budgetary cost.
IRAs have often been differentiated from other tax benefits
for capital income as the plan focused on moderate income or
middle class individuals. The IRA has been successful in that
more of the benefits are targeted to moderate income
individuals than is the case for many other tax benefits for
capital (e.g., capital gains tax reductions). Nevertheless,
data on participation and usage, and the current allowance of
IRAs for lower income individuals, suggest that the benefit
will still accrue more to higher than to lower income
individuals.
Certain features will complicate administrative costs, and
there has been relatively little attention paid to the dramatic
differences in the penalties for early withdrawal associated
with back-loaded vs front-loaded accounts.
(b) Residential Retirement Assets
Tax incentives, which have long promoted the goal of home
ownership, include the income tax deductions for real estate
taxes and home mortgage interest. The other major homeowner
incentive is the tax-free exclusion on up to $250,000 ($500,000
for married taxpayers) of capital gains from the sale of a
primary residence.
Prior to 1986, there was no limit on the amount of mortgage
interest that could be deducted. Under current law, the amount
of mortgage interest that can be deducted on a principal or
secondary residence (on loans taken out after 1987) is limited
to the interest paid on the combined debt on these homes of up
to $1.1 million. The $1.1 million limit on debt includes up to
$100,000 of home equity loans that are often used for other
purposes.
Now that interest on personal loans is no longer
deductible, more homeowners are taking out home equity lines of
credit and using the proceeds to pay off or take on new debt
for autos, vacations, or to make payments on credit card
purchases. In effect, homeowners are converting nondeductible
personal interest into tax deductible home mortgage interest
deductions.
Aside from the fairness issues (for example, that renters
cannot take advantage of this tax provision), there is concern
that some homeowners may find it too easy to spend their home
equity (retirement savings in many cases) on consumer items,
thereby reducing their retirement ``nest egg.'' At the same
time, many elderly homeowners are finding home equity
conversion programs useful because they make it easier to
convert the built up equity in a home into much needed
supplemental retirement income. A section that describes in
detail home equity conversions is contained in chapter 13 of
this committee print. Others are using this buildup in equity
to pay for property taxes, home repairs, and entrance into
retirement communities or nursing homes. Some fear that the
inappropriate use of home equity loans in the early or mid-
years of life could mean that for some, substantial mortgage
payments might continue well into later life with the possible
result being less retirement security than originally planned.
CHAPTER 4
EMPLOYMENT
A. AGE DISCRIMINATION
1. Background
Older workers continue to face numerous obstacles to
employment, including negative stereotypes about aging and
productivity; job demands and schedule constraints that are
incompatible with the skills and needs of older workers; and
management policies that make it difficult to remain in the
labor force, such as corporate downsizing brought on by
recession.
Age discrimination in the workplace plays a pernicious role
in blocking employment opportunities for older persons. The
development of retirement as a social pattern has helped to
legitimize this form of discrimination. Although there is no
agreement on the extent of age-based discrimination, nor how to
remedy it, few would deny that the problem exists for millions
of older Americans.
The forms of age discrimination range from the more
obvious, such as age-based hiring or firing, to the more
subtle, such as early retirement incentives. Other
discriminatory practices involve relocating an older employee
to an undesirable area in the hopes that the employee will
instead resign, or giving an older employee poor evaluations to
justify the employee's later dismissal. The pervasive belief
that all abilities decline with age has fostered the myth that
older workers are less efficient than younger workers. Because
younger workers, rather than older workers, tend to receive the
skills and training needed to keep up with technological
changes, the myth continues. However, research has shown that
although older people's cognitive skills are slower, they
compensate with improved judgment.
Too often, employers wrongly assume that it is not
financially advantageous to retrain an older worker because
they believe that a younger employee will remain on the job
longer. In fact, the mobility of today's work force does not
support this perception. According to the Bureau of Labor
Statistics, in 1998, the median job tenure for a current
employee was as little as 3.6 years.
Age-based discrimination in the workplace poses a serious
threat to the welfare of many older persons who depend on their
earnings for their support. While the number of older persons
receiving maximum Social Security benefits is increasing, most
retirees receive less than the maximum.
According to 1998 Bureau of Labor Statistics (BLS), the
unemployment rate was 2.5 percent for workers age 55 to 59, 2.7
percent for workers 60 to 64, 3.3 percent for workers age 65 to
69, and 3.2 percent for workers age 75 and over. Although older
workers as a group have the lowest unemployment rate, these
numbers do not reflect those older individuals who have
withdrawn completely from the labor force due to a belief that
they cannot find satisfactory employment.
Duration of unemployment is also significantly longer among
older workers. As a result, older workers are more likely to
exhaust available unemployment insurance benefits and suffer
economic hardships. This is especially true because many
persons over 45 still have significant financial obligations.
Prolonged unemployment can often have mental and physical
consequences. Psychologists report that discouraged workers can
suffer from serious psychological stress, including
hopelessness, depression, and frustration. In addition, medical
evidence suggests that forced retirement can so adversely
affect a person's physical, emotional, and psychological health
that lifespan may be shortened.
Despite the continuing belief that older workers are less
productive, there is a growing recognition of older workers'
skills and value. In 1988 the Commonwealth Fund began a 5-year
study, Americans Over 55 at Work, examining the economic and
personal impact of what the fund saw as a ``massive shift
toward early retirement that occurred in the 1970's and
1980's.'' The fund estimates that over the past decade,
involuntary retirement has cost the economy as much as $135
billion a year. The study concludes that older workers are both
productive and cost-effective, and that hiring them makes good
business sense.
Many employers also have reported that older workers tend
to stay on the job longer than younger workers. Some employers
have recognized that older workers can offer experience,
reliability, and loyalty. A 1989 AARP survey of 400 businesses
reported that older workers generally are regarded very
positively and are valued for their experience, knowledge, work
habits, and attitudes. In the survey, employers gave older
workers their highest marks for productivity, attendance,
commitment to quality, and work performance.
In the early 1990's, there was a steady increase in the
number of complaints received by the EEOC. The number of
complaints rose from 14,526 in fiscal year 1990 to 19,573 in
fiscal year 1992. Since that time, however, the number of
complaints has declined to 16,008 in fiscal year 2000.
2. The Equal Employment Opportunity Commission
The EEOC is responsible for enforcing laws prohibiting
discrimination. These include: (1) Title VII of the Civil
Rights Act of 1964; (2) The Age Discrimination in Employment
Act of 1967; (3) The Equal Pay Act of 1963; (4) Sections 501
and 505 of the Rehabilitation Act of 1973; and (5) the
Americans With Disabilities Act of 1990.
When originally enacted, enforcement responsibility for the
ADEA was placed with the Department of Labor (DOL) and the
Civil Service Commission. In 1979, however, Congress enacted
President Carter's Reorganization Plan No. 1, which called for
the transfer of responsibilities for ADEA administration and
enforcement to the EEOC, effective July 1, 1979.
The EEOC has been praised and criticized for its
performance in enforcing the ADEA. In recent years, concerns
have been raised over EEOC's decision to refocus its efforts
from broad complaints against large companies and entire
industries to more narrow cases involving few individuals.
Critics also point to the large gap between the number of age-
based complaints filed and the EEOC's modest litigation record.
In fiscal year 2000, the EEOC received 16,008 ADEA complaints
and filed suit in just 27 cases.
3. The Age Discrimination in Employment Act
(a) Background
Over three decades ago, Congress enacted the Age
Discrimination in Employment Act of 1967 (ADEA) (P.L. 90-202)
``to promote employment of older persons based on their ability
rather than age; to prohibit arbitrary age discrimination in
employment; and to help employers and workers find ways of
meeting problems arising from the impact of age on
employment.''
In large part, the ADEA arose from a 1964 Executive Order
issued by President Johnson declaring a public policy against
age discrimination in employment. Three years later, the
President called for congressional action to eliminate age
discrimination. The ADEA was the culmination of extended debate
concerning the problems of providing equal opportunity for
older workers in employment. At issue was the need to balance
the right of older workers to be free from age discrimination
in employment with the employer's prerogative to control
managerial decisions. The provisions of the ADEA attempt to
balance these competing interests by prohibiting arbitrary age-
based discrimination in the employment relationship. The law
provides that arbitrary age limits should not be conclusive in
determinations of nonemployability, and that employment
decisions regarding older persons should be based on individual
assessments of each older worker's potential or ability.
The ADEA prohibits discrimination against persons age 40
and older in hiring, discharge, promotions, compensation, term
conditions, and privileges of employment. The ADEA applies to
private employers with 20 or more workers; labor organizations
with 25 or more members or that operate a hiring hall or office
which recruits potential employees or obtains job
opportunities; Federal, state, and local governments; and
employment agencies.
Since its enactment in 1967, the ADEA has been amended
numerous times. The first set of amendments occurred in 1974,
when the law was extended to include Federal, state, and local
government employers. The number of covered workers was also
increased by limiting exemptions for employers with fewer than
20 employees. (Previous law exempted employers with 25 or fewer
employees.) In 1978, the ADEA was amended by extending
protections to age 70 for private sector, state, and local
government employers, and by removing the upper age limit for
employees of the Federal Government.
In 1982, the ADEA was amended by the Tax Equity and Fiscal
Responsibility Act (TEFRA) to include the so-called ``working
aged'' clause. As a result, employers are required to retain
their over-65 workers on the company health plan rather than
automatically shift them to Medicare. Under previous law,
Medicare was the primary payer and private plans were
secondary. TEFRA reversed the situation, making Medicare the
payer of last resort.
Amendments to the ADEA were also included in the 1984
reauthorization of the Older Americans Act (P.L. 98-459). Under
the 1984 amendments, the ADEA was extended to U.S. citizens who
are employed by U.S. employers in a foreign country. Support
for this legislation stemmed from the belief that such workers
should not be subject to possible age discrimination just
because they are assigned abroad. In addition, the executive
exemption was raised from $27,000 to $44,000, the annual
private retirement benefit level used to determine the
exemption from the ADEA for persons in executive or high
policymaking positions.
The Age Discrimination in Employment Act Amendments of 1986
contained provisions that eliminated mandatory retirement
altogether. By removing the upper age limit, Congress sought to
protect workers age 40 and above against discrimination in all
types of employment actions, including forced retirement,
hiring, promotions, and terms and conditions of employment. The
1986 Amendments to the ADEA also extended through the end of
1993 an exemption from the law for institutions of higher
education and for State and local public safety officers (these
issues are discussed below).
In 1990, Congress amended the ADEA by enacting the Older
Workers Benefit Protection Act (P.L. 101-433). This legislation
restored and clarified the ADEA's protection of older workers'
employee benefits. In addition, it established new protections
for workers who are asked to sign waivers of their ADEA rights.
The Age Discrimination in Employment Amendments of 1996
(P.L. 104-208) amended the 1986 amendments to restore the
public safety exemption. These amendments allowed police and
fire departments to use maximum hiring ages and mandatory
retirement ages as elements of their overall personnel
policies.
The ADEA was amended again in 1998 by the Higher Education
Amendments of 1998 (P.L. 105-244) (HEA of 1998). The HEA of
1998 created an exception to the ADEA that allows colleges and
universities to offer an additional age-based benefit to
tenured faculty who voluntarily retire.
(b) Tenured Faculty Exemption
Provisions in the 1986 amendments to the ADEA to
temporarily exempt universities from the law reflect the
continuing debate over the fairness of the tenure system in
institutions of higher education. During consideration of the
1986 amendments, several legislative proposals were made to
eliminate mandatory retirement of tenured faculty, but
ultimately a compromise allowing for a temporary exemption was
enacted into law.
The exemption allowed institutions of higher education to
set a mandatory retirement age of 70 years for persons serving
under tenure at institutions of higher education. This
provision was in effect for 7 years, until December 31, 1993.
The law also required the EEOC to enter into an agreement with
the National Academy of Sciences to conduct a study to analyze
the potential consequences of the elimination of mandatory
retirement for institutions of higher education. The National
Academy of Sciences formed the Committee on Mandatory
Retirement in Higher Education (the Committee) to conduct the
study.
Proponents of mandatory retirement at age 70 argue that
without it, institutions of higher education will not be able
to continue to bring in those with fresh ideas. The older
faculty, it is claimed, would prohibit the institution from
hiring younger teachers who are better equipped to serve the
needs of the school. They also claim that allowing older
faculty to teach or research past the age of 70 denies women
and minorities access to the limited number of faculty
positions.
Opponents of the exemption claim that there is little
statistical proof that older faculty keep minorities and women
from acquiring faculty positions. They cite statistical
information gathered at Stanford University and analyzed in a
paper by Allen Calvin which suggests that even with mandatory
retirement and initiatives to hire more minorities and women,
there was only a slight change in the percentage of tenured
minority and women. In addition, they argue that colleges and
universities are using mandatory retirement to rid themselves
of both undesirable and unproductive professors, instead of
dealing directly with a problem that can affect faculty members
of any age. The use of performance appraisals, they argue, is a
more reliable and fair method of ending ineffectual teaching
service than are age-based employment policies.
Based upon its review, the Committee recommended ``that the
ADEA exemption permitting the mandatory retirement of tenured
faculty be allowed to expire at the end of 1993.'' On December
31, 1993, the exemption expired.
The Committee reached two key conclusions:
(1) At most colleges and universities, few tenured
faculty would continue working past age 70 if mandatory
retirement is eliminated because most faculty retire
before age 70. In fact, colleges and universities
without mandatory retirement that track the data on the
proportion of their faculty over age 70 report no more
than 1.6 percent.
(2) At some research universities, a high proportion
of faculty may choose to work past age 70 if mandatory
retirement is eliminated. A small number of research
universities report that more than 40 percent of the
faculty who retire each year have done so at the
current mandatory retirement age of 70. The study
suggested that faculty who are research oriented, enjoy
inspiring students, have light teaching loads, and are
covered by pension plans that reward later retirement
are more likely to work past 70.
The Committee examined the issue of faculty turnover and
concluded that a number of actions can be taken by universities
to encourage, rather than mandate selected faculty retirements.
Although some expense may be involved, the proposals are likely
to enhance faculty turnover. Most prominent among them is the
use of retirement incentive programs. The Committee recommended
that Congress, the Internal Revenue Service, and the EEOC
``permit colleges and universities to offer faculty voluntary
retirement incentive programs that are not classified as an
employee benefit, include an upper age limit for participants,
and limit participation on the basis of institutional needs.''
The Committee also recommended policies that would allow
universities to change their pension, health, and other benefit
programs in response to changing faculty behavior and needs.
The 1998 ADEA amendments contained in the Higher Education
Amendments of 1998 incorporated the suggestions of the
Committee. The HEA of 1998 allowed colleges and universities to
create voluntary incentive programs through the use of
supplemental benefits, or benefits in addition to any
retirement or severance benefits that are generally offered to
tenured employees upon retirement. Supplemental benefits may be
reduced or eliminated on the basis of age without violating the
ADEA. The amendment expressly prohibited non-supplemental
benefits from being reduced or eliminated based on age. The
voluntary incentive plans are subject to certain requirements.
A tenured employee who becomes eligible to retire has 180 days
in which time they may retire and receive both regular benefits
and supplemental benefits. Upon electing to retire, an
institution may not require retirement before 180 days from the
date of the election.
(c) State and Local Public Safety Officers
In 1983, the Supreme Court in EEOC v. Wyoming, 460 U.S.
226, rejected a mandatory retirement age for state game
wardens, holding that states were fully subject to the ADEA. In
1985, the Court outlined the standards for proving a ``bona
fide occupational qualification'' (BFOQ) defense for public
safety jobs in two cases, Western Air Lines v. Criswell, 472
U.S. 400 (rejecting mandatory retirement age for airline flight
engineers), and Johnson v. Baltimore, 472 U.S. 353 (rejecting
mandatory retirement age for firefighters). The Court made
clear that age may not be used as a proxy for safety-related
job qualifications unless the employer can satisfy the narrow
BFOQ exception.
Criswell's discussion of the BFOQ defense indicated that
the State's interest in public safety must be balanced by its
interest in eradicating age discrimination. In order to use age
as a public safety standard, the employer must prove that it is
``reasonably necessary to the normal operation of the
business.'' This may be proven only if the employer is
``compelled'' to rely upon age either because (a) it has
reasonable cause to believe that all or substantially all
persons over that age would be unable to safely do the job or
(b) it is highly impractical to deal with older persons
individually.
In subsequent years, some states and localities with
mandatory retirement age policies below age 70 for public
safety officers were concerned about the impact of these
decisions. By March 1986, 33 states or localities had been or
were being sued by the EEOC for the establishment of mandatory
retirement hiring age laws.
In 1986, the ADEA was amended to eliminate mandatory
retirement based upon age in the United States. As part of a
compromise that enabled this legislation to pass, Congress
established a 7-year exemption period during which State and
local governments that already had maximum hiring and
retirement ages in place for public safety employees could
continue to recognize them. The exemption allowed public
employers time to phase in compliance without having to worry
about litigation.
Supporters of a permanent exemption for state and local
public safety officers argue that the mental and physical
demands and safety considerations for the public, the
individual, and co-workers who depend on each other in
emergency situations, warrant mandatory retirement ages below
70 for these state and local workers. In addition, they contend
that it would be difficult to establish that a lower mandatory
retirement age for public safety officers is a BFOQ under the
ADEA. Because of the conflicting case law on BFOQs, costly and
time-consuming litigation would be likely. They note that
jurisdictions wishing to retain the hiring and retirement
standards established for public safety officers prior to the
Wyoming decision are forced to engage in costly medical studies
to support their standards. Finally, they question the
feasibility of individual employee evaluations, some citing the
difficulty involved in administering the tests because of
technological limitations concerning what human characteristics
can be reliably evaluated, the equivocal nature of test
results, and economic costs. They do not believe that
individualized testing is a safe and reliable substitute for
pre-established age limits for public safety officers.
Those who oppose an exemption contend that there is no
justification for applying one standard to Federal public
safety personnel and another to state and local public safety
personnel. They believe that exempting state and local
governments from the hiring and retirement provisions of the
ADEA will give these governments the same flexibility that
Congress granted to Federal agencies that employ law
enforcement officers and firefighters.
As an additional argument against exempting public safety
officers from the ADEA, opponents note that age affects each
individual differently. They maintain that tests can be used to
measure the effects of age on individuals, including tests that
measure general fitness, cardiovascular condition, and reaction
time. In addition, they cite research on the performance of
older law enforcement officers and firefighters which supports
the conclusion that job performance does not invariably decline
with age and that there are accurate and economical ways to
test physical fitness and predict levels of performance for
public safety occupations. All that the ADEA requires, they
argue, is that the employer make individualized assessments
where it is possible and practical to do so. The only fair way
to determine who is physically qualified to perform police and
fire work is to test ability and fitness.
Finally, those arguing against an exemption contend that
mandatory retirement and hiring age limits for public safety
officers are repugnant to the letter and spirit of the ADEA,
which was enacted to promote employment of older persons based
on their ability rather than age, and to prohibit arbitrary age
discrimination in employment. They believe that it was
Congress' intention that age should not be used as the
principal determinant of an individual's ability to perform a
job, but that this determination, to the greatest extent
feasible, should be made on an individual basis. Maximum hiring
age limitations and mandatory retirement ages, they contend,
are based on notions of age-based incapacity and would
represent a significant step backward for the rights of older
Americans.
The 1986 amendments to the ADEA required the EEOC and the
Department of Labor to jointly conduct a study to determine:
(1) whether physical and mental fitness tests are valid
measures of the ability and competency of police and
firefighters to perform the requirements of their jobs; (2)
which particular types of tests are most effective; and (3) to
develop recommendations concerning specific standards such
tests should satisfy. Congress also directed the EEOC to
promulgate guidelines on the administration and use of physical
and mental fitness tests for police officers and firefighters.
The 5-year study completed in 1992 by the Center for Applied
Behavioral Sciences of the Pennsylvania State University (PSU)
concluded that age is not a good predictor of an individual's
fitness and competency for a public safety job. The study
expressed the view that the best, albeit imperfect, predictor
of on-the-job fitness is periodic testing of all public safety
employees, regardless of age. No recommendations with respect
to the specific standards that physical and mental fitness
tests should measure were developed. Instead, the study
discussed a range of tests that could be used. The EEOC did not
promulgate guidelines to assist State and local governments in
administering the use of such tests.
In the early 1990's, the issue of mandatory retirement for
public safety officers was addressed in two bills introduced in
the House of Representatives. On July 23, 1993, Representative
Major R. Owens, together with Representative Austin J. Murphy
and 15 other cosponsors, introduced H.R. 2722, ``Age
Discrimination in Employment Amendments of 1993.'' It is
similar but not identical to H.R. 2554, ``Firefighters and
Police Retirement Security Act of 1993,'' that Representative
Murphy introduced on June 29, 1993.
H.R. 2554 sought to amend the Age Discrimination in
Employment Amendments of 1986 to repeal the provision which
terminated an exemption for certain bona fide hiring and
retirement plans applicable to state and local firefighters and
law enforcement officers. H.R. 2554 would have preserved the
exemption beyond 1993.
H.R. 2722 sought to amend section 4 of the ADEA to allow,
but not require, State and local bona fide employee benefit
plans that used age-based hiring and retirement policies as of
March 3, 1983 to continue to use such policies, and to allow
state and local governments that either did not use or stopped
using age-based policies to adopt such policies provided that
the mandatory retirement age is not less than 55 years of age.
In addition, H.R. 2722 once again directed the EEOC to identify
particular types of physical and mental fitness tests that are
valid measures of the ability and competency of public safety
officers to perform their jobs and to promulgate guidelines to
assist state and local governments in the administration and
use of such tests.
On March 24, 1993, the Subcommittee on Select Education and
Civil Rights conducted an oversight hearing on the issue of the
use of age for hiring and retiring law enforcement officers and
firefighters. On March 24, 1993, the Subcommittee held a markup
of H.R. 2722 and approved it by voice vote. The Committee on
Education and Labor considered H.R. 2722 for markup on October
19, 1993. The Committee accepted two amendments by voice vote,
including an amendment offered by Representative Thomas C.
Sawyer. A quorum being present, the Committee, by voice vote,
ordered the bill favorably reported, as amended.
On November 8, 1993, H.R. 2722, as amended, passed in the
House by voice vote, under suspension of the rules (two-thirds
vote required). On November 9, 1993, H.R. 2722 was referred to
the Senate Committee on Labor and Human Resources. There was no
further action on H.R. 2722 in the 103d Congress.
On September 30, 1996, The Age Discrimination in Employment
Act Amendments of 1996 amended the ADEA to allow police and
fire departments to use maximum hiring ages and mandatory
retirement ages as elements in their overall personnel
policies. The 1996 amendments to the ADEA were included in the
Omnibus Consolidated Appropriations for fiscal year 1997 (P.L.
104-208).
(d) The Supreme Court
The Supreme Court addressed the elements of an ADEA prima
facie case in O'Connor v. Consolidated Coin Caterers Corp., 517
U.S. 308 (1996). The Court held that a prima facie case is not
established by showing simply that an employee was replaced by
someone outside of the class. The plaintiff must show that he
was replaced because of his age.\1\ The Court evaluated whether
the prima facie elements evinced by the U.S. Court of Appeals
for the Fourth Circuit were required to establish a prima facie
case. The Fourth Circuit held that a prima facie case is
established under the ADEA when the plaintiff shows that: ``(1)
He was in the age group protected by the ADEA; (2) he was
discharged or demoted; (3) at the time of his discharge or
demotion, he was performing his job at a level that met his
employer's legitimate expectations; and (4) following his
discharge or demotion, he was replaced by someone of comparable
qualifications outside of the protected class.'' \2\ The Court
found that the fourth prong, replacement by someone outside of
the class, is not the only manner in which a plaintiff can
prove a prima facie case under the ADEA.\3\ A violation can be
shown even if the person was replaced by someone who also falls
within the protected class. For example, replacing a 76-year-
old with a 45-year-old may be a violation of the ADEA, if the
person was replaced because of his age.
---------------------------------------------------------------------------
\1\ O'Connor v. Consolidated Coin Caterers Corp., 517 U.S. 308
(1996).
\2\ O'Connor, 517 U.S. at 310.
\3\ See O'Connor, 517 U.S. at 312. Justice Scalia, writing for the
majority, stated: ``As the very name `prima facie case' suggests, there
must be at least a logical connection between each element of the prima
facie case and the illegal discrimination for which it establishes a
`legally mandatory' rebuttable presumption... The element of
replacement by someone under 40 fails this requirement. The
discrimination prohibited by the ADEA is discrimination `because of
[an] individual's age'' ' (voting Texas Dept. of Community Affairs v.
Burdine, 450 U.S. 248, 254 n. 7 (1981).
---------------------------------------------------------------------------
In 1993, the Court ruled on two cases affecting the aged
community. Burden of proof problems formed the heart of the
controversy in both employment discrimination cases. In Hazen
Paper Co. v. Biggins, 507 U.S. 604 (1993), the Court held
unanimously that there can be no violation of the ADEA when the
employer's allegedly unlawful conduct is motivated by some
factor other than the employee's age. The fact that an
employee's discharge occurred a few weeks before his pension
was due to vest did not establish a per se violation of the
statute.
In Biggins, a family owned company hired an employee in
1977 and discharged him in 1986 when he was 62 years old. The
discharge, which was the culmination of a dispute with the
company over his refusal to sign a confidentiality agreement,
occurred a few weeks prior to the end of the 10-year vesting
period for his pension. The employee sued the employer under
the ADEA and the Employee Retirement Income Security Act
(ERISA). At trial, the jury found that the company had violated
ERISA and ``willfully'' violated the ADEA. The district court
granted judgment notwithstanding the verdict on the finding of
willfulness. The First Circuit affirmed the judgment on both
the ADEA and ERISA counts, but reversed on the issue of
willfulness.
On appeal, the Court held that an employer's interference
with pension benefits, which vest according to years, does not
by itself support a finding of an ADEA violation. The Court
reasoned that in a disparate treatment case liability depends
on whether the protected trait motivated the employer's
decision and that a decision based on years of service is not
necessarily age-based.
Justice O'Connor explained that the ADEA is intended to
address the ``very essence'' of age discrimination, when an
older employee is discharged due to the employer's belief in
the stereotype that ``productivity and competence decline with
old age.'' The ADEA forces employers to focus on productivity
and competence directly instead of relying on age as a proxy
for them. However, the problems posed by such stereotypes
disappear when the employer's decision is actually motivated by
factors other than age, even when the motivating factor is
correlated with age, as is usually the case with pension
status. O'Connor explained that the correlative factor remains
analytically distinct, however much it is related to age. The
vesting of pension plans usually is a function of years of
service. However, a decision based on that factor is not
necessarily age-based. An older employee may have accumulated
more years of service by virtue of his longer length of time in
the workforce, but an employee too young to be protected by the
ADEA may have accumulated more if he has worked for a
particular employer for his entire career while an older worker
may have been recently hired. Thus, O'Connor concluded that the
discharge of a worker because his pension is about to vest is
not the result of a stereotype about age, but of an accurate
judgment about the employee.
The Court noted that its holding did not preclude a
possible finding of liability if an employer uses pension
status as a proxy for age, a finding of dual liability under
ERISA and ADEA, or a finding of liability if vesting is based
on age rather than years of service. The Biggins Court also
held that the ``knowledge or reckless disregard'' standard for
liquidated damages established in TransWorld Airlines, Inc. v.
Thurston, 469 U.S. 111 (1985), applies to situations in which
the employer has violated the ADEA through an informal decision
motivated by an employee's age, as well as through a formal,
facially discriminatory policy.
In St. Mary's Honor Center v. Hicks, 509 U.S. 502 (1993)
the Court altered the burden shifting analysis for resolving
Title VII intentional discrimination cases set forth in Texas
Department of Community Affairs v. Burdine, 450 U.S. 248
(1981). Burdine had regularly been applied to ADEA cases. See,
e.g. Williams v. Valentec Kisco, Inc., 964 F.2d 723 (8th Cir.),
cert. denied, 506 U.S. 1014 (1992); Williams v. Edward Apffels
Coffee Co., 792 F.2d 1492 (9th Cir. (1992)). As a result of the
holding in Hicks, an employee who discredits all of an
employer's articulated legitimate nondiscriminatory reasons for
an employment decision is not automatically entitled to
judgment in an action under the ADEA.
Prior to Hicks, in McDonnell-Douglas Corp. v. Green, 411
U.S. 792 (1973), the Court established a three-step framework
for resolving Title VII cases involving intentional
discrimination. This framework was reaffirmed by the Court in
Burdine: first, the plaintiff must establish a prima facie case
of discrimination with evidence strong enough to result in a
judgment that the employer discriminated, if the employer
offers no evidence of its own; second, if the plaintiff
establishes a prima facie case, the employer must then come
forward with a clear and specific nondiscriminatory reason for
the challenged action; and third, if the employer offers a
nondiscriminatory reason for its conduct, the plaintiff then
must establish that the reason the employer offered was a
pretext for discrimination. Significantly, the Court made clear
in Burdine that the plaintiff can prevail at this third stage
``either directly by persuading the court that a discriminatory
reason more likely motivated the employer, or indirectly by
showing that the employer's proffered explanation is unworthy
of credence.''
The majority in Hicks held that an employee who discredits
all of an employer's stated reasons for his demotion and
subsequent discharge is not automatically entitled to judgment
in his case under Title VII. Accordingly, the trial court in
Hicks was justified in granting judgment to the employer on the
basis of a reason the employer did not articulate.
In Hicks, an African-American shift commander at a halfway
house was demoted to the position of correctional officer and
later discharged. He had consistently been rated ``competent''
and had not been disciplined for misconduct or dereliction of
duty until his supervisor was replaced. The new supervisor
viewed him differently. At trial, the plaintiff alleged that
the employment decisions were racially motivated. However, the
employer claimed that the plaintiff had violated work rules.
The district court found this reason to be pretextual.
Nevertheless, it ruled for the halfway house. The district
court felt that the plaintiff had not shown that the effort to
terminate him was motivated by race rather than some other
factor. The U.S. Circuit Court of Appeals for the Eighth
Circuit reversed. The Eighth Circuit maintained that once the
shift commander proved that all of the employer's proffered
reasons were pretextual, the plaintiff was entitled to judgment
as a matter of law, because the employer was left in a position
of having offered no legitimate reason for its actions.
In a 5-4 decision written by Justice Scalia, the Supreme
Court reversed the Eight Circuit's decision and upheld the
district court's judgment for the employer. The Court held that
the plaintiff was not entitled to judgment even though he had
established a prima facie case of discrimination and disproved
the employer's only proffered reason for its conduct. Instead,
the majority said that plaintiffs may be required not just to
prove that the reasons offered by the employer were pretextual,
but also to ``disprove all other reasons suggested, no matter
how vaguely, in the record.''
Justice Souter wrote a dissenting opinion, joined by
Justices Blackmun, White, and Stevens. Justice Souter charged
that the majority's decision ``stems from a flat misreading of
Burdine and ignores the central purpose of the McDonnell-
Douglas framework.'' He also accused the majority of rewarding
the employer that gives false evidence about the reason for its
employment decision because the falsehood would be sufficient
to rebut the prima facie case and the employer can then hope
that the factfinder will conclude that the employer acted for a
valid reason. ``The Court is throwing out the rule,'' Justice
Souter asserted, ``for the benefit of employers who have been
found to have given false evidence in a court of law.''
In Reeves v. Sanderson Plumbing Products, 530 U.S. 133
(2000), the Court ruled that a plaintiff's prima facie case,
combined with sufficient evidence to find that the employer's
asserted justification is false, may permit the trier of fact
to conclude that the employer engaged in unlawful
discrimination. Reeves, a then 57 year-old supervisor at
Sanderson Plumbing, was discharged for allegedly making
numerous timekeeping errors and misrepresentations. At trial,
Reeves established a prima facie case for violation of the ADEA
and offered evidence to demonstrate that Sanderson Plumbing's
explanation for his termination was a pretext for age
discrimination. Reeves introduced evidence of his accurately
recording the attendance and hours of the employees under his
supervision. Reeves also showed that an executive at Sanderson
Plumbing demonstrated age-based animus in his dealings with
him. A jury awarded Reeves $35,000 in compensatory damages. The
district court awarded $35,000 in liquidated damages, based on
the jury's finding that the age discrimination was willful, and
an additional $28,491 in front pay. The Fifth Circuit reversed,
finding that Reeves had not introduced sufficient evidence to
sustain the jury's finding of unlawful discrimination.
The Supreme Court reversed the Fifth Circuit's decision.
Justice O'Connor, writing for a unanimous Court, maintained
that the Fifth Circuit disregarded impermissibly critical
evidence favorable to Reeves. To determine whether a party is
entitled to judgment as a matter of law, a reviewing court must
consider the evidentiary record as a whole and disregard
evidence favorable to the moving party. The Fifth Circuit ruled
that Sanderson Plumbing was entitled to judgment as a matter of
law. However, in disregarding evidence favorable to Reeves and
failing to draw all reasonable inferences in his favor, the
Fifth Circuit impermissibly substituted its judgment concerning
the weight of the evidence for the judgment of the jury.
Since 1990, the Court has decided several other cases
involving the ADEA. In Gilmer v. Interstate/Johnson Lane Corp.,
500 U.S. 20 (1990), the Court found that the ADEA does not
preclude enforcement of a compulsory arbitration clause. The
plaintiff in Gilmer, signed a registration application with the
New York Stock Exchange (NYSE), as required by his employer.
The application provided that the plaintiff would agree to
arbitrate any claim or dispute that arose between him and
Interstate. Gilmer filed an ADEA claim with the EEOC upon being
fired at age 62. The Court maintained that Congress would have
explicitly precluded arbitration in the ADEA had it not wanted
arbitration to be an appropriate method of attaining relief.
The compulsory arbitration clause required simply that the
plaintiff's claim be brought in an arbitral rather than a
judicial forum.
In Oubre v. Entergy Operations, Inc., 522 U.S. 422 (1998),
the Court considered whether an employee had to return money
she received as part of a severance agreement before bringing
suit under the ADEA. The Older Workers Benefit Protection Act
established new protections for workers who are asked to sign
waivers of their ADEA rights. The employee received severance
pay in return for waiving any claims against the employer. The
Court held that the plaintiff did not have to return the money
before bringing suit because the employer failed to comply with
three of the requirements of the waiver provisions under the
ADEA.
Finally, in Kimel v. Florida Board of Regents, 528 U.S. 62
(2000), the Court determined that states are immune from suit
by public employees under the ADEA. In a divided opinion, the
Court found that the ADEA is not appropriate legislation under
section 5 of the Fourteenth Amendment. As legislation enacted
solely under Congress' Commerce Clause authority, the ADEA did
not abrogate the states' sovereign immunity. Because the ADEA
prohibits substantially more state employment decisions than
would likely be found unconstitutional under the applicable
equal protection rational basis standard, the Court maintained
that it lacked a ``congruence and proportionality'' between the
injury to be prevented or remedied and the means adopted to
achieve that end. Further, the Court found no evidence in the
legislative history of the ADEA to suggest that state and local
governments were unconstitutionally discriminating against
their employees. Thus, the enactment of the ADEA did not appear
to be appropriate legislation under section 5 of the Fourteenth
Amendment.
B. FEDERAL PROGRAMS
There are two primary sources of Federal employment and
training assistance available to older workers. The first, and
larger of the two, is ``Adult and Dislocated Worker Employment
and Training Activities'' authorized under Title I of the
Workforce Investment Act of 1998. The second is the Senior
Community Service Employment Program authorized under Title V
of the Older Americans Act.
1. The Adult and Dislocated Worker Program Authorized under the
Workforce Investment Act
The Workforce Investment Act of 1998 (WIA) was enacted on
August 7, 1998. The intent of the legislation was to
consolidate, coordinate, and improve employment, training,
literacy, and vocational rehabilitation programs. Among other
things, WIA repealed the Job Training Partnership Act (JTPA) on
July 1, 2000, and replaced it with new training provisions
under Title I of WIA. States were required to implement WIA no
later than July 1, 2000. The first full year of WIA
implementation ended June 30,2001. Data is not yet available on
the total number of individuals served or the percent who were
55 years of age and older.
Under WIA, for the most part, one set of services and one
delivery system are authorized both for ``adults'' and for
``dislocated workers,'' but funds continue to be appropriated
separately for the two groups. Funds for these programs are
contained in the Labor-HHS-ED appropriations act. The FY2001
appropriation for adult activities is $950 million, and for
dislocated workers is approximately $1.4 billion.
Funds from the adult funding stream are allotted among
States according to the following three equally weighted
factors: (1) relative number of unemployed individuals living
in areas with jobless rate of at least 6.5 percent for the
previous year; (2) relative number of unemployed individuals in
excess of 4.5 percent of the State's civilian labor force; and
(3) the relative number of economically disadvantaged adults.
At least 85 percent of the funds allocated to States are
allocated to local areas by formula. Not less than 70 percent
of the local funds must be allocated using the same three-part
formula used to allocate funds to States. The remainder of the
adult funds allocated to local areas can be allocated based on
formulas approved by the Secretary of Labor as part of the
State plan that take into account factors relating to excess
poverty or excess unemployment above the State average in local
areas.
Funds from the dislocated worker funding stream are
allotted among States according to the following three equally
weighted factors: (1) relative number of unemployed
individuals; (2) relative number of unemployed individuals in
excess of 4.5 percent of the State's civilian labor force; and
(3) the relative number of individuals unemployed 15 weeks or
longer. At least 60 percent of the funds allocated to States
must be allocated to local areas based on a formula. This
formula, prescribed by the Governor, must be based on factors,
such as insured unemployment data, unemployment concentrations,
and long-term unemployment data. Local areas, with the approval
of the Governor, may transfer 20 percent of funds between the
adult program and the dislocated worker program.
Funds appropriated for adult and dislocated worker
activities are used to provide services to adults age 18 and
older and to individuals who meet the definition of being a
dislocated worker (i.e., a person who has lost a job or
received notice, and is unlikely to return to the current job
or industry; was self-employed, but is now unemployed due to
economic conditions or natural disaster; or is a displaced
homemaker.) Three levels of service are provided: ``core
services,'' ``intensive services,'' and ``training services.''
Any individual who meets the definition of an adult or a
dislocated worker is eligible to receive core services, such as
job search and placement assistance. To be eligible to receive
intensive services, such as comprehensive assessments and
individual counseling and career planning, an individual has to
be unemployed, and unable to obtain employment through core
services or employed but in need of intensive services to
obtain or retain employment that allows for self-sufficiency.
To be eligible to receive training services, such as
occupational training, on-the-job training, and job readiness
training, an individual has to have met the eligibility for
intensive service and been unable to obtain or retain
employment through those services. There is no income
eligibility requirement for receiving services, although for
intensive and training services provided from appropriations
for adult activities, local areas are required to give priority
to recipients of public assistance and other low-income
individuals if funds are limited in the local area.
Training is provided primarily though individual training
accounts (ITA's), which are used by participants to purchase
training services from eligible providers in consultation with
a case manager. (Eligible providers are entities that meet
minimum requirements established by the Governor.) Payments
from ITA's may be made in a variety of ways, including the
electronic transfer of funds through financial institutions and
vouchers. In addition to core, intensive, and training service,
local areas can decide whether or not to provide supportive
services, such as transportation and child care to individuals
receiving any of the three levels of service who are unable to
obtain them through other programs.
Under WIA, each local area must develop a ``one-stop''
system to provide core services and access to intensive
services and training through at least one physical center,
which may be supplemented by electronic networks. The law
mandates that certain ``partners,'' including entities that
carry out the Senior Community Service Employment Program,
provide ``applicable'' services through the one-stop system.
Partners must enter into written agreements with local boards
regarding services to be provided, the funding of the services
and operating costs of the system, and methods of referring
individuals among partners.
Since 1984, DOL has sponsored biennial surveys (as
supplements to the monthly Current Population Survey) to
collect information on job displacement. Displaced workers are
defined as those who had at least 3 years tenure on their most
recent job and lost their job due to a plant shutdown or move,
reduced work, or the elimination of their position or shift.
Those in jobs with seasonal work fluctuations are excluded.
The February 1998 survey polled workers who lost their jobs
between January 1995 and December 1997. The majority of
displaced older workers report job loss following a plant
closing, for which seniority is no protection. Older displaced
workers were much more likely than younger displaced workers to
have left the labor force rather than be reemployed at the time
of the survey. Thirty percent of the 55- to 64-year-olds, and
55 percent of those 65 years and older were not in the labor
force compared to 14 percent of all displaced workers 20 years
and older. The reemployment rate for displaced workers 20 years
and older was 76 percent, while the rates for workers 55 to 64
years and 65 years and older were 60 percent and 35 percent
respectively.
2. Title V of the Older Americans Act
The Senior Community Service Employment Program (SCSEP) has
as its purpose to promote useful part-time opportunities in
community service activities for unemployed low income persons
with poor employment prospects. Created during the 1960's as a
demonstration program under the Economic Opportunities Act, and
later authorized under the Title V of the Older Americans Act,
it is one of a few subsidized jobs programs for adults. The
program provides low income older persons an opportunity to
supplement their income through wages received, to become
employed, and to contribute to their communities through
community service activities performed under the program.
Participants may also have the opportunity to become employed
in the private sector after their community service experience.
SCSEP is administered by the Department of Labor (DoL),
which awards funds to 10 national sponsoring organizations and
to State agencies, generally State agencies on aging. These
organizations and agencies are responsible for the operation of
the program, including recruitment, assessment, and placement
of enrollees in community service jobs.
Persons eligible under the program must be 55 years of age
and older (with priority given to persons 60 years and older),
unemployed, and have income levels of not more than 125 percent
of the poverty level guidelines issued by the Department of
Health and Human Services (DHHS).
Enrollees are paid the greater of the Federal or State
minimum wage, or the local prevailing rate of pay for similar
employment, whichever is higher. Federal funds may be used to
compensate participants for up to 1,300 hours of work per year,
including orientation and training. Participants work an
average of 20 to 25 hours per week. In addition to wages,
enrollees may receive physical examinations, personal and job-
related counseling and, under certain circumstances,
transportation for employment purposes. Participants may also
receive training, which is usually on-the-job training and
oriented toward teaching and upgrading job skills.
Participants work in a wide variety of community service
activities. In program year 1999-2000 (July 1, 1999-June 30,
2000), about one-third of jobs were in services to the elderly
community, including nutrition services, senior centers, and
home care, and about two-thirds were in services to the general
community, including social services, education and recreation
and parks. About 74 percent of participants were women. About
half completed high school education About 84 percent of
participants were age 60 and older and over one-third were 70
years or older. Members of minority racial or ethnic groups
made up 42 percent of total participants.
For further information, see section on the Older Americans
Act.
CHAPTER 5
SUPPLEMENTAL SECURITY INCOME
OVERVIEW
In 1972, the Supplemental Security Income (SSI) program was
established to help the Nation's poor aged, blind, and disabled
meet their most basic needs. The program was designed to
supplement the income of those who do not qualify for Social
Security benefits or those whose Social Security benefits are
not adequate for subsistence. The program also provides
recipients with opportunities for rehabilitation and incentives
to seek employment. In January 2001, 6.4 million individuals
received assistance under the program.
To those who meet SSI's nationwide eligibility standards,
the program provides monthly cash payments. In most States, SSI
eligibility automatically qualifies recipients for Medicaid
coverage and food stamp benefits. Despite progress in recent
years in alleviating poverty, a substantial number remain poor.
When the program was started a quarter of a century ago, some
14.6 percent of the Nation's elderly lived in poverty. In 1999,
the elderly poverty rate was 9.8 percent.
The effectiveness of SSI in reducing poverty is constrained
by benefit levels, stringent financial criteria, and a low
participation rate. In most States, program benefits do not
provide recipients with an income that meets the poverty
threshold. Nor has the program's allowable income and assets
level kept pace with inflation.
In recent years, Congressional attention has focused on the
need to eliminate abuses in the management of the SSI program.
Legislation enacted in 1996 (P.L. 104-121 and 104-193)
eliminated SSI benefits for persons who were primarily
considered disabled because of their drug addiction or
alcoholism. It severely restricted SSI to most noncitizens,
made it more difficult for children with ``less severe''
impairments to receive SSI, required periodic systematic review
of disability cases to monitor eligibility status, and allowed
SSA to make incentive payments to correctional facilities that
reported prisoners who received SSI. P.L. 105-33, enacted
during the 105th Congress, reversed some of the effects of P.L.
104-193 allowing qualified noncitizen recipients who filed for
benefits before August 22, 1996, or who are blind or disabled
and were lawfully residing in the United States on August 22,
1996 to maintain their SSI eligibility.
A. BACKGROUND
The SSI program, authorized in 1972 by Title XVI of the
Social Security Act (P.L. 92-603), began providing a nationally
uniform guaranteed minimum income for qualifying elderly,
disabled, and blind individuals in 1974. Underlying the program
were three congressionally mandated goals- to construct a
coherent, unified income assistance system; to eliminate large
disparities between the States in eligibility standards and
benefit levels; and to reduce the stigma of welfare through
administration of the program by SSA. It was the hope, if not
the assumption, of Congress at the time that a central,
national system of administration would be more efficient and
eliminate the demeaning rules and procedures that had been part
of many State-operated, public-assistance programs. SSI
consolidated three State-administered public-assistance
programs-old age assistance; aid to the blind; and aid to the
permanently and totally disabled.
Under the SSI program, States play both a required and an
optional role. They must maintain the income levels of former
public-assistance recipients who were transferred to the SSI
program. In addition, States may opt to use State funds to
supplement SSI payments for both former public-assistance
recipients and subsequent SSI recipients. They have the option
of either administering their supplemental payments or
transferring the responsibility to SSA.
SSI eligibility rests on definitions of age, blindness, and
disability; on residency and citizenship; on levels of income
and assets; and, on living arrangements. The basic eligibility
requirements of age, blindness, or disability (except of
children under age 18) have not changed since 1974. Aged
individuals are defined as those 65 or older. Blindness refers
to those with 20/200 vision or less with the use of a
corrective lens in the person's better eye or those with tunnel
vision of 20 degrees or less. Disabled adults are those unable
to engage in any substantial gainful activity because of a
medically determined physical or mental impairment that is
expected to result in death or that can be expected to last, or
has lasted, for a continuous period of 12 months.Disabled
children are those with marked and severe functional
limitations.
As a condition of participation, an SSI recipient must
reside in the United States or the Northern Mariana Islands and
be a U.S. citizen or if not a citizen, (a) be a refugee or
asylee who has been in the country for less than 7 years, or
(b) be a ``qualified alien'' who was receiving SSI as of August
22, 1996 or who was living in the United States on August 22,
1996 and subsequently became disabled. In addition, eligibility
is determined by a means test under which two basic conditions
must be satisfied. First, after taking into account certain
exclusions, monthly income must fall below the benefit
standard, $531 for an individual and $796 for a couple in 2001.
Second, the value of assets must not exceed a variety of
limits.
Under the program, income is defined as earnings, cash,
checks, and items received ``in kind,'' such as food and
shelter. Not all income is counted in the SSI calculation. For
example, the first $20 of monthly income from virtually any
source and the first $65 of monthly earned income plus one-half
of remaining earnings, are excluded and labeled as ``cash
income disregards.'' Also excluded are the value of social
services provided by federally assisted or State or local
government programs such as nutrition services, food stamps, or
housing, weatherization assistance; payments for medical care
and services by a third party; and in-kind assistance provided
by a nonprofit organization on the basis of need.
In determining eligibility based on assets, the calculation
includes real estate, personal belongings, savings and checking
accounts, cash, and stocks. Since 1989, the asset limit has
been $2,000 for an individual and $3,000 for a married couple.
The income of an ineligible spouse who lives with an SSI
applicant or recipient is included in determining eligibility
and amount of benefits. Assets that are not counted include the
individual's home; household goods and personal effects with a
limit of $2,000 in equity value; $4,500 of the current market
value of a car (if it is used for medical treatment or
employment it is completely excluded); burial plots for
individuals and immediate family members; a maximum of $1,500
cash value of life insurance policies combined with the value
of burial funds for an individual.
The Federal SSI benefit standard also factors in a
recipient's living arrangements. If an SSI applicant or
recipient is living in another person's household and receiving
support and maintenance from that person, the value of such in-
kind assistance is presumed to equal one-third of the regular
SSI benefit standard. This means that the individual receives
two-thirds of the benefit. In 2001, that totaled $354 for a
single person and $531 for a couple. If the individual owns or
rents the living quarters or contributes a pro rata share to
the household's expenses, this lower benefit standard does not
apply. In December 1999, 4.1 percent, or 268,800 recipients
came under this ``one-third reduction'' standard. Sixty-five
percent of those recipients were receiving benefits on the
basis of disability.
When an SSI beneficiary enters a hospital, or nursing home,
or other medical institution in which a major portion of the
bill is paid by Medicaid, the SSI monthly benefit amount is
reduced to $30. This amount is intended to take care of the
individual's personal needs, such as haircuts and toiletries,
while the costs of maintenance and medical care are provided
through Medicaid.
B. ISSUES
1. Limitations of SSI Payments to Immigrants
The payment of benefits to legal immigrants on SSI has
undergone dramatic changes during the last several years. Until
the passage of the 1996 welfare reform legislation, an
individual must have been either a citizen of the United States
or an alien lawfully admitted for permanent residence or
otherwise permanently residing in the United States under color
of law to qualify for SSI. Before passage of the Unemployment
Compensation Amendments of 1993 (P.L. 103-152), SSI law
required that for purposes of determining SSI eligibility and
benefit amount, an immigrant entering the United States with an
agreement by a U.S. sponsor to provide financial support was
deemed to have part of the sponsor's (and, in most instances,
part of the sponsor's spouse's) income and resources available
for his or her support during the first 3 years in the United
States. Public Law 103-152 temporarily extended the ``deeming''
period for SSI benefits from 3 years to 5 years. This provision
was effective from January 1, 1994, through September 30, 1996.
The welfare legislation signed in 1996 (P.L. 104-193) had a
direct impact on legal immigrants who were receiving SSI. The
1996 law barred legal immigrants from SSI unless they have
worked 10 years or are veterans, certain active duty personnel,
or their families. Those who were receiving SSI at the date of
the legislation's enactment were to be screened during the 1-
year period after enactment. If the beneficiary was unable to
show that he or she had worked for 10 years, was a naturalized
citizen, or met one of the other exemptions, the beneficiary
was terminated from the program. After the 10 year period, if
the legal immigrant has not naturalized, he or she will likely
need to meet the 3 year deeming requirement that was part of
the changes in the 1993 legislation.
SSI and Medicaid eligibility was restored for some
noncitizens under P.L. 105-33, the Balanced Budget Act of 1997.
The Balanced Budget Act (1) continued SSI and related Medicaid
for ``qualified alien'' noncitizens receiving benefits on
August 22, 1996, (2) allowed SSI and Medicaid benefits for
aliens who were here on August 22, 1996 and who later become
disabled, (3) extended the exemption from SSI and Medicaid
restrictions for refugees and asylees from 5 to 7 years after
entry, (4) classified Cubans/Haitians and Amerasians as
refugees, as they were before 1996, thereby making them
eligible from time of entry for Temporary Assistance for Needy
Families (TANF) and other programs determined to be means-
tested, as well as for refugee-related benefits, and (5)
exempted certain Native Americans living along the Canadian and
Mexican borders from SSI and Medicaid restrictions.
2. SSA Disability Determination Process
In 2000, it was estimated that 8.7 million DI and disabled
adult SSI beneficiaries received benefits from SSA. The
workload for initial disability claims was 2.0 million in
fiscal year 2000. In 1994, SSA began to examine the disability
process used for the SSI and Social Security Disability
Insurance (SSDI) programs. This represented the first attempt
to address major fundamental changes needed to realistically
cope with disability determination workloads for both Social
Security Disability Insurance (DI) and disabled adult SSI
beneficiaries. In 1996, SSA developed a 7 year plan to process
the backlog of continuing disability reviews (CDRs) and to
address the new SSI CDR workload. SSA became current in the
SSDI program in 2000 and expects to be current in the SSI
program by the end of fiscal year 2002. SSA has taken steps to
reduce hearing processing times from the peak of 397 days in
fiscal year 1997 to about 300 days as of June 2001. Processing
times for cases at the Appeals level have been reduced by 140
days since April 2000 and pending cases have been reduced by
45,000. Over the 7 years of its plan, SSA estimates an average
savings of $10 in benefits for every administrative dollar
spent.
In response to concerns raised by the General Accounting
Office (GAO), Congress, and disability advocates, SSA is in the
process of finalizing its redesign plan. The solution presented
by SSA focuses on streamlining the determination process and
improving service to the public. The proposed process is
intended to reduce the number of days for a claimant's first
contact with SSA to an initial decision, from an average of 135
days (in fiscal year 1998) to less than 15 days. To accomplish
this goal, the team proposed that SSA establish a disability
claims manager as the focal point for a claimant's contact and
that the number of steps needed to produce decisions be
substantially reduced. The proposal also suggested providing
applicants with a better understanding of how the disability
determination process works and the current status of their
claims.
SSA is developing a plan to identify the near-term and
longer-term operational policy changes and disability process
improvements to improve the administration of the SSI and SSDI
programs. SSA is currently testing a new decision process in 10
states. This process involves an enhanced role for the
disability examiner at the State DDS, the elimination of the
reconsideration step for initial disability claims, and the
implementation of informal conferences between the
decisionmaker and the claimant if the evidence does not support
a fully favorable determination. Early indications suggest that
the new process has improved the accuracy of disability
determinations. Once sufficient data has been gathered on these
test sites, SSA will decide whether to extend the process to
other states.
3. Employment and Rehabilitation for SSI Recipients
Section 1619 and related provisions of SSI law provide that
SSI recipients who are able to work in spite of their
impairments can continue to be eligible for reduced SSI
benefits and Medicaid. The number of SSI disabled and blind
recipients with earnings has increased from 87,000 in 1980 to
352,940 in March 2001; 12,450 of the individuals with earnings
were age 65 and older.
Before 1980, a disabled SSI recipient who found employment
faced a substantial risk of losing both SSI and Medicaid
benefits. The result was a disincentive for disabled
individuals to attempt to work. The Social Security Disability
Amendments of 1980 (P.L. 96-265) established a temporary
demonstration program aimed at removing work disincentives for
a 3-year period beginning in January 1981. This program, which
became Section 1619 of the Social Security Act, was meant to
encourage SSI recipients to seek and engage in employment.
Disabled individuals who lost their eligibility status for SSI
because they worked were provided with special SSI cash
benefits and assured Medicaid eligibility.
The Social Security Disability Benefits Reform Act of 1984
(P.L. 98-460), which extended the Section 1619 program through
June 30, 1987, represented a major push by Congress to make
work incentives more effective. The original Section 1619
program preserved SSI and Medicaid eligibility for disabled
persons who worked even though two provisions that set limits
on earnings were still in effect. These provisions required
that after a trial work period, work at the ``substantial
gainful activity level'' (then counted as over $300 a month
earnings, which has since been raised to $740) led to the loss
of disability status and eventually benefits even if the
individual's total income and resources were within the SSI
criteria for benefits.
Moreover, when an individual completed 9 months of trial
work and was determined to be performing work constituting
substantial gainful activity, he or she lost eligibility for
regular SSI benefits 3 months after the 9-month period. At this
point, the person went into Section 1619 status. After the
close of the trial work period, there was, however, an
additional one-time 15-month period during which an individual
who had not been receiving a regular SSI payment because of
work activities above the substantial gainful activities level
could be reinstated to regular SSI benefit status without
having his or her medical condition reevaluated.
The Employment Opportunities for Disabled Americans Act of
1986 (P.L. 99-643) eliminated the trial work period and the 15-
month extension period provisions. Because a determination of
substantial gainful activity was no longer a factor in
retaining SSI eligibility status, the trial work period was
recognized as serving no purpose. The law replaced these
provisions with a new one that allowed use of a ``suspended
eligibility status'' that resulted in protection of the
disability status of disabled persons who attempt to work.
The 1986 law also made Section 1619 permanent. The result
has been a program that is much more useful to disabled SSI
recipients. The congressional intent was to ensure ongoing
assistance to the severely disabled who are able to do some
work but who often have fluctuating levels of income and whose
ability to work changes for health reasons or the availability
of special support services. Despite SSI work incentives, few
recipients are engaged in work or leave the rolls because of
employment. In March 2001, only 5.3 percent of SSI recipients
had earnings.
While Congress has been active in building a rehabilitation
component into the disability programs administered by SSA over
the last decade, the number of people who leave the rolls
through rehabilitation is very small. In 1997, out of a
population of about 7 million DI and adult SSI beneficiaries,
only about 297,000 individuals were referred to a State
Vocational rehabilitation agency. Moreover, only 8,337 of these
individuals were considered successfully rehabilitated (which
meant that State agencies were able to receive reimbursement
for the services provided). Because of concerns about the
growth in the SSI program, policymakers have begun to question
the effectiveness of the work incentive provisions. The General
Accounting Office (GAO) undertook two studies which were
completed in 1996 which analyzed the weaknesses of the work
incentive provisions and SSA's administration of these
provisions. GAO's report concluded that the work incentives are
not effective in encouraging recipients with work potential to
return to employment or pursue rehabilitation options. In
addition, it concluded that SSA has not done enough to promote
the work incentives to its field employees, who in turn do not
promote the incentives to beneficiaries.
According to a 1998 report by the Social Security Advisory
Board, entitled, How SSA's Disability Programs Can Be Improved
(p. 37):
To a large extent, the small incidence of return to
work on the part of disabled beneficiaries reflects the
fact that eligibility is restricted to those with
impairments which have been found to make them unable
to engage in any substantial work activity. By
definition, therefore, the disability population is
composed of those who appear least capable of
employment. Moreover, since eligibility depends upon
proving the inability to work, attempted work activity
represents a risk of losing both cash and medical
benefits. While some of this risk has been moderated by
the work incentive features adopted in recent years, it
remains true that the initial message the program
presents is that the individual must prove that he or
she cannot work in order to qualify for benefits.
During the 106th Congress, the Ticket to Work and Work
Incentive Improvement Act (P.L. 106-170) was signed into law.
The law contained a number of provisions designed to eliminate
work disincentives that existed in the SSI program. Under this
law, an individual whose eligibility for SSI benefits
(including eligibility under section 1619(b)) has been
terminated due to 12 consecutive months of suspension for
excess income from work activity, may request reinstatement of
SSI benefits without filing a new application. To be eligible
for this expedited reinstatement of benefits, an individual
must have become unable to continue working due to a medical
condition and must file the application for reinstatement
within 60 months of the termination of benefits.
The ticket to work law also requires SSA to establish a
community-based Work Incentive Planning and Assistance Program
to provide individuals with information on SSI work incentives.
Specifically, SSA must establish a corps of work incentive
specialists within the agency and a program of grants,
cooperative agreements, and contracts to provide benefit
planning and assistance to individuals with disabilities and
outreach to individuals who may be eligible for the Work
Incentive Program. SSA is authorized to make grants directly`to
qualified protection and advocacy programs to provide services
and advice about vocational rehabilitation, employment
services, and obtaining employment to SSI beneficiaries.
P.L. 106-170 allows States to have the option of covering
additional groups of working individuals under Medicaid. States
may provide Medicaid coverage to working individuals with
disabilities who, except for their earnings, would be eligible
for SSI and to working individuals with disabilities whose
medical conditions have improved. Individuals covered under
this new option could buy into Medicaid coverage by paying
premiums or other cost-sharing charges on a sliding fee scale
based on income established by the State. States are permitted
to allow working individuals with incomes above 250 percent of
the Federal poverty level to buy into the Medicaid Program.
4. Fraud Prevention and Overpayment Recovery
During the 106th Congress, legislation related to SSI fraud
reduction and overpayment recovery was signed into law. The
Foster Care Independence Act of 1999 (P.L. 106-169) contained
provisions to make representative payees liable for the
repayment of Social Security benefit checks distributed after
the recipient's death and authorized SSA to intercept Federal
and State payments owed to individuals and to use debt
collection agencies to collect overpayments. Under the law,
individuals or their spouses who dispose of resources at less
than fair market value will be ineligible for SSI benefits from
the date the individual applied for benefits or, if later, the
date the individual disposed of resources at less than fair
market value, for a length of time calculated by SSA. The
ineligibility period may not exceed 36 months. Certain
resources are exempt from the provision and the Commissioner of
SSA has some discretion in making determinations regarding
ineligibility. P.L. 106-169 authorized SSA to establish new
penalties for individuals who have fraudulently claimed
benefits in cases considered too small to prosecute in court.
Health care providers and attorneys convicted of fraud or
administratively fined for fraud involving SSI eligibility
determinations are barred from participating in the SSI program
for at least 5 years under P.L. 106-169. Under the law, assets
and income in irrevocable trusts, previously exempt from SSI
resource limit calculations, will be counted toward the
resource limits for program eligibility and for determining
benefit amounts.
Chapter 6
FOOD ASSISTANCE PROGRAMS AND FOOD SECURITY AMONG THE ELDERLY
OVERVIEW: 1999-2000
In addition to nutrition programs for the elderly operated
under Title III of the Older Americans Act (discussed in the
chapter devoted to the Older Americans Act programs), the
Federal Government supports three non-emergency food assistance
programs affecting significant numbers of older persons: the
Food Stamp program, the Commodity Supplemental Food program,
and the Child and Adult Care Food program: \1\
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\1\ Nutrition programs that can provide help to elderly persons
also include two emergency assistance programs--the Emergency Food
Assistance program and the Emergency Food and Shelter program. The
Emergency Food Assistance program provides Agriculture Department
support (through state agencies)--in the form of federally donated food
commodities and funding for distribution costs--to aid food
distribution to needy persons served by public and private nonprofit
emergency feeding organizations like food banks, food pantries, and
emergency shelters/soup kitchens. The Emergency Food and Shelter
program, operated under the Federal Emergency Management
Administration, makes grants to local public and private nonprofit
entities (through local boards) to provide services to the homeless. No
significant legislative changes were made to these programs in the
106th Congress.
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Significant legislative revisions to the Food Stamp program
were included in FY2001 Agriculture Department appropriations
measure, and the Agriculture Risk Protection Act contained
amendments affecting administration of the Child and Adult Care
Food program. The FY2001 appropriations law changed rules
governing the treatment of vehicles as assets in judging food
stamp eligibility, liberalized the treatment of excessively
high shelter expenses when determining food stamp benefits, and
revised the terms of Puerto Rico's nutrition assistance block
grant (operated in lieu of food stamps in the Commonwealth).
The Agriculture Risk Protection Act incorporated amendments to
improve the intergrity and management of the Child and Adult
Care Food program. No legislation affecting the Commodity
Supplemental Food program was considered in the 106th Congress.
In 1999 and 2000, food stamp enrollment and spending
continued to drop significantly. Participation went from a
monthly average of 19.8 million persons during FY1998, to 18.2
million people in FY1999 and 17.2 million in FY2000. An
improved economy, program changes wrought by Federal and State
welfare reform initiatives, and restrictions on eligibility
placed into law in 1996 (e.g., loss of eligibility for many
noncitizen and able-bodied adults without dependents)
contributed to this decline. Participation by elderly persons,
(age 60+), on the other hand, increased slightly from 1.6
million people in FY 1998 to 1.7 million in FY2000; overall,
the proportion of elderly recipients in the food stamp caseload
rose from 8.2 percent in FY1998 to 10 percent in FY2000.
However, the rate at which eligible elderly persons actually
enroll in the Food Stamp program (a 29 percent participation
rate) remains the lowest of any major demographic group other
than able-bodied adults without dependents. Spending for the
regular Food Stamp program tracked the decline in participation
and decreased from $19.2 billion in FY1998, to $18.1 billion in
FY1999 and $17.3 billion in FY2000.
Participation by elderly persons in the Commodity
Supplemental Food program and the Child and Adult Care Food
program grew noticeably in 1999 and 2000. Elderly enrollees in
the Commodity Supplemental Food Program increased from 249,000
persons in FY1998, to 279,000 people in FY1999 and 294,000 in
FY 2000, while spending for all recipients (including women,
infants, and children) grew from $89 million in FY1998, to $90
million in FY1999 and $92 million in FY2000. Participation in
and spending for the adult-care component of the Child and
Adult Care Food program also rose--from 58,000 persons in ($32
million) in FY1998, to 63,000 people ($37 million) in FY 1999
and 68,000 ($43 million) in FY 2000.
A. BACKGROUND ON THE PROGRAMS
1. Food Stamps
The Food Stamp program provides monthly benefits--averaging
$73 a person in FY2000--that increase low-income recipients'
food purchasing power. Eligible applicants must have monthly
income and liquid assets below federally prescribed limits (or
be receiving cash public assistance) and must pass several
nonfinancial eligibility tests: e.g., work requirements, bars
against eligibility for many noncitizens and postsecondary
students. Benefits are based on the monthly cost of the
Agriculture Department's ``Thrifty Food Plan,'' are adjusted
annually for inflation, and vary with household size, amount
and type of income (e.g., earnings are treated more liberally
than income like Social Security or public assistance
payments), and certain nonfood expenses (e.g., shelter costs,
child support payments, dependent care and medical expenses).
Basic eligibility and benefit standards are federally set, and
the Federal Government pays for benefits (other than those
financed by State reimbursements) and about half the cost of
administration and work/training programs for recipients.
States shoulder the remaining expenses and have responsibility
for day-to-day operations (e.g., determining individuals'
eligibility and issuing benefits) and a number of significant
program rules. The regular Food Stamp program operates in the
50 States, the District of Columbia, Guam, and the Virgin
Islands. Variants of the regular program are funded through
nutrition assistance block grants to Puerto Rico, American
Samoa, and the Northern Marianas.
The Food Stamp Act became law in 1964 (after a three-year
pilot program); however, the program did not become nationally
available until early 1975, when Puerto Rico and the last few
counties in the country chose to enter. In 1977, the 1964 Act
(as amended) was substantially rewritten and replaced with the
Food Stamp Act of 1977, which greatly liberalized the program
and increased participation. Amendments to the 1977 Act during
the early 1980s significantly restricted eligibility and
benefits. But, beginning in the mid-1980s and continuing
through amendments in 1990 and 1993, program benefits were
generally increased. In 1996, the welfare reform law (the
Personal Responsibility and Work Opportunity Reconciliation
Act; P.L. 104-193) incorporated the most extensive changes to
the program since the 1977 rewrite of the law. Substantial
benefit and eligibility cutbacks were legislated, and States
were given more latitude in running the program. Among the
changes most affecting the elderly was a provision that barred
eligibility for most noncitizen legal immigrants (over 800,000
persons, many of them elderly). In 1997, provisions in P.L.
105-18 allowed States to choose to pay the cost of providing
food stamp to noncitizens (and certain others) made ineligible
by the 1996 welfare reform law, and, in 1998, amendments in
P.L. 105-185 returned federally financed food stamp eligibility
to many of those barred in the 1996 law (particularly the
elderly who were resident in the United States at enactment of
the welfare reform law in August 1996). Two other legislative
changes directed increased Federal spending on work/training
programs for food stamp recipients (contained in the 1997
Balanced Budget Act; P.L. 105-33) and cut Federal spending for
food stamp administrative costs (in P.L. 105-185).\2\
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\2\ See the discussion of Legislative Developments in the next
section of this chapter for the most recent legislative changes.
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Eligibility. Applicants for food stamps must have their
eligibility determined, and if eligible, their benefits issued,
within 30 days of application--or 7 days if they are very poor.
In most cases, benefits are issued within 2 weeks of initial
application; however, applicants can be refused benefits if
they fail to cooperate with the State administering agency in
obtaining the information necessary for a determination.
Initial determination of eligibility usually involve face-to-
face interviews and presentation of requested documentation
about income, assets, living expenses (such as rent and utility
payments), and other items (or contacts that can provide
corroboration of household circumstances).
The food stamp assistance unit is a household, typically
those living together who also purchase and prepare food
together. But not all co-residents are required to apply
together: (e.g., while spouses and parents and children must
apply together, unrelated persons not purchasing and preparing
food in common may apply separately; ineligible individuals
(e.g. some noncitizens) living with others may be treated as
non-household members (although their financial resources can
be counted as available to their co-residents). Households are
certified eligible for ``certification periods'' that differ
according to the variability of their circumstances: from 1-3
months to as long as 2 years. They often must have to face-to-
face interviews for recertification, and during their
certification period, they must report significant changes in
their circumstances. States, in turn, must act on those reports
of changed circumstances (e.g., income, household size) by
adjusting benefits or eligibility status.
Food stamp eligibility depends primarily on whether a
household has cash monthly income and liquid assets below
Federal limits. For the large majority of applicants, the
income test confines eligibility to households with monthly
total cash income at or below 130 percent of the Federal income
poverty guidelines, annually adjusted for inflation and
differing by household size. Most income is counted in making
an eligibility determination, but a few types of income are not
(e.g., Federal energy assistance payments, most student aid,
Earned Income Tax Credit payments, noncash income). For FY2001,
130 percent of the poverty guidelines equals $905 a month for
one person, $1,219 for two-person households, $1,533 for three-
person households, and higher amounts for larger households.\3\
However, a slightly more liberal income test is applied to
households containing elderly or disabled persons (for more
detail on this, see the later discussion of the elderly and the
Food Stamp program). The liquid asset limit is $2,000, or
$3,000 for households with an elderly member. But all financial
resources are not taken into account. Some important exclusions
include a household's home, furnishings, and personal
belongings, either all or a portion of the value of any car,
certain retirement funds, burial plots, and work- or business-
related assets.
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\3\ Income eligibility limits are 25 percent higher in Alaska and
15 percent higher in Hawaii.
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With some exceptions, food stamps are available
automatically (i.e., without regard to the income and asset
tests noted above) to recipients of cash public assistance
under States' Temporary Assistance for Needy Families (TANF)
programs, Supplemental Security Income (SSI) payments, and
State or local general assistance benefits. Under the two major
exceptions, (1) SSI recipients in California are not eligible
for food stamps because their SSI payment is assumed to include
a food stamp component and (2) public assistance recipients
living with persons not receiving public aid are not
automatically food-stamp eligible.
Non-financial eligibility criteria include those related to
work, student status, institutional residence, and citizenship.
Most unemployed able-bodied non-elderly adults must meet work/
training requirements to remain eligible, and eligibility is
denied to households with strikers. Non-working postsecondary
students without children are barred. Residents of institutions
(other than residents in substance abuse programs and shelters
for the homeless and battered women and children) are not
eligible. And the eligibility of noncitizens generally is
limited to legal residents (1) with substantial U.S. work
histories, (2) who are veterans or active duty military
personnel (and their families), (3) who are refugees, asylees,
Cuban/Haitian entrants, or have been admitted for certain
humanitarian reasons (for seven years after entry), (4) who are
children and entered the country by August 22, 1996, (5) who
were elderly (age 65+) and here as of August 22, 1996, (6) who
receive disability benefits and entered before August 22, 1996
(including persons who become disabled after that date), and
(7) who are Hmong refugees from Laos and certain Native
Americans living along the Canadian and Mexican borders.
Finally, States may, at their own expense, take advantage
of an option to provide food stamp benefits to (1) any
noncitizen legal immigrant barred form federally financed food
stamps and (2) persons made ineligible for federally financed
food stamps by certain work/training rules for able-bodied
adults without dependents.
Benefits. Food stamp benefits are aimed at increasing
recipients' food purchasing power. In FY2000, monthly benefits
averaged $73 a person (about $180 for a typical household).
They are inflation-adjusted each October, and vary with the
type and amount of income, household size, and some nonfood
expenses (see the discussion of ``deductions'' below). Food
stamps are provided monthly, and, except for very poor
recipients, monthly allotments are not intended to cover all of
a household's food costs--i.e., most recipients are expected to
contribute a portion of their income to their food expenses.
To determine monthly benefit allotments, a household's
total cash monthly income is reduced to a ``net'' income figure
(representing income deemed available for food and other normal
living costs). This is done by allowing a standard deduction
($134 a month) and additional deductions for certain expenses.
These include deductions for excessively high (but not all)
shelter costs, 20 percent of earnings, dependent care expenses
related to work/education, child support payments, and, for
elderly and disabled, medical expenses above $35 a month.
Deductions for dependent care costs and for the shelter
expenses of households without elderly or disabled person are
subject to monthly dollar limits. As a result of these
deductions, an average of about 50 percent-60 percent of gross
monthly household income is actually counted as net income for
benefit determinations.
Food stamp allotments then equal the estimated monthly cost
of an adequate low-cost diet (maximum benefits, set at the cost
of the Agriculture Department's ``Thrifty Food Plan'' for the
household's size and indexed annually for inflation), less 30
percent of monthly net income (the household's expected
contribution toward its food costs). The theory is that food
stamps should fill the deficit between what a household can
afford for food (its 30 percent contribution) and the estimated
expense of a low-cost diet (maximum benefits). For FY2001,
maximum monthly benefits in the 48 States and the District of
Columbia are $130 for one person, $238 for two-person
households, $341 for three-persons households, and larger
amounts for bigger households; significantly higher maximums
apply in Alaska, Hawaii, Guam, and the Virgin Islands.
Monthly allotments may be spent for virtually any food item
(but not alcohol, tobacco products, or ready-to-eat hot foods)
in approved food stores. They also may be used for some
prepared meals (e.g., in shelters for the homeless and battered
women and children, in elderly nutrition programs), seeds and
plants for growing food, and hunting and fishing equipment in
remote areas of Alaska. Purchases with food stamp benefits are
not subject to sales taxes, and food stamp assistance is not
counted as income under welfare, housing, and tax laws.
Food stamp allotments historically have been issued as
paper ``coupons.'' but food stamp recipients in all or part of
nearly all States and the District of Columbia (representing
over three-quarters of recipients) now receive their benefits
through electronic benefit transfer (EBT) systems. These EBT
systems deliver benefits by using special ATM-like debit cards
rather than coupons, and all States are expected to use EBT
systems by the end of 2002. Food stamp benefits also can, in
some cases, be paid as cash--in a limited number of local
projects for the elderly and disabled, for some recipients
leaving cash welfare rolls, and in work supplementation
programs (where the food stamp benefit is paid to a recipient's
employer).
Puerto Rico, American Samoa, and the Northern Marianas.
Variants of the regular Food Stamp program operate in Puerto
Rico, American Samoa, and the Northern Mariana Islands. Puerto
Rico's Nutrition Assistance program provides its benefits in
cash under rules similar to (but generally more restrictive
than) the regular program. Federal support is limited to an
annual block grant ($1.3 billion in FY2001), and the program
serves some 1.1 million persons. The programs in American Samoa
and the Northern Marianas also are limited to Federal grants,
each funded at $3-$5 million a year and serving 3,000-4,000
people. They are not cash assistance programs and are roughly
similar to the regular program, although American Samoa's
program is limited to the elderly and disabled and the Northern
Marianas' program has special rules directing use of some
benefits to purchase local products.
The Elderly and the Food Stamp Program. Food stamp
participation by eligible elderly persons is relatively low, 29
percent by the most recent count (1999). This compares with a
participation rate of 57 percent among all those eligible.
Based on preliminary Agriculture Department survey data for
FY2000, households with at least one elderly member account for
21 percent of food stamp households. But, because the elderly
generally live in small households (e.g., 80 percent live in
single-person households, typically single women), they make up
only 8 percent of total food stamp enrollees. Overall, the
survey information also shows that elderly food stamp
recipients have income that generally is higher than other
participants and, because of this and their smaller household
size, have lower-than-average benefits. Using FY1999 estimates,
average total monthly income for elderly persons in the Food
Stamp program is about 80 percent of the Federal poverty income
guidelines (compared to 53 percent of poverty among households
with no elderly members), and their monthly average household
benefit is 37 percent of the average for all households in the
program.
The Food Stamp program includes a number of special rules
for the elderly:
A more liberal income eligibility test is
applied. Households with elderly (or disabled) members
must have monthly income below the Federal poverty
income guidelines after the standard and expense
deductions noted in the earlier discussion of benefits.
While their income is compared against a lower standard
than most other households (who must have total income
below 130 percent of the poverty guidelines), the
amount of income counted against the standard is
significantly less because the various deductions
(nearly $300 a month on average) have been subtracted
out.
A more liberal asset limit is used in
judging eligibility. Households with elderly members
can have countable liquid assets of up to $3,000 and
remain eligible (vs. $2,000 for others).
When calculating benefits and income
eligibility, no monthly dollar limit on the size of the
deduction for excessively high shelter expenses is
applied to households with elderly (or disabled)
members; others are subject to a limit of $340 a month.
When calculating benefits and income
eligibility, elderly (and disabled) households can
claim a deduction for any out-of-pocket medical costs
above $35 a month; this deduction is not available to
others. For those claiming this deduction, it is
typically over $100 a month, translating into a monthly
benefit increase of some $30.
Elderly (and disabled) persons who are
applicants for or recipients of Supplemental Security
Income benefits can make preliminary application for
food stamps through their Social Security office and
get assistance in completing their application.
In addition, some general food stamp rules can have special
importance for the elderly: all eligible households of 1 or 2
persons are guaranteed a minimum monthly benefit of $10 (other
households can be eligible for either no food stamp benefit
after the benefit calculation is finished or a benefit as small
as $2 a month); food stamp offices are required to have special
procedures for those who have difficulty applying at the
office, and applicants and recipients can designate authorized
representatives to act on their behalf in the application
process and using food stamp benefits.
2. The Commodity Supplemental Food Program
The Commodity Supplemental Food program provides
supplemental foods to low-income elderly persons and to low-
income infants, children, and pregnant, postpartum, and
breastfeeding women. It is authorized, under Section 4(a) of
the Agriculture and Consumer Protection Act of 1973, as amended
(7 U.S.C. 612c note), and operates through local projects in 22
States, the District of Columbia, and two Indian reservations.
The program began in the late 1960s and is the predecessor of
the Special Supplemental Nutrition Program for Women, Infants,
and Children (the WIC program). Until 1995, it served primarily
women, infants, and children not participating in the WIC
program. But, 76 percent of its recipients now are elderly--
294,000 out of 389,000 in FY2000. And, while women, infants,
and children are accorded priority, the proportion of elderly
enrollees is expected to continue increasing. Coverage of this
program is limited by annual appropriations.
Participtig local projects establish most of their
operating rules and receive (1) food items purchased with
annually appropriated funds, (2) food commodities donated from
excess Agriculture Department stocks, and (3) cash grants to
help cover costs for administration and food storage and
distribution. Food packages distributed by local sponsors are
designed with the specific nutritional needs of the elderly and
women, infants, children in mind. They include foods such as
canned fruits, vegetables, meats, and fish, peanut butter,
cereal and grain products, and dairy products.
FY2000 spending for the Commodity Supplemental Food program
was $92 million ($20 million of which represented support for
administrative and distribution/storage costs); in addition,
almost $10 million worth of commodities donated from excess
Federal stocks were made available. While elderly participants
made up about three-quarters of participants, the value of the
food packages distributed to them (about $15 a person) is
significantly less than for packages provided to women,
infants, and children (just over $19 a person).
3. The Child and Adult Care Food Program
The adult-care component of the Child and Adult Care Food
program provides Federal cash subsidies for meals and snacks
served to chronically impaired disabled adults, or those 60
years of age or older, in licensed non-residential day care
settings (adult day care centers). It is permanently authorized
under Section 17 of the Richard B. Russell National School
Lunch Act and offers the same subsidies given for meals and
snacks served in child day care centers. Each meal and snack
served that meets Federal nutrition standards is subsidized at
a legislatively set (and inflation-adjusted) rate, with meals/
snacks served to lower-income persons subsidized at a higher
rate than others. For July 2001-June 2002, the subsidy rates
range from $2.09 for lunches/suppers served free to those with
income below 130 percent of the Federal poverty income
guidelines to 5 cents for snacks served to those with income
above 185 percent of the poverty guidelines. In FY2000, average
daily attendance at the 2,000 sites operated by 1,300 sponsors
was just over 68,000 persons, and Federal subsidies totaled $43
million.
B. LEGISLATIVE DEVELOPMENTS: 1999-2000
The FY2001 Agriculture Department appropriations law (P.L.
106-387) included three amendments to the Food Stamp Act--
The most important change liberalized the
treatment of vehicles as assets when determining
applicants' eligibility for food stamps.\4\ It allowed
states to consider vehicles as an asset in food stamp
eligibility determination using the rules applied in
their Temporary Assistant for Needed Families (TANF)
programs--if their TANF rules are more liberal than the
regular food stamp rules. As a result, in most states,
it is expected that at least one vehicle per household
will be disregarded for food stamp eligibility
purposes; under the regular food stamp rule, the fair
market value of any vehicle would be counted as an
asset to the extent it exceeds $4,650.
---------------------------------------------------------------------------
\4\ Food-stamp-eligible households are limited to $2,000 in liquid
assets ($3,000 for elderly households).
---------------------------------------------------------------------------
A second revision liberalized the treatment
of shelter expenses when determining food stamp
benefits. Food stamp law increases benefits for those
with very high shelter expenses in relation to their
income; it allows the cost of shelter above a threshold
equal to roughly one-third of total household income to
be disregarded (``deducted'') when judging the amount
of income a household has available for food spending.
For households without an elderly or disabled member,
prior law limited the disregarded/deducted amount to
$300 a month, thereby restricting the shelter-expense-
related benefit increase available to non-elderly, non-
disabled households (primarily families with children).
The amendment in the appropriations law raised this
limit to $340 a month and indexed it annually beginning
with FY 2002.
The third change required that Puerto Rico's
nutrition assistance block grant (operated in lieu of
the Food Stamp program) be indexed for food-price
inflation.
The Agriculture Risk Protection Act (P.L. 106-224)
incorporated a number of amendments aimed at improving the
integrity and management of the Child and Adult Care Food
program, primarily in response to 1999 reports by the
Agriculture Department's Inspector General and the General
Accounting Office criticizing program operations. Major program
integrity/management provisions of the new law, which are
particularly directed at oversight of providers and sponsors of
day care homes for children: (1) disqualify institutions
determined ineligible for any other publicly funded program
because they violated requirements of that program, (2)
establish specific eligibility criteria for applicant
institutions (particularly with regard to their administrative
and financial managemnet capabilities), (3) tighten tax-
exemption requirements for private nonprofit institutions, (4)
give State oversight agencies greater control over the approval
process for applicant institutions, (5) strengthen requirements
for site visits to participating institutions, and (6) allow
withholding of administrative funds from States failing to
provide sufficient training, technical assistance, and
monitoring of the program.
C. FOOD SECURITY AMONG THE ELDERLY
A review of the available data from the last three decades
on the nutritional health and food security of the elderly
reveals that a variety of research has been conducted. However,
the findings of that research also reveal both a mixed and
inconclusive picture of the actual nutritional status of this
age group.
Concern about nutrition problems, particularly food
insecurity, among the elderly is the result, in part, of the
general characteristics of this age group. As a group, older
Americans are a growing proportion of the U.S. population, yet
there is relatively little data collected on the elderly
compared to certain other high risk groups, such a children. As
a group, the elderly seem to be more reticent to admit to being
hungry and needing any type of assistance. Fixed incomes, a
variety of health problems and loss of independence can all
contribute to general health, nutrition and food security
problems of older Americans. They seem less likely to use
emergency feeding or participate in Federal food assistance
programs. At the same time, the elderly are disproportionately
heavy users of health care. A major concern has become
minimizing health care costs, while maintaining a desirable
quality of life in old age. It is well recognized that poor
nutrition increases health problems and thus health care costs.
Thus attention to the food security of elderly Americans is
acknowledged as a way to help in reducing health care costs.
The issue of hunger in America captured public attention in
1967 when members of the then-Senate Subcommittee on
Employment, Manpower and Poverty visited the rural South. The
Subcommittee held hearings on the impact of the ``War on
Poverty'' policy initiated during the Johnson administration
and heard witnesses describe widespread hunger and poverty.
Later that year, a team of physicians under the auspices of the
Ford Foundation observed severe nutritional problems in various
areas of the country where they traveled.
Subsequently Congress authorized a national nutrition
survey to determine the magnitude and location of malnutrition
and related health problems in the country. The results of the
Ten State Nutrition Survey revealed that persons over 60 years
of age showed evidence of general undernutrition which was not
restricted to the very poor or to any single ethnic group. The
most significant nutritional problems in those over 60 years of
age were in the intakes of iron, vitamins A, C and thiamine, as
well as obesity (in elderly females).
Reports on hunger and malnutrition in the United States, as
well as the 1970 White House Conference on Food, Nutrition and
Health, contributed to changes in several Federal programs
during this period. The results of the Ten State Nutrition
Survey led to the addition of a nutrition component to the
health examination survey conducted by the then Department of
Health, Education and Welfare. This addition created the Health
and Nutrition Examination Survey (HANES), which was designed to
collect and analyze data on the nutritional status of the U.S.
population. The voluntary nutrition labeling program was
initiated in the early 1970s to provide consumers with more
information on the nutrient content of the foods that they were
purchasing. The Federal food assistance programs also underwent
significant expansion during the 1970s. In 1977 the physicians
returned to the same communities visited a decade earlier to
evaluate progress made in combating hunger. They discovered
dramatic improvements in the nutritional status of the
residents, which were attributed to the expansion of the
Federal food programs.
Throughout the 1980s, considerable attention was focused on
the re-emergence of widespread hunger in the United States.
Beginning in 1981 numerous national, State and local studies on
hunger have been published by a variety of governmental
agencies, universities and advocacy organizations. The reports
have suggested that hunger in America is widespread and
entrenched, despite national economic growth. However, the
problem that exists has few clinical symptoms of deprivation,
unlike the hunger observed during drought, famine, and civil
war elsewhere in the world.
In 1983 President Ronald Reagan appointed a commission to
investigate allegations that hunger was widespread and actually
growing in America. The President's Task Force on Food
Assistance concluded that there was little evidence of
widespread hunger in the United States and reductions in
Federal spending for assistance had not hurt the poor. However,
it did note that there was likely hunger that went undetected
in certain high risk groups, including the elderly. The Task
Force formulated several modest recommendations to make the
Food Stamp Program more accessible to the hungry, along with
offsetting cost-reduction measures that increased State
responsibility for erroneous payments and offered the option of
block granting food assistance.
During the 1980s, numerous nongovernmental groups continued
to document the prevalence of hunger and malnutrition
throughout the country. Many reports focused specifically on
children and families. The Harvard School of Public Health
conducted a 15-month examination of the problem of hunger in
New England and concluded in 1984 that substantial hunger
existed in every State examined, was more widespread than
generally believed, and had been growing at a steady pace for
at least three years. The researchers reported that an
increasing number of elderly persons were using emergency food
programs, while many others were suffering quietly in the
privacy of their homes. The report expressed concern about
reports from medical practitioners that there were increasing
numbers of malnourished children and greater hunger among their
elderly patients. The researchers cited the impact of
malnutrition on health in general and emphasized that children
and the elderly are likely to suffer the greatest harm from
inadequate diets.
In 1984 the U.S. Conference of Mayors issued its first
report which detailed a significant increase in requests for
emergency food assistance, citing unemployment as a primary
cause. Subsequent reports published indicated annual increases
ranging from 9 to 28 percent during the period of 1985 to 1998.
In 1998 emergency food assistance requests by the elderly
increased in 67 percent of the 30 cities surveyed and requests
increased by an average of six percent in each city.
The New York Times reported in 1985 that scientists
estimated that from 15 to 50 percent of Americans over the age
of 65 consume fewer calories, proteins, essential vitamins and
minerals than are required for good health. According to the
article, gerontologists were becoming increasingly alarmed by
evidence that much of the physiological decline in resistance
to disease seen in elderly patients (a weakening in
immunological defenses that commonly has been blamed on the
aging process) may be attributable to malnutrition. Experts
reported that many elderly fall victim to the spiral of
undereating, illness, physical inactivity, and depression.
Reports more recently suggest that a significant amount of the
illness among the elderly could be prevented through aggressive
nutrition assistance. Many physicians believe that
immunological studies hold promise that many elderly could
reduce their disease burden in old age by eating better.
In 1987 a national survey of nutritional risk among the
elderly was conducted by the advocacy group, the Food Research
and Action Center. Despite the fact that the majority of the
elderly surveyed participated in an organized food service for
older persons, many respondents reported signs of nutrition
risk. More than one half of those surveyed reported that they
did not have enough money to purchase food they needed at least
part of the time. Over one-third usually ate less than three
meals a day and 17 percent felt like eating nothing at all at
least once a week. Twenty percent had lost weight over the last
month without trying. Some 17.2 percent could not shop for or
prepare their own food, and 18.3 percent could not leave home
without assistance of another person. Over 25 percent of
respondents had no one to help them if they were sick and
confined to bed. Twenty percent responded affirmatively to at
least five of the risk questions, which put them into
nutritional risk category and this risk was especially true of
the seniors who were living below the poverty level. Seniors
living below the poverty level were much less likely to report
being able to purchase the food they needed than those living
on incomes above the poverty level.
Because of well-organized concerns about poor nutritional
status in older Americans, the Nutrition Screening Initiative
was formed in 1990 by three health professionals and aging
groups as a five -year multifaceted effort to promote nutrition
screening and better nutritional care in the America's health
care system. It was a direct response to the call for increased
nutrition screening of the 1988 Surgeon General's Workshop on
Health Promotion and Healthy People 2000. The group identified
a number of risk factors or early warning signs that might be
associated with poor nutritional status in older Americans. The
risk factors included such elements as inappropriate food
intake, poverty, social isolation, dependency/disability,
acute/chronic diseases or conditions, chronic medication use
and advanced age. Identification of these risk factors led to
the creation of relatively easily administered screening tools
that can be used in settings where social service or health
care professionals are in contact with the elderly. The
information obtained allows for the detection of common
nutritional problems for which an intervention may be indicated
and managed by qualified professionals. Nutrition Care Alerts
were subsequently developed and distributed for use by
caregivers in long term care facilities.
In June 1992, the General Accounting Office reported on
elderly Americans and the health, housing and nutrition gaps
between the poor and nonpoor. GAO suggested that while the
information on the relationship between poverty and nutrition
among the elderly was limited, the available data indicate that
poor elderly persons consume less of some essential nutrients
than do nonpoor elderly persons. As many as one half of poor
elderly persons consumed less than two thirds of the
recommended daily allowance of vitamin C, calcium and other
nutrients. However, the agency indicated that the data were
limited by being a decade old, lacking information on specific
elderly subpopulations and the absence of adequate nutritional
standards or guidelines by which to judge the elderly
population. GAO indicated that improvements were needed in both
nutrition data and nutrition guidelines before definitive
conclusions could be drawn about the nutritional status of the
poor elderly.
In 1993, the Urban Institute released a report based on
about 4300 interviews conducted in both community and meal
program settings to determine the extent of food insecurity
among the elderly. The findings showed no difference between
the rate of food insecurity in urban and rural locations, which
was about 37 percent experiencing food insecurity in a six-
month period. Hispanic elderly had the highest levels of food
insecurity followed by blacks and the elderly of other races,
while whites had the lowest levels. Other indicators of food
deprivation, including eating fewer meals a day, eating a less
balanced diet, experiencing days with no appetite, and
reporting not getting enough to eat, provided an indication
that these populations face a number of problems associated
with food insecurity. Seniors with below poverty incomes
appeared to suffer the greatest food insecurity, but those with
incomes up to 150 percent of poverty still report considerable
food insecurity. The report concluded that between 2.8 and 4.9
million elderly Americans experience food insecurity in a six-
month period.
A 1993 study published in the Journal of the American
Dietetic Association reported that over one-third of the
elderly who are admitted from their homes into a nursing
facility were malnourished at the time of admission and nearly
forty percent of those admitted from acute care facilities were
malnourished. At the same time the prevalence of malnutrition
in nursing home patients is between 35 and 85 percent of the
population. The high prevalence of malnutrition in the nursing
home population may reflect in part the transfer of
malnourished patients from acute-care hospitals to the nursing
facility or the progressive development of malnutrition during
nursing home stays.
The 1996 Administration on Aging report on the national
evaluation of the elderly nutrition program in 1993-1995
indicated that individuals who receive elderly nutrition
program meals have higher daily intake for key nutrients than
similar nonparticipants. These meals seem to provide between 40
and 50 percent of participants' daily intakes of most
nutrients. Participants have more social contacts per month
than similar nonparticipants and most participant report
satisfaction with the services provided.
The Second Harvest (the largest domestic hunger relief
organization) report, Hunger 1997: The Faces and Facts,
concluded that about 16 percent of the clients being served by
its network were 65 years and older. This age group were
reported to represent 16.5 percent of clients in food pantries,
17.2 percent in soup kitchens and 4.3 percent in shelters.
The recent advanced report of Household Food Security in
the United States released by USDA contained survey data from
1995 to 1998. It indicated that 90 percent of all U.S.
households were food secure, that is they had access at all
times to enough food for an active healthy life with no need
for recourse to emergency food sources or other extraordinary
coping behaviors to meet their basic food needs. About 10.2
percent of households were food insecure. For the households
with elderly and elderly living alone, 94.5 percent and 94.6
percent respectively reported being food secure. For the
remaining approximately 5.5 percent in each group during this
period, about 40 percent reported being food insecure with
hunger, meaning that they did not have access to enough food to
fully meet basic needs at all times during the year.
The U.S. Conference of Mayors recent 25 cities survey
entitled ``A Status Report on Hunger and Homelessness in
America's Cities: 2000,'' indicated that estimates for the past
year for emergency food assistance increased by an average of
17 percent. Requests for such assistance by elderly persons
increased by an average of 9 percent during the same period,
with 75 percent of the cities reporting an increase.
Several recent studies have examined the definitions of
food insecurity with regard to the elderly. The term food
insecurity has been generally reviewed as whenever the
availability of nutritionally adequate and safe foods or the
ability to acquire acceptable foods in socially acceptable ways
is limited or uncertain. While that definition is applicable to
the elderly, there are now recognized additional aspects that
consider the functional impairments that need to be evaluated
when determining the extent of food insecurity with this age
group. The additional criteria to be considered are altered
food use as a result of different physical and socioeconomic
conditions, perceptions, attitudes and experiences throughout
their life toward food problems, along with poverty, disease,
living arrangement, age, gender, race-ethnicity and education.
Many elderly are seemingly unwilling to report food problems
consistent with their situations. There is also a reticence
among the elderly to use available feeding programs, even when
they are knowledgeable about their eligibility to participate.
Any of these aspects can contribute to low nutrient intake
which can impact overall health. Persistent or intermittent
food insecurity that existed in the past among the elderly may
lead them to consume lower nutrient intakes and even change
their body composition and eating habits. Elderly food
insecurity also seems to follow a progression of severity,
beginning with compromised diet quality; it then progresses to
food anxiety, socially unacceptable meals, use of emergency
food strategies, and finally actual hunger. Furthermore poorer
health status in this age group may contribute to food
insecurity because of higher medical bills and higher costs for
medications. Because most older Americans do not report
consuming nutritionally adequate diets, consideration may need
to be given to whether assistance programs need to target
middle-aged and older adults that are at higher risk for poor
dietary quality including women, persons over 65 years, non-
Hispanic and African American men, individuals with less
education, smokers, alcohol users, those who do not exercise,
and those with low energy intakes. There is a need for
additional research in this age group to fully characterize the
nature, extent and prevention of food insecurity in the
elderly.
CHAPTER 7
HEALTH CARE
A. NATIONAL HEALTH CARE EXPENDITURES
1. Introduction
In 1960, national health care expenditures amounted to
$26.7 billion, or 5.1 percent of the Gross Domestic Product
(GDP), the commonly used indicator of the size of the overall
economy. The enactment of Medicare and Medicaid in 1965, and
the expansion of private health insurance-covered services
contributed to a health spending trend that grew much more
quickly than the overall economy. By 1990, spending on health
care was at $695.6 billion, or 12.0 percent of the GDP.
Increases in health care spending during the late 1980's and
early 1990's focused attention on the problems of rising costs
and led to unsuccessful health care reform efforts in the 103d
Congress to expand access to health insurance and control
spending.
In the mid-1990's, however, changes in financing and
delivery of health care, such as the emerging use of managed
care by public and private insurers, had an impact on U.S.
health care spending patterns. While spending for health care
reached $1 trillion for the first time in 1996, growth in
spending between 1993 and 1999 was lower than in previous
years. Health spending growth was only 4.8 percent in 1998, the
lowest rate in more than 3\1/2\ decades. Spending as a percent
of the economy remained relatively constant at around 13.0
percent; for the first time this could be attributed to a
slowdown in the rate of growth of health care spending and not
just growth in the overall economy. There are concerns,
however, as to whether these trends in health care expenditures
and costs will continue. The Centers for Medicare and Medicaid
Services (CMS, formerly known as the Health Care Financing
Administration) projects larger increases in health care
spending in the coming years. CMS expects national health
spending to reach over $2 trillion by 2006, or approximately
15.1 percent of GDP.
National health expenditures include public and private
spending on health care, services and supplies related to such
care, funds spent on the construction of health care
facilities, as well as public and private noncommercial
research spending. The amount of such expenditures is
influenced by a number of factors, including the size and
composition of the population, general price inflation, medical
care price inflation, changes in health care policy, and
changes in the behavior of both health care providers,
consumers, and third-party payers. The aging of the population
contributes significantly to the increase in health care
expenditures.
In 1999, spending for health care in the United States
totaled $1.2 trillion, with 87.4 percent of expenditures on
personal health care, or services used to prevent or treat
diseases in the individual. The remaining 12.6 percent was
spent on program administration, including administrative costs
and profits earned by private insurers, noncommercial health
research, new construction of health facilities, and government
public health activities.
Ultimately, every individual pays for each dollar spent on
health through health insurance premiums, out-of-pocket, taxes,
philanthropic contributions, or other means. However, there has
been a substantial shift over the past four decades in the
relative role of various payers of health services. In 1960,
almost half (48.4 percent) of all health expenditures were paid
out-of- pocket by consumers, while private health insurance
represented only 22.0 percent and public funds (Federal, state,
and local governments) 24.8 percent. The growth of private
health insurance and the enactment of the Medicare and Medicaid
programs changed the system from one relying primarily on
direct patient out-of-pocket payments to one which depends
heavily on third-party private and government insurance
programs. In 1999, individual out-of-pocket spending (including
coinsurance, deductibles, and any direct payments for services
not covered by an insurer) represented only 15.4 percent of all
health expenditures.
Since 1990, the difference between the share of health
spending financed by private and public sources has narrowed.
In 1990, private spending paid for 59.4 percent and public
programs funded 40.6 percent. While all private sources
combined continued to finance most health care spending in 1999
($662.1 billion, or 54.7 percent), public program funding
increased to 45.3 percent ($548.5 billion). Federal spending is
the second largest single contributor, financing 31.8 percent
of all spending. This share is slightly smaller than the 33.1
percent funded by the largest single payer, private insurance.
The Federal Government assumed an increasingly significant role
in funding national health expenditures in 1965 with the
enactment of the Medicare and Medicaid programs. In 1960 the
Federal Government contribution represented 10.6 percent of all
health expenditures; by 1970, the Federal Government's share
increased to 24.0 percent. Federal spending continued to rise
as a percent of all expenditures until 1976, when it
represented about 29 cents of each health dollar. Between 1976
and 1991, the share of health spending paid by the Federal
Government hovered between 27.7 percent and 29.1 percent.
During much of the 1990's, Federal spending on health has grown
from this plateau to represent 1/3 of all health spending in
1997. This increase was likely due to the ability of private
managed care organizations to decrease its share of costs.
Subsequently, the Federal Government's share of health
expenditures has decreased somewhat. In 1999, the Federal
Government spent $384.7 billion, 31.8 percent of total national
health expenditures. The Federal Government is expected to
spend over $500 billion for health care in the year 2003,
amounting to 30.4 percent of health care expenditures.
2. Medicare and Medicaid Expenditures
The Medicare and Medicaid programs are an important source
of health care financing for the aged. Medicare provides health
insurance protection to most individuals age 65 and older, to
persons who are entitled to Social Security or Railroad
Retirement benefits because they are disabled, and to certain
workers and their dependents who need kidney transplantation or
dialysis. Medicare is a Federal program with a uniform
eligibility and benefit structure throughout the United States.
It consists of three parts. Part A (Hospital Insurance) covers
medical care delivered by hospitals, skilled nursing
facilities, hospices and home health agencies. Part B
(Supplementary Medical Insurance) covers physicians' services,
laboratory services, durable medical equipment, outpatient
hospital services and other medical services. Part C
(Medicare+Choice) offers managed care and other options to
beneficiaries. Most outpatient prescription drugs are not
covered under Medicare, and some other services (such as
coverage for care in skilled nursing facilities) are limited.
Medicare is financed by Federal payroll and self-employment
taxes, government contributions, and premiums from
beneficiaries. Medicaid is a joint Federal-state entitlement
program that pays for medical services on behalf of certain
groups of low-income persons. Medicaid is administered by
states within broad Federal requirements and guidelines. The
Federal Government finances between 50 percent and 83 percent
of the care provided under the Medicaid program in any given
state. For more information on the background and mechanics of
the Medicare and Medicaid programs see Chapters 8 and 9.
During fiscal year 1967, the first full year of the
program, total Medicare outlays amounted to $3.4 billion. In
fiscal year 1999, Medicare expenditures totaled $212.0 billion.
This increase in outlays since the program's first year
represents an average annual growth rate of 13.8 percent. Much
of the growth in spending occurred in the early years of the
program, however. From fiscal year 1967 to fiscal year 1980,
total program expenditures grew from $3.4 billion to $35.0
billion, for an average annual growth rate of 19.6 percent.
Over the fiscal year 1980 to fiscal year 1990 period, total
outlays grew from $35.0 billion to $109.7 billion, for an
average annual rate of growth of 12.1 percent. For the fiscal
year 1990 to fiscal year 1999 period, total outlays grew from
$109.7 billion to $212.0 billion, for an average annual growth
rate of only 7.6 percent. The low growth rate in total outlays
in recent years can be attributed to both a decrease in Part A
spending and small increases in Part B spending. Between fiscal
year 1997 and fiscal year 1999, Part A outlays decreased from
$137.8 billion to $131.4 billion, for an annual average growth
rate of -2.3 percent. Over this same time period, Part B
spending increased from $72.6 billion to $80.5 billion, for an
annual average increase of 5.3 percent.
The Balanced Budget Act of 1997 provided for structural
changes to the Medicare program and slowed the rate of growth
in reimbursements for providers, and this slower growth is
reflected in projections of Medicare expenditures. According to
CBO's April 2001 baseline projections, total Medicare outlays
will be $426.6 billion in FY2009. This represents an average
annual overall rate of growth of 7.2 percent for the time
period FY1999-FY2009.
Medicaid expenditures have historically been one of the
fastest growing components of both Federal and state budgets.
From fiscal year 1975 to fiscal year 1984, Medicaid spending
almost tripled, increasing from $12.6 billion to $37.6 billion.
Spending rose even more dramatically in the late 1980's and
early 1990's, increasing an average of 21 percent per year from
FY1989 through FY1992. This was attributed to increased
enrollment, increases in spending per beneficiary, and growth
in disproportionate share hospital (DSH) payments. Growth
slowed down, however, to an average of about 10 percent from
fiscal year 1993 to fiscal year 1995. This may be due to
improvements in the overall economy, decreased enrollment, and
increased use of managed care programs by states for Medicaid
beneficiaries. Total Federal and state outlays for Medicaid in
fiscal year 1999 were $190.9 billion. The Federal Government
pays about 57 percent of total Medicaid costs. CBO projects
that Federal outlays for Medicaid will grow from $117.9 billion
in fiscal year 2000 to $266.5 billion in fiscal year 2010, an
average growth rate of 8.5 percent.
According to the 1996 Medicare Current Beneficiary Survey,
Medicare covers about 67.5 percent of the total medical costs
of the non-institutionalized elderly. About 15.1 percent of
total costs are paid by the elderly out-of-pocket. The
remaining costs are paid by private insurance coverage
(including retiree health insurance plans and Medigap),
government sources such as Medicaid or state assistance
programs, or other private sources such as charity.
Among the institutionalized beneficiaries (such as those in
nursing homes), Medicare pays about 19.4 percent of total
personal health costs, and Medicaid, funded by both the Federal
and state governments, pays an additional 39.8 percent of
costs. Institutionalized beneficiaries pay 30.0 percent of the
costs of care out-of-pocket. Private health insurance pays for
a greater proportion of costs among the non-institutionalized
elderly (12.6 percent) than among the institutionalized (1.1
percent) since relatively few beneficiaries have private
insurance coverage for long-term care.
3. Hospitals
Hospital care costs continue to be the largest component of
the nation's health care bill. In 1999, an estimated 32.3
percent, or $390.9 billion, of national health care
expenditures was paid to hospitals. From 1971 to 1980, spending
on hospital care increased at an average rate of 13.9 percent
per year, and in 1980, hospital care expenditures had reached
41.3 percent of total health expenditures. In 1983, Medicare's
prospective payment system (PPS) was introduced. Under this
program, hospitals are paid a predetermined rate for each
patient based on the patient's diagnosis. With this incentive
to provide care more efficiently, the hospital share of total
health expenditures declined to 36.5 percent in 1990. The rate
of growth in hospital spending has also decreased since the
implementation of PPS. From 1984 to 1990, hospital expenditures
grew at an average annual rate of 8.5 percent. From 1991 to
1994, hospital expenditures grew at an average annual rate of
7.0 percent. From 1995 to 1999, hospital spending increased at
an average annual rate of only 3.3 percent. Hospital
expenditures increased only 2.6 percent in 1998, but grew at a
slightly higher rate of 3.7 percent in 1999.
In 1999, public (Federal, state, and local) sources
accounted for 59.5 percent of hospital service expenditures.
The Federal Government's share has grown from 16.8 percent in
1960 to 47.4 percent in 1999, making it the single largest
payer. Medicare spending for hospitals dropped by 1.8 percent
in 1998, and dropped 0.3 percent in 1999. Medicaid spending for
hospital services, however, grew by 9.4 percent, more than
twice as fast as overall hospital spending in 1999.
In 1999, private health insurance was responsible for about
31.7 percent of all hospital spending. In 1990, its portion was
38.3 percent, but this has been declining as a larger portion
of care has been provided in ambulatory settings, and managed
care plans have negotiated lower prices for services. Out-of-
pocket expenditures by consumers represented 20.8 percent of
payments for hospital care before the enactment of Medicare and
Medicaid; they represented only 3.2 percent in 1999.
The introduction of Medicare's PPS in 1983 also had an
effect on hospital admissions and the number of inpatient days.
Hospital admissions for all age groups increased at an average
annual rate of 1.0 percent between 1978 and 1983. After the
start of PPS, however, total admissions decreased each year
until 1993 and 1994, when they rose 0.7 percent and 0.9 percent
respectively. In 1995, total admissions increased 1.4 percent
over the previous year, the largest increase in 15 years. In
1997, hospital admissions increased by 0.4 percent.
Between 1978 and 1993, hospital inpatient admissions for
persons 65 and over increased an average of 4.8 percent per
year. After introduction of PPS, admissions among the older
population decreased at an average annual rate of 3.0 percent
during the 1984-1986 period. However, after this period,
hospital admissions for the elderly increased. From 1987 to
1992, inpatient admissions for persons age 65 and older
increased at an average annual rate of 1.6 percent. From 1993
to 1995, growth in hospital admissions of elderly patients
ranged from 2.0 percent-2.9 percent. In 1996, however, there
was a much smaller increase of only 0.4 percent in the number
of hospital admissions for the elderly. Admissions for the
elderly grew at a slightly higher rate (1.4 percent) in 1997.
The average length of stay in a hospital for elderly
patients is higher than that for patients under the age of 65.
In 1997, the average length of stay for a person over the age
of 65 was 6.5 days; the average length of stay for a person
under the age of 65 was 4.7 days, a difference of almost 2
days. This difference is narrower than in the past, however. In
1978, the average length of stay for those over the age of 65
versus those under the age of 65 was 10.6 days and 6.0 days,
respectively (a difference of over 4 days). While the average
stay for both groups has declined over time, the narrowing of
the gap between them can be attributed to the larger decreases
in the average stay for elderly patients. Between 1992 and
1997, the average hospital stay for a patient over age 65
declined from 8.3 days to 6.5 days, a decrease of 21.6 percent.
During this same time period, the average stay for a patient
under age 65 declined from 5.2 days to 4.7 days, a decrease of
only 9.6 percent.
4. Physicians' Services
Utilization of physicians' services increases with age. In
1998, the population as a whole made over 1 billion ambulatory
care visits to physicians, which translates to 378 visits per
100 persons. Visits by patients age 65 and over amounted to 697
visits per 100 persons, and those by patients age 75 and over
amounted to 764 visits per 100 persons. For each of these
groups, over 80 percent of visits occurred at a physician's
office, as opposed to a hospital outpatient department or a
hospital emergency departments.
Physician services is the second largest component of
personal health care expenditures. In 1999, $269.4 billion was
spent on this category of health care, representing 22.2
percent of all health care expenditures. In 1960, $5.4 billion
was spent on physician services, and by 1970, spending had
reached $47.1 billion. This increase represents an average
annual growth rate of 10.1 percent. Growth in physician
expenditures was slightly higher in the following two decades.
From 1971 to 1980, spending on physician services grew at an
average annual rate of 12.9 percent, and from 1981 to 1990,
spending on physician services grew at an average annual rate
of 12.8 percent. In the 1990's, however, the annual rate of
growth in payments for physician services was slower than the
previous three decades. From 1991 to 1999, expenditures on
physician services grew at an average annual rate of only 6.1
percent, a rate that is less than half of that experienced
during the 1970's and 1980's. This slowdown in the rate of
growth could be attributable to several factors, including
adjustments in private sector payment systems, reflecting
Medicare's fee schedule (see Chapter 8); and increased use of
managed care.
In 1999, approximately 11.4 percent of the cost of
physician services was paid out-of-pocket. These payments
include copayments, deductibles, or in-full payments for
services not covered by health insurance plans. Like
expenditures for hospital services, the share of physician
costs paid directly by individuals has declined sharply since
the 1960's. However, unlike hospital services, the single
largest payer for physician services is not the Federal
Government, but rather private health insurance companies. In
1960, private health insurers contributed 29.8 percent of the
total; by 1990, this figure had reached 43.0 percent. In 1999,
private health insurers paid for 47.8 percent of all physician
services.
Medicare spending for physician services was $54.7 billion
in 1999, or 20.3 percent of total funding for care by
physicians. In comparison, Medicare paid for only 11.8 percent,
or $1.6 billion, of total physician service expenditures in
1970. Between 1971 and 1990, the average annual rate of growth
in Medicare payments for physician services was 15.7 percent.
National payments for physician services in this time period
grew at an average annual rate of 12.9 percent. Because of
changes in the Medicare physician payment system, the growth of
Medicare spending for physician services has decelerated
substantially. Medicare physician payments grew at an average
annual rate of 6.1 percent between 1990 and 1999, compared with
5.5 percent for national physician payments during the same
time period.
5. Nursing Home and Home Health Costs
Long-term care refers to a broad range of medical, social,
and personal care, and supportive services needed by
individuals who have lost some capacity for self-care because
of a chronic illness or condition. Services are provided either
in a nursing home or in home and community-based care settings.
The need for long-term care is often measured by assessing
limitations in a person's capacity to manage certain functions.
These are referred to as limitations in ADLs, ``activities of
daily living,'' which include self-care basics such as
dressing, toileting, moving from one place to another, and
eating. Another set of limitations, ``instrumental activities
of daily living,'' or IADLs, describe difficulties in
performing household chores and social tasks.
In its estimate of total national heath expenditures, CMS
includes spending for nursing home and home health care. The
total for these two categories of services amounted to $123.1
billion in 1999, and includes all age groups needing long-term
care. However, this amount excludes $11 billion spent under the
Medicaid Home and Community Based Waiver program.
In 1999, 73.1 percent of long-term care spending, or $90.0
billion, was for nursing home care. Nursing home care
represented 7.4 percent and home care services represented 2.7
percent of national health care expenditures. The cost of long-
term care can be catastrophic. The average cost of nursing home
care is in excess of $40,000 a year. Senior citizens who must
enter a nursing home encounter significant uncovered liability
for this care with out-of-pocket payments by the elderly and
their families comprising 26.6 percent of nursing home spending
in 1999. Private insurance coverage of nursing home services is
currently very limited, and covered only 8.4 percent of
spending in 1999. The elderly can qualify for Medicaid
assistance with nursing home expenses, but only after they have
depleted their income and resources on the cost of care.
Federal and state Medicaid funds finance a growing portion
of the share of nursing home care--47.0 percent in 1999.
Medicare's role as a payer for nursing home care has also
increased in the last several years, from 3.2 percent in 1990
to 10.7 percent in 1999. This accounts for much of the increase
in the Federal Government's share of nursing home spending,
which rose from 30.0 percent in 1990 to 39.5 percent in 1999.
About 1.5 million Americans over the age of 65 were
receiving nursing home care in 1997. This represented only 4.3
percent of the aged, however; most elderly prefer to use long-
term care services in the home and community.
Comparatively little long-term care spending is for these
alternative sources of care, with home health care spending at
$33.1 billion in 1999. In calendar year 1999, Medicare paid
$8.7 billion for home health services, or 26.4 percent of the
total. It should be noted that this total for home health
excludes spending for non-medical home care services needed by
many chronically ill and impaired persons. Sources of funding
for these services include the Older Americans Act, the Social
Services Block Grant, state programs, and out-of-pocket
payments.
Also, while Americans are not entering nursing homes at the
same rate as they have in previous years, public policy experts
are concerned about the large future commitment of public
funding to long term care. The elderly (65 years and over)
population is the fastest growing age group in the U.S. In
1999, there were 34.5 million people aged 65 and over,
representing 12.7 percent of the population. According to
Census projections, there will be 82.0 million people ages 65
and over (representing 20.3 percent of the population) by the
year 2050.
Although chronic conditions occur in individuals of all
ages, their incidence, especially as they result in disability,
increases with age. The population ages 85 and over is growing
especially fast and is the age group most likely to need
nursing home care. This group is projected to more than double
from nearly 4.2 million (1.5 percent of the population) in 1999
to 8.9 million (2.5 percent) in 2030, then to more than double
again in size to 19.4 million (4.8 percent) in 2050.
6. Prescription Drugs
(a) background
According to data from CMS's National Health Expenditures,
in 1999, prescription drug expenditures in the United States
were approximately $99.6 billion, or about 8.2 percent of total
health care spending. This figure measures spending for
prescription drugs purchased from retail pharmacies, including
community pharmacies, grocery store pharmacies, mail-order
facilities, and mass-merchandising establishments. The spending
figure is also adjusted to account for manufacturers' rebates
to third-party payers. However, it does not include the value
of drugs provided by hospitals, nursing homes, or health
professionals. These drug costs are included with estimates of
spending for those providers' services.
In recent years, the rate of growth in spending for
prescription drugs has risen at a faster rate than other
categories of health care spending. For example, between 1996
and 1999, spending on hospital care grew 9.8 percent, physician
services spending rose 17.4 percent, and dental services
spending grew 19.7 percent. Spending on prescription drugs in
the same period grew 48.2 percent.
(b) issues for older Americans
(1) Prescription Drug Coverage Among Older Americans
Most older Americans receive health insurance coverage
through the Medicare program. However, Medicare provides
limited coverage for drugs. The program provides coverage for
drugs administered in a hospital or skilled nursing facility
and for some drugs administered by physicians, but does not
generally provide coverage for outpatient prescription drugs.
For those that it does cover payments are made under Part B of
the program. In 1999, Medicare, which covered approximately 40
million beneficiaries (35 million of whom were elderly), paid
$2.0 billion for outpatient prescription drugs.
Medicare provides coverage for drugs which cannot be self-
administered and are ``incident to'' a physician's professional
service. Coverage is generally limited to those drugs which are
administered by injection.
Despite the general limitation on coverage for outpatient
drugs, the law specifically authorizes coverage for certain
classes of drugs: those used for the treatment of anemia in
dialysis patients, immunosuppressive drugs for 3 years
following an organ transplant paid for by Medicare, certain
oral cancer and associated anti-nausea drugs, and certain
immunizations.
Most beneficiaries have some form of private or public
health insurance coverage to supplement Medicare. In 1998, 93
percent had additional insurance coverage through managed care
organizations, employer-sponsored plans, Medigap (three of the
10 standardized Medigap plans offer some level of drug
coverage), Medicaid, or other public sources. However, many
persons with supplementary coverage have limited or no coverage
for prescription drug costs. In 1998, 73 percent of
beneficiaries had some drug insurance coverage. According to an
analysis of the 1998 Medicare Current Beneficiary Survey, 92
percent of beneficiaries enrolled in Medicare HMOs, 89 percent
of beneficiaries with Medicaid, 90 percent of beneficiaries
with employer-sponsored plans, and 43 percent of those with
Medigap plans had primary drug coverage. Beneficiaries with
supplementary prescription drug coverage use prescriptions at a
considerably higher rate than those without supplementary
coverage. In 1998, persons with coverage used an average of
24.4 prescriptions per year while those without coverage used
an average of 16.7 prescriptions per year. In addition, several
states and the pharmaceutical industry offer assistance with
prescription drug costs for low-income individuals.
(2) Prescription Drug Spending by Older Americans
In 1998, spending for prescription drugs by persons aged 65
and over amounted to about $30 billion. On a per capita basis,
the average Medicare beneficiary in the community consumed $878
worth of drugs. Of this amount, beneficiaries paid, on average,
$384 (43.8 percent) out-of-pocket. For the population as a
whole, 36.7 percent of all drug expenditures in 1998 were paid
out-of-pocket.
The elderly devote a larger share of their household
expenditures to prescription drugs than other segments of the
population. In 1998, persons over age 65 spent 2.7 percent of
their total household expenditures on drugs. Persons between
ages 25 and 34 spent 0.4 percent; persons between ages 35 and
44 spent 0.6 percent; persons between ages 45 and 54 spent 0.8
percent; and persons between ages 55 and 64 spent 1.1 percent.
The higher percentage of household expenditures spent on drugs
by the elderly reflects the fact that this group has both
higher average drug spending and lower total household
expenditures than the rest of the population.
Out-of-pocket spending varies depending on the
beneficiary's coverage by supplemental health insurance. The
National Academy of Social Insurance (NASI) examined 1999 out-
of-pocket drug expenditures for non-institutionalized Medicare
beneficiaries who are not in Medicare+Choice plans. NASI
estimates that 17 percent will have no drug expenditures. For
the remainder, 34 percent will have out-of-pocket expenditures
under $200, 21 percent will spend $200-$499, 15 percent between
$500 and $999, 7 percent between $1,000 and $1,499, and 3
percent between $1,500 and $1,999. An estimated 4 percent will
have out-of-pocket expenses of $2,000 or more.
Some observers contend that prices paid by the elderly
paying cash for their prescriptions are significantly higher
than those paid by large purchasers, such as managed care
organizations and the Federal Government. One study conducted
in 1998 by staff on the House Government Reform and Oversight
Committee surveyed the prices of particular drugs used often by
seniors. The results of their findings, cited in Table 1, list
bulk and retail prices for an average monthly supply. Some
analysts have criticized the methodology used in the study. One
analysis of the data cites a problem with comparing the bulk
buyer prices on the Federal Supply Schedule (FSS) with retail
prices. Whereas the FSS price is the ``direct-from-the-
manufacturer'' price, the retail price includes markups made
over and above the manufacturer price at both the wholesale and
retail levels.
------------------------------------------------------------------------
Retail
Prices prices
Drug name for Bulk paid by
Buyers senior
citizens
------------------------------------------------------------------------
Synthroid......................................... $1.75 $27.05
Micronase......................................... $10.05 $46.50
Zocor............................................. $42.95 $104.80
Prilosec.......................................... $56.38 $111.94
Norvasc........................................... $58.83 $113.77
Procardia XL...................................... $67.35 $126.86
Zoloft............................................ $123.88 $213.72
------------------------------------------------------------------------
Source: House Government Reform and Oversight Committee, Democratic
Staff Report
(b) drug industry issues
(1) Growth in Prescription Drug Expenditures
Spending on prescription drugs grew 16.9 percent in 1999.
According to the Bureau of Labor Statistics, a relatively small
portion of this aggregate spending growth was due to price
inflation. A much larger portion of the growth in spending was
due to non-price factors, such as increased volume of purchases
of existing drugs and the introduction of new products. In
1999, the consumer price index (CPI) for prescription drugs
increased 5.7 percent, while volume and other non-price factors
increased 10.6 percent. In fact, drug price inflation, on
average, has been slightly less than that for medical care as a
whole. Between 1991 and 1999, prescription drug prices
increased at an average annual rate of 4.0 percent whereas
overall medical care prices increased at an average annual rate
of 4.4 percent.
Health plan sponsors have experienced large increases in
their prescription drug costs. A recent Newsweek article stated
that the automaker General Motors spent $1.1 billion on
prescription drugs in 2000, accounting for more than 25 percent
of its medical spending. It is expected that the company's drug
expenditures will increase 22 percent in 2001.
Profit margins for the pharmaceutical industry are
relatively high. In 1999 the pharmaceutical industry had the
highest return on revenues of any industry, as measured by
Fortune magazine. According to Fortune, the pharmaceutical
profits were 18.6 percent of revenues in 1999; by comparison,
the median return on revenue for the top 500 companies was 5.0
percent. However, this measure of profitability is based on
conventional accounting practices that do not account for the
risk involved in conducting research and development. A 1994
study by the Congressional Budget Office stated that, with
proper accounting for the inherent riskiness in pharmaceutical
research and development, profit margins would be only slightly
above industry in general.
(2) Research and Development
The American pharmaceutical industry contends that higher
profits are necessary to draw the investment capital needed for
research and development. The industry has been described as
one of the most innovative, producing almost half of the new
drugs introduced internationally. About 20 percent of the
industry's revenues are invested in R&D compared to 3 percent-6
percent for other industries. Estimates of the costs of
developing a successful drug range from $116 million to $500
million (in 1990 dollars). The drug development process,
including the pre-clinical trial phase, clinical trials, and
the approval phase, can take over 15 years. From the large
number of potential drugs that exist at the beginning of the
development process, only a relatively small percentage go on
the market. New drugs have up to 20 years of patent protection,
after which the generic drug industry can market their
equivalents of brand name drugs. However, Food and Drug
Administration (FDA) approval for new drugs sometimes comes
several years after the drug was patented. The drug industry
maintains that this limits their ability to recover the cost of
bringing a new drug to market.
(3) Health Benefits and Cost-Effectiveness of Drugs
The pharmaceutical industry argues that another reason for
increasing expenditures on drugs is that drugs are used as
substitutes for other more expensive health treatments. There
are several studies that show cost savings result when drugs
are used to treat certain conditions. For example, a study by
the Agency for Health Care Policy and Research found that
40,000 strokes per year could be prevented through the use of a
blood-thinning drug at a savings of $600 million per year. A
study published in the New England Journal of Medicine found
that providing treatment with beta-blockers to patients
following a heart attack can reduce deaths by 40 percent.
Another study published in the New England Journal of Medicine
showed that an ACE (angiotensin converting enzyme) inhibitor
given to patients for congestive heart failure saved $9,000 per
year in hospital costs and reduced deaths by 16 percent. New
drugs used to treat AIDS have dramatically reduced death from
the disease and decreased hospitalization costs. But, according
to a study by the drug manufacturer Merck, the short-term costs
of treating HIV-positive patients have not dropped; they have
just been transferred from hospitals to drugs.
(4) Role of Large Payers
Another issue facing the drug industry is the role of large
payers, such as insurance companies, hospitals, HMOs and other
managed care organizations, and Federal and state governments.
Through the use of formularies (lists of drugs approved for
use), insurers may limit the type of drugs that they will
cover. Their large market share allows them the clout to
negotiate significant discounts on prices paid to drug
manufacturers. Additionally, manufacturers negotiate contracts
with Federal purchasers buying drugs through the Federal Supply
Schedule. Under the Medicaid program, manufacturers must
provide rebates to states for drugs purchased by beneficiaries.
(5) Generic Manufacturers
Competition from generic drug manufacturers also affects
sales in the brand name pharmaceutical industry. The Drug Price
Competition and Patent Term Restoration Act of 1984 (P.L. 98-
417), referred to as the Hatch-Waxman Act, provided a statutory
mechanism which enabled generic drug producers to bring their
equivalent products to market immediately upon expiration of
the brand name drug's patent. According to one market analyst,
the generic drug market share increased from 18.6 percent in
1984 to 42.8 percent in 1995. Managed care organizations and
other large purchasers encourage the use of less expensive
generic brands.
Brand name manufacturers employ methods to diminish the
encroachment on their markets by generic manufacturers. In some
instances, they release a new, improved version of a drug just
as the patent on the old drug expires. They also employ direct-
to-consumer (DTC) advertising to encourage individuals to ask
their physicians to prescribe specific drugs by name. DTC
advertising, once thought inappropriate by the drug industry,
is used to supplement industry representative visits to
physicians and hospitals. Between 1991 and 1999, DTC
advertising increased from $55.3 million to $1.9 billion.
(c) Congressional response
(1) Previous Efforts to Expand Medicare's Coverage of Prescription
Drugs
Since its inception in 1965, Congress has been concerned
over the lack of prescription drug coverage in the Medicare
program. Over the past decade, two major attempts were made to
add this coverage. The first was the Medicare Catastrophic
Coverage Act of 1988 (P.L. 100-366). It contained catastrophic
prescription drug coverage subject to a $600 deductible and 50
percent coinsurance. The Act was repealed the following year.
The second attempt was during the health reform debate in 1994.
The Health Security Act, proposed by the Clinton
Administration, would have added a prescription drug benefit to
Medicare Part B beginning in 1996. After a $250 deductible had
been met by the beneficiary, Medicare would pay 80 percent of
the cost of each drug; the beneficiary would pay the remaining
20 percent. This plan was never enacted into law.
(2) Current Debate
Several proposals were introduced in the 106th Congress
affecting prescription drugs for Medicare beneficiaries, some
of which have been re-introduced in the 107th Congress. Most of
the proposals introduced in the 106th Congress would have
relied on pharmacy benefit managers or similar entities to
administer the benefit and negotiate with manufacturers. Some
would have extended coverage to the entire population while
others would have limited coverage to low-income beneficiaries.
A few measures would not have added a new benefit, but rather
would have focused on reducing the price beneficiaries pay for
drugs.
In July 2001, President Bush unveiled a voluntary program
to encourage seniors to enroll in prescription drug card plans.
Under the plan, the government would approve plans that meet
minimum criteria. Seniors would pay a one-time fee not to
exceed $25 to enroll in a plan. In return, the seniors would
receive discounts on prescription drugs similar to those
received by health plans and other third-party buyers. The
program is intended to provide an interim solution until a drug
benefit for the elderly is enacted.
A number of issues must be considered in formulating a drug
benefit for Medicare beneficiaries.
Persons Covered.--Some observers have recommended extending
prescription drug coverage to the entire Medicare population;
others have suggested targeting a new benefit toward those most
in need, such as those with incomes below 135 percent of
poverty who are not eligible for full Medicaid benefits.
Medigap Mandates.--As stated earlier, only three of the 10
standardized Medigap plans offer some level of drug coverage.
Many observers have noted that only persons who expect to
utilize a significant quantity of prescriptions actually
purchase Medigap plans with drug coverage. This adverse
selection tends to drive up the premium costs of these
policies. Some have suggested that all Medigap plans be
required to offer prescription drug coverage. Unless the
benefit were identical across all plans, there would still be
some adverse selection. In addition, requiring prescription
drug coverage could potentially make any Medigap coverage
unaffordable for some beneficiaries, and result in less health
coverage for any beneficiary forced to drop their Medigap
coverage.
Scope of Benefits.--There is debate as to whether the
benefit should be catastrophic or more comprehensive in scope.
A catastrophic benefit would only help a small portion of the
population and would likely have a high deductible and perhaps
high coinsurance charges. A more comprehensive benefit would
have lower beneficiary cost-sharing charges, perhaps more
comparable to current beneficiary cost-sharing under Part B
($100 deductible; 20 percent coinsurance).
Cost Control Strategies.--There is currently concern that
Medicare pays more for prescription drugs than do other
government programs or private managed care organizations. Some
observers have suggested that cost control methods should be
adopted. However, the pharmaceutical industry is concerned that
cost controls could shrink industry profits and hinder future
research and development of new drugs. Possible cost control
methods being considered include drug formularies,
manufacturers' discounts, rebates, prior authorization for use
of certain categories of drugs, implementation of quantity
limits (for example, drugs limited to 30- or 60-day supplies
with a limited number of refills), and utilization review.
Pharmacy Benefit Managers (PBMs).--A growing number of
health insurers have contracted with PBMs, companies which
manage pharmacy benefit programs on behalf of health plans.
Through the use of various strategies (developing retail
pharmacy network arrangements, operating mail order pharmacies,
developing formularies, negotiating discounts, etc.) PBMs are
credited with controlling rapidly rising pharmacy costs. They
have been attributed with saving the Federal Employees Health
Benefits Program plans significant costs.
Cost and Financing.--The issues of cost and financing also
must be addressed. The Congressional Budget Office (CBO) has
estimated that a new benefit with a $250 deductible, 50 percent
coinsurance, an annual cap on out-of-pocket costs of $4,000,
and beneficiary premiums that would cover 50 percent of the
program's costs would cost the Federal Government $29.6 billion
in 2004. NASI has estimated that a drug benefit could add
between 7-13 percent to Medicare's cost over the next decade.
There is no consensus on how a drug benefit would be
financed. Currently, Medicare's limited drug benefit is funded
under Part B of the program. Under Part B, beneficiary premiums
cover 25 percent of program costs and Federal general revenues
cover the remaining 75 percent. The addition of a comprehensive
drug benefit under this arrangement would mean a substantial
increase in overall Medicare expenditures paid by general
revenues, and a significant increase in the Part B premium,
above current CBO projections. It is expected that financing a
drug benefit will be one of the most difficult issues to
resolve.
7. Health Care for an Aging U.S. Population
Advances in medical care, medical research, and public
health have led to a significant improvement in the health
status of Americans during the twentieth century. Between 1900
and 1998, the average life expectancy at birth increased from
46.4 years to 73.9 years for men, and from 49.0 to 79.4 years
for women. The American population is aging at an accelerating
rate, due to increasing longevity and the number of ``baby
boomers'' who will begin to reach age 65 in the year 2011.
Currently, those aged 65 and over comprise 12.7 percent of the
population. By 2015, they will constitute 14.7 percent, and
will be 20.0 percent by 2030. The fastest growing group among
those 65 and over is people aged 85 and over. Currently 1.5
percent of the population, by 2050 they will comprise 4.8
percent.
Increased longevity raises questions about the quality of
these extended years and whether they can be spent as healthy,
active members of the community. According to the 1998 Medicare
Current Beneficiary Survey, 78.9 percent of the elderly aged 65
to 74 rated their health as good, very good, or excellent.
However, this number falls to 63.9 percent in the 85+ group.
While only 6.4 percent of the 65-74 age group reported that
their health was poor, 10.8 percent of the 85+ group reported
their health as poor. Age is not the only factor affecting
health status. Among individuals aged 65-74, 18.7 percent of
whites and 15.1 percent of Hispanics reported their health as
excellent, compared to 11.6 percent of blacks. Only 10.5
percent of whites and 10.8 percent of Hispanics aged 85 and
over reported their health as poor; 14.9 percent of blacks in
the same age group reported their health as poor. Another
factor affecting self-reported health status is insurance
coverage. Of those beneficiaries with only Medicare fee-for-
service coverage, 62.2 percent reported their health as
excellent, very good, or good; 15.1 percent reported poor
health. Those percentages for beneficiaries in Medicare managed
care were 79.1 percent and 5.9 percent. Beneficiaries with
Medicaid as their insurance to supplement Medicare reported
poorer health: 48.7 percent reported excellent, very good, or
good health, and 20.5 percent reported poor health. People with
both individually purchased and employer-sponsored private
health insurance to supplement their Medicare coverage reported
the best health in 1998: 84.4 percent in the good-very good-
excellent category, and only 4.4 percent in the poor category.
Although most elderly Medicare beneficiaries consider their
health good, 68.5 percent report having two or more chronic
conditions. The most common of these are arthritis and
hypertension. With age, rates of hearing and visual impairments
also increase rapidly. Alzheimer's disease is expected to
become a significant source of disability and mortality in
coming years, as the numbers of the oldest old grow. According
to the National Institute on Aging, as many as 4 million people
in the United States and about half the persons 85 years and
older have symptoms.
The extent of need for personal assistance with everyday
activities (such as dressing, eating, moving about, and
toileting) also increases with age and is an indicator of need
for health and social services. Non-institutionalized elderly
persons reporting the need for personal assistance with
everyday activities in 1998 increased with age, from only 31.5
percent of persons aged 65 to 74 up to 79.4 percent of those
aged 85 and older.
Although the economic status of the elderly as a group has
improved over the past 30 years, many elderly continue to live
on very modest incomes. In 1998, 65.4 percent of elderly
beneficiaries reported incomes of less than $25,000, and 25.3
percent had incomes of less than $10,000. Medicare coverage is
an integral part of retirement planning for the majority of the
elderly. However, there are a number of particularly vulnerable
subgroups within the Medicare population who depend heavily on
the program to meet all of their basic health needs, including
the disabled; the ``oldest'' old, particularly women over the
age of 85; and the poor elderly. Much of Medicare payments on
behalf of elderly beneficiaries are directed toward those
beneficiaries with modest incomes: 29.7 percent of elderly
spending is on behalf of those with incomes of less than
$10,000 and 72.5 percent of elderly spending is on behalf of
those with incomes of less than $25,000.
Most persons devote a portion of their household
expenditures to health care. This spending includes payments
for health insurance, medical services, prescription drugs, and
medical supplies not covered by Medicare. The elderly, however,
direct more of their household expenditures toward health care
than any other segment of the population. In 1999, persons age
65 and over spent 11.4 percent of their household expenditures
on health care. By contrast, persons between ages 25 and 34
spent 3.2 percent; persons between ages 35 and 44 spent 3.8
percent; persons between ages 45 and 54 spent 4.7 percent; and
persons between ages 55 and 64 spent 6.2 percent. The higher
percentage spent by the elderly reflects several factors,
including their higher usage of health care services, payments
for long-term care services, the premiums paid by those who
purchase supplemental insurance (i.e., ``Medigap'') policies,
and their lower household spending on goods and services in
general.
Because per capita, the elderly consume four times the
level of health spending as the under 65 population, the
demands of an aging population for health services will
continue to be a major public policy issue. One major concern
is the availability and affordability of long term care. It is
difficult however to predict the numbers of people that will
need this service. Much depends on whether medical technology,
which has contributed to the lengthening life expectancy, can
increase active life expectancy among the oldest old. If
symptoms of diseases which disproportionately afflict the aged
could be delayed by five or 10 years, more of the end of life
could be lived independently with less need for expensive
medical services.
CHAPTER 8
MEDICARE
A. BACKGROUND
Medicare was enacted in 1965 to insure older Americans for
the cost of acute health care. Since then, Medicare has
provided millions of older Americans with access to quality
hospital care and physician services at affordable costs. In
FY2000, Medicare insured approximately 39 million aged and
disabled individuals at an estimated cost of $201.2 billion
($221.8 billion in gross outlays, offset by $20.6 billion in
beneficiary premium payments). Medicare is the second most
costly Federal domestic program, exceeded only by the Social
Security program. It is administered by the Centers for
Medicare and Medicaid Services (CMS), formerly the Health Care
Financing Administration (HCFA).
Medicare (authorized under Title XVIII of the Social
Security Act) provides health insurance protection to most
individuals age 65 and older, to persons who have been entitled
to Social Security or Railroad Retirement benefits because they
are disabled, and to certain workers and their dependents who
need kidney transplantation or dialysis. Medicare is a Federal
program with a uniform eligibility and benefit structure
throughout the United States. It is available to insured
persons without regard to their income or assets. Medicare is
composed of the Hospital Insurance (HI) program (Part A) and
the Supplementary Medical Insurance (SMI) program (Part B). A
new Medicare+Choice program (Part C), providing managed care
options for beneficiaries, was established by the Balanced
Budget Act of 1997 (BBA 97, P.L. 105-33).
Medicare covers most of the costs of hospitalization and a
substantial share of the costs for physician services. However,
Medicare does not cover all of these costs, and there are some
services, such as long term care and prescription drug costs,
which the program does not cover. To cover some of these
expenses, largely cost-sharing charges required under the
program, in 1998, approximately 76.7 percent of Medicare
beneficiaries had supplemental coverage, including employer-
based coverage, individually purchased protection (known as
Medigap), and Medicaid. Another 16.5 percent were enrolled in
managed care organizations, which are required to provide the
same coverage to beneficiaries as traditional fee-for-service
Medicare.
One of the greatest challenges in the area of Medicare
policy is the need to rein in program costs while assuring that
elderly and disabled Americans have access to affordable, high
quality health care. The 105th Congress passed the Balanced
Budget Act of 1997 which achieved estimated Medicare savings of
$116 billion over the period of FY1998 to FY2002. It provided
for new payment systems for skilled nursing facilities, home
health agencies, and other service categories and expanded
Medicare's coverage of preventive services. It modified payment
methods for managed care organizations and established the
Medicare+Choice program which added new managed care options
for beneficiaries, including preferred provider organizations,
provider-sponsored organizations, and private fee-for-service
plans. It also provided for a demonstration project allowing a
limited number of beneficiaries to establish medical savings
accounts in conjunction with a high deductible health insurance
plan.
In the first years following the passage of the Balanced
Budget Act of 1997, Medicare spending set records for low or
declining rates of program growth. In fiscal year 1998, the
Medicare growth rate slowed to a then record low of just 1.5
percent for the entire year, an amount less than would be
expected allowing for increases in enrollment and for
inflation. The following year set a new record, when, for the
first time in the program's history, Medicare spending dropped
from 1 year to the next.
Congress first addressed the issue of slower rates of
growth in Medicare spending with the passage of the Balanced
Budget Refinement Act of 1999 (BBRA, P.L. 106-113). At the time
of passage, the Congressional Budget Office (CBO) estimated
that the BBRA would add approximately $16 billion back into the
Medicare program for 2001-2005. At the end of the 106th
Congress, a second piece of legislation was passed, the
Medicare, Medicaid, and SCHIP Benefits Improvement and
Protection Act of 2000 (BIPA, P.L. 106-554), that CBO estimates
will increase Medicare spending by $32.3 billion over the 5-
year period (2001-2005) and $81.5 billion over the 10-year
period (2001-2010). The Medicare legislative proposals were
designed to increase payments for many of the services covered
by the Medicare program, such as hospitals, Medicare+Choice
organizations, home health agencies, and skilled nursing
facilities. The legislation also included limited expansions of
certain preventive benefits and modified the appeals and
coverage processes, but did not address the issue of
prescription drug coverage.
1. Hospital Insurance Program (Part A)
Most Americans age 65 and older are automatically entitled
to benefits under Part A. Those who are not automatically
entitled (that is, those not eligible for monthly Social
Security or Railroad Retirement cash benefits) may obtain Part
A coverage by paying a monthly premium covering the full
actuarial cost of such coverage. The maximum monthly premium
for those persons is $300 in 2001. Also eligible for Part A
coverage are individuals who for 2 years have been receiving
monthly Social Security disability benefits or Railroad
Retirement disability payments.
Part A is financed principally through a special hospital
insurance (HI) payroll tax levied on employees, employers, and
the self-employed. Each worker and employer pays the HI tax of
1.45 percent on covered earnings. The self-employed pay both
the employer and employee shares. In FY2000, payroll taxes for
the HI Trust Fund amounted to an estimated $137.7 billion,
accounting for 86 percent of HI income. An estimated $127.9
billion in Part A benefit payments were made in fiscal year
2000.
Benefits included under Part A, in addition to inpatient
hospital care, are skilled nursing facility (SNF) care, some
home health care, and hospice care. Beneficiaries are subject
to deductible and coinsurance amounts for these services. For
2001, these amounts are:
for inpatient hospital care, the beneficiary
is subject to a deductible of $792 for the first 60
days of care in each benefit period; for days 61
through 90, a daily coinsurance payment of $198 is
required; for hospital stays longer than 90 days, a
beneficiary may elect to draw upon a 60-day ``lifetime
reserve.'' A coinsurance payment of $396 is required
for each lifetime reserve day.
for skilled nursing facility (SNF) services,
for each benefit period, there is no coinsurance
payment required for the first 20 days, and a daily $99
coinsurance payment for the 21st through the 100th day.
No SNF coverage is provided after 100 days.
for hospice care, a limited coinsurance
payment is required for prescription drug coverage and
inpatient respite care.
for the home health benefit, no beneficiary
cost sharing is required.
A full discussion of SNF and home health benefits is
provided in the next chapter.
Hospital reimbursement.--Most hospitals are reimbursed for
their Medicare patients on a prospective basis. The Medicare
prospective payment system (PPS) pays hospitals fixed amounts
which have been established before the services are provided.
The payments are based on the average costs for treating a
specific diagnosis. For each beneficiary discharged from a
hospital, Medicare pays one lump sum amount depending on the
patient's primary diagnosis during the hospital stay. There are
approximately 500 diagnosis-related group (DRG) payment rates.
If a hospital can treat a patient for less than the DRG amount,
it can keep the savings. If treatment for the patient costs
more, the hospital must absorb the loss. Hospitals are not
allowed to charge beneficiaries any difference between hospital
costs and the Medicare DRG payment. Because the amount a
hospital receives from Medicare does not depend on the amount
or type of services delivered to the patient, there are no
incentives to overuse services.
The base PPS rate is updated annually by a measure (known
as the Market Basket Index, or MBI) of the costs of goods and
services used by hospitals. Since hospital payments represent a
significant part of total Medicare spending, and 68 percent of
total Part A benefit payments, reductions in the growth of
Medicare payments to hospitals provides significant budgetary
savings.
In addition to the basic DRG payment, hospitals may also
receive certain adjustments to their Medicare payments.
Teaching hospitals may receive adjustments for indirect medical
education costs (those not directly related to medical
education but which are present in teaching hospitals, such as
a higher number of more severely ill patients or an increased
use of diagnostic testing by residents and interns). Certain
hospitals which serve a higher number of low-income patients,
known as Disproportionate Share Hospitals (DSH), also receive
adjustments to their Medicare payments. Adjustments are also
made to hospitals for atypical cases, known as ``outliers,''
which require either extremely long lengths of stay or
extraordinarily high treatment costs.
Outside of the PPS, Medicare makes additional payments to
teaching hospitals for the direct costs of graduate medical
education (GME), such as the salaries of residents and faculty.
These payments are hospital-specific and include hospital-
specific caps on the number of residents. Incentive payments
are made to hospitals which voluntarily reduce their number of
residents. Also outside of the PPS, Medicare pays hospitals for
the cost of bad debts attributable to beneficiaries' not making
their deductible or coinsurance payments.
There are five types of specialty hospitals (psychiatric,
rehabilitation, children's, long-term care, and cancer) and two
types of distinct-part units in general hospitals (psychiatric
and rehabilitation) that are paid on the basis of reasonable
costs, subject to ceilings or upper target amounts, and the DRG
system does not apply.
2. Supplementary Medical Insurance (Part B)
Part B of Medicare, also called Supplementary Medical
Insurance (SMI), is a voluntary program. Anyone eligible for
Part A and anyone over age 65 can obtain Part B coverage by
paying a monthly premium ($50 in 2001). Beneficiary premiums
finance 25 percent of program costs with Federal general
revenues covering the remaining 75 percent. Part B covers
physicians' services, outpatient hospital services, physical
therapy, diagnostic and X-ray services, durable medical
equipment, some home health care, and certain other services.
Beneficiaries using covered services are generally subject to a
$100 deductible and 20 percent coinsurance charges.
Physician Payment.--The Omnibus Budget Reconciliation Act
of 1989 made substantial changes in the way Medicare pays
physicians, effective in 1992. A fee schedule was established
based on a relative value scale (RVS). The RVS is a method of
valuing individual services in relationship to each other. The
relative values reflect three factors: physician work (time,
skill, and intensity involved in the service), practice
expenses (office rents, employee wages), and malpractice costs.
These relative values are adjusted for approximately 90
different geographic locations. Geographically adjusted
relative values are converted into a dollar payment amount by a
figure known as the conversion factor. It is updated by the
``sustainable growth rate'' formula based on real gross
domestic product growth. This rate is intended to constrain
total spending for physician care.
A physician may choose whether or not to accept assignment
on a claim. Accepting assignment means that the physician
agrees to accept Medicare's fee schedule amount as payment in
full. Medicare pays the physician 80 percent of the fee
schedule amount, and the beneficiary pays the remaining 20
percent. When a physician agrees to accept assignment of all
Medicare claims in a given year, the physician is referred to
as a participating physician. Physicians who do not agree to
accept assignment on all Medicare claims in a given year are
referred to as nonparticipating physicians.
There are a number of incentives for physicians to become
participating physicians, chief of which is that the fee
schedule payment amount for nonparticipating physicians is only
95 percent of the recognized amount for participating
physicians. Nonparticipating physicians may charge
beneficiaries more than the fee schedule amount on nonassigned
claims; these balance billing charges are subject to certain
limits. The limit is 115 percent of the fee schedule amount for
nonparticipating physicians (which is only 9.25 percent higher
than the amount recognized for participating physicians, i.e.,
115 percent x .95 = 1.0925).
Private contracting.--Physicians are required to submit
claims for services provided to their Medicare patients. They
are subject to limits on the amounts they can bill these
patients for services covered by Medicare. Prior to BBA 97, the
law was interpreted to prohibit physicians from entering into
private contracts with Medicare beneficiaries to provide
services which would normally be paid for by Medicare, but for
which no Medicare claim would be submitted. BBA 97 permitted
private contracting under specified conditions. Among other
things, a contract, signed by the beneficiary and the
physician, must clearly indicate that the beneficiary agrees to
be responsible for payments for services rendered under the
contract. In addition, the beneficiary must acknowledge that no
Medicare charge limits apply. An affidavit, signed by the
physician and filed with the Secretary of Health and Human
Services, must be in effect at the time the services are
provided. Physicians entering into private contracts may not
receive any Medicare reimbursements for 2 years. The
beneficiary is not subject to the 2-year limit.
Outpatient services.--Medicare beneficiaries receive
services in a variety of outpatient settings, including
hospital outpatient departments (OPDs) and ambulatory surgical
centers (ASCs). In the past, Medicare reimbursed OPDs on a
reasonable cost basis with certain adjustments. Unlike most
other Part B services where beneficiary cost sharing is 20
percent of the approved Medicare payment, for OPD services,
beneficiary copayment may be 20 percent of the OPD's actual
charges. Because actual charges are higher than approved
payments, beneficiaries' ``effective copayment'' is often much
higher than 20 percent of the Medicare approved payment. Both
BBA 97 and BIPA included provisions to eventually correct this
situation. BIPA limited the copayment to no more than the
hospital inpatient deductible for that year. Additionally,
beginning in 2001, the beneficiary effective copayment rate for
outpatient services would be capped at 57 percent and would
steadily reduce until it reached 40 percent in 2006, eventually
declining to 20 percent in subsequent years.
Preventive care benefits.--Medicare covers health services
which are reasonable and necessary for the diagnosis and
treatment of illness of injury. Originally, the program did not
cover preventive services. However, in recent years, Congress
has responded to concerns about the lack of this coverage by
adding specific benefits to Medicare law. The program covers
the following preventive services (unless otherwise noted,
beneficiaries are liable for regular Part B cost-sharing
charges: $100 annual deductible and 20 percent coinsurance):
Pneumococcal pneumonia vaccination. The
benefit covers 100 percent (i.e., not subject to
deductible or coinsurance) of the reasonable costs of
the vaccine and its administration when prescribed by a
doctor.
Hepatitis B vaccination. Medicare covers
hepatitis B vaccinations for high- or intermediate-risk
beneficiaries when prescribed by a doctor.
Influenza vaccination. The benefit covers
100 percent of the cost of influenza virus vaccine and
its administration. Coverage does not require a
physician's prescription or supervision.
Screening Pap smears and pelvic examinations
for early detection of cervical and vaginal cancer. The
benefit includes the test, which must be prescribed by
a physician, its interpretation by a doctor, and a
screening pelvic examination (defined to include a
clinical breast examination), once every 2 years. The
law also provides for an annual screening pelvic
examination for certain high-risk individuals. The Pap
smear and screening pelvic examination benefits are not
subject to the deductible; beneficiaries are liable for
coinsurance payments for the screening pelvic
examinations.
Screening mammography for early detection of
breast cancer. The test is covered annually for all
women over age 39. It is not subject to the deductible.
Prostate cancer screening. Medicare covers
annual prostate cancer screening tests for men over age
50. The benefit covers digital rectal examinations and
prostate specific antigen (PSA) blood tests. After
2002, Medicare will cover other procedures determined
effective by the Secretary.
Colorectal cancer screening. Medicare
provides coverage of several screening procedures for
early detection of colorectal cancer: annual screening
fecal-occult blood tests for beneficiaries over age 49;
screening flexible sigmoidoscopy, every 4 years for
beneficiaries over age 49; screening colonoscopies are
covered every 2 years for high-risk beneficiaries. For
those not at high risk, screening colonoscopies are
covered not more often than 10 years after a previous
screening colonoscopy or 4 years after a previous
screening sigmoidoscopy. Barium enema tests can be
substituted for either of the two last procedures.
Diabetes self-management. Medicare began
covering educational and training services provided on
an outpatient basis by physicians or other certified
providers to qualified beneficiaries. Blood testing
strips and home blood glucose monitors are covered for
diabetics regardless of whether they are insulin-
dependent.
Bone mass measurement. Medicare covers the
cost of procedures used to measure bone mass, bone
loss, or bone quality for certain high-risk
beneficiaries.
Glaucoma screening. The tests, performed
under the supervision of an ophthalmologist or
optometrist, is covered annually for individuals at
high-risk for glaucoma. Tests include dilated eye
examinations with interocular pressure measurement and
a direct ophthalmoscopy or a slit-lamp biomicroscopic
examination.
Durable Medical Equipment (DME) and Prosthetics and
Orthotics (PO).--Medicare covers a wide variety of DME and PO.
As defined, DME must be equipment that can withstand repeated
use, is used primarily to serve a medical purpose, generally
would not be useful in the absence of illness or injury, and is
appropriate for use in the home. Prosthetics and orthotics are
items which replace all or part of an internal organ, other
devices such as cardiac pacemakers, prostheses, back braces,
and artificial limbs. DME and PO are reimbursed on the basis of
a fee schedule established by the Omnibus Budget Reconciliation
Act of 1987. Investigations have shown that Medicare payments
for some DME and PO are higher than those made by other health
care insurers, including the Department of Veterans Affairs
(VA), which use competitive bidding processes to establish
payment levels. BBA 97 required the Secretary to establish five
3-year competitive bidding demonstration projects, in which
suppliers of Part B items and services (except physician
services) compete for contracts to furnish Medicare
beneficiaries with these items and services. Currently, there
are demonstration sites in Polk County, Florida, and San
Antonio, Texas.
3. Medicare+Choice (Part C)
The Medicare+Choice program (M+C) was established by the
Balanced Budget Act of 1997. It provides expanded managed care
options for Medicare beneficiaries who are enrolled in both
Parts A and B. Beneficiaries may remain in the traditional fee-
for-service program or enroll in one of several managed care
and other health plan options:
Health Maintenance Organizations (HMOs)
allow beneficiaries to obtain services from a
designated network of doctors, hospitals, and other
health care providers, usually with little or no out-
of-pocket expenses. (This option has been available
since 1983.)
HMOs with a Point-of-Service (POS) option
allow beneficiaries to selectively go out of the
designated network of providers to receive services.
Higher out-of-pocket expenses are required when a
beneficiary goes out of the network.
Preferred Provider Organizations (PPOs) are
networks of providers which have contracted with a
health plan to provide services. Beneficiaries can
choose to go to providers outside the network, and the
plan will pay a percentage of the costs. The
beneficiary is responsible for the rest.
Provider-Sponsored Organizations (PSOs) are
similar in operation to an HMO, but they are generally
cooperative ventures among a group of providers (such
as hospitals and physicians) who directly assume the
financial risk of providing services.
Private Fee-for-Service (PFFS) plans. Under
these arrangements, the beneficiary chooses a private
indemnity plan. The plan, rather than the Medicare
program, decides what it will reimburse for services.
Medicare pays the private plan a premium to cover
traditional Medicare benefits. Providers are permitted
to bill beneficiaries beyond what the health plan pays,
up to a limit, and the beneficiary is responsible for
paying this additional amount. The beneficiary might
also be responsible for additional premiums.
Medical Savings Accounts (MSAs). BBA 97
authorized an MSA demonstration program for up to
390,000 participants. The beneficiary chooses a private
high-deductible (up to $6,000) insurance plan. Medicare
pays the premium for the plan and makes a deposit into
the beneficiary's MSA. The beneficiary uses the money
in the MSA to pay for services until the deductible is
met (and for other services not covered by the MSA
plan). There are no limits on what providers can charge
above amounts paid by the MSA.
A number of beneficiary protections were established. These
include a guarantee of beneficiary access to emergency care,
quality assurance and informational requirements for M+C
organizations, and external review, grievance, and appeal
requirements.
Payments to plans.--Payment is made in advance on a monthly
basis to M+C organizations for each enrolled beneficiary in a
payment area (generally a county). The annual M+C per capita
rate for a payment area is the highest of three amounts
calculated for each county:
A ``blended'' rate equal to a combination of
an area-specific (local, generally county) and a
national rate. Blending is designed to reduce payments
in counties where adjusted average per capita costs
(AAPCCs) \1\ were historically higher and to increase
payments where AAPCCs were lower. Over time, the
blended rate will rely more heavily on the national
rate, and less heavily on the local rate, thus reducing
variation in rates across the country.
---------------------------------------------------------------------------
\1\ Prior to BBA 97, payments for beneficiaries in HMOs with risk-
sharing contracts with Medicare were based on the adjusted average per
capita cost (AAPCC) which was calculated by a complex formula based on
the costs of providing benefits to Medicare beneficiaries in the fee-
for-service (i.e., non-managed care) portion of the Medicare program.
---------------------------------------------------------------------------
A minimum, or floor, payment was $402 for
2000. For 2001, the floor is $525 for aged enrollees
within the 50 states and the District of Columbia
residing in a Metropolitan Statistical Area (MSA) with
a population of more than 250,000. For all other areas
within the 50 states and the District of Columbia, the
floor is $475. For any area outside the 50 states and
the District of Columbia, the $525 and $475 floor
amounts is also applied, except that the 2001 floor
cannot exceed 120 percent of the 2000 floor amount. The
payment amount is increased annually by a measure of
growth in program spending known as the national growth
percentage. The floor rate is designed to increase
payments to certain counties more quickly than would
occur under the blended rate.
A ``minimum update'' rate protects counties
that would otherwise receive only a small (if any)
increase. In 1998, the minimum rate for any payment
area was 102 percent of its 1997 AAPCC. For 1999 and
2000, the increase was 102 percent of the annual M+C
per capita rate for the previous year. BIPA applied a 3
percent minimum update for 2001, beginning in March.
For subsequent years, the minimum increase will return
to an annual January update of an additional 2 percent
over the previous year's amount.
Rates must produce budget-neutral payments. This means that
total M+C spending in a given year must be equal to the total
payments that would be made if they were based solely on area-
specific rates. Because floor and minimum percentage rates
cannot be reduced to meet budget neutrality, only blended rates
can be adjusted. If the budget neutrality target would be
exceeded, counties scheduled to receive a blended rate would
have their rates reduced, but never below the higher of the
floor or minimum update rate. When this occurred in 1998, 1999,
and 2001, CMS chose to waive the budget-neutrality rule rather
than waiving the floor or minimum rate rule.
The M+C program was established to increase the number of
plans available around the country and to encourage
beneficiaries to enroll in them. However, the M+C program has
not been successful at expanding coverage; the initial moderate
growth in enrollment between 1998 and 2000 has since taken a
downward turn. By September 2001, there were approximately 180
M+C plans available to almost two-thirds of Medicare
beneficiaries. Approximately 14 percent of all beneficiaries
were enrolled, about the same percentage as were enrolled in
Medicare managed care plans prior to the enactment of BBA 97.
The majority of enrollees are in California, Florida, New York,
and Pennsylvania. Beneficiaries living in urban areas have
greater access to M+C plans.
4. Supplemental Health Coverage
At its inception, Medicare was not designed to cover
beneficiaries' total health care expenditures. Several types of
services, such as long-term care for the frail elderly or
chronic illnesses and most outpatient prescription drugs, are
not covered at all, while others are partially covered and
require the beneficiary to pay deductibles and coinsurance.
Medicare covers approximately half of the total medical
expenses for noninstitutionalized, aged Medicare beneficiaries.
Remaining health care expenses are paid for out-of-pocket or by
some form of supplemental health insurance. Approximately 36.1
percent of beneficiaries get this coverage through their
employers or through retiree plans. Medicaid provides coverage
for 13.2 percent, about 16.1 percent are enrolled in M+C
organizations, and 3.8 percent getting coverage through other
sources.
Approximately 26 percent get their supplemental coverage
through privately purchased plans such as Medigap. These plans
offer coverage for Medicare's deductibles and coinsurance and
pay for some services not covered by Medicare. In 1990,
Congress provided for a standardization of Medigap policies, in
order to enable beneficiaries to better understand policy
choices and to prevent marketing abuses.
Standardized packages.--Generally, there are 10
standardized Medigap benefit packages which can be offered in a
state, designated as Plans A through J. Plan A offers a core
group of benefits, with the other nine offering the same core
benefits and different combinations of additional benefits.
Plans H, I, and J offer limited prescription drug coverage. BBA
97 added two additional high-deductible plans which offer the
same benefits as either Plan F or J. The deductible was $1,500
for 1999 and is increased by the CPI in subsequent years. Not
all 10 plans are available in all states; however, all Medigap
insurers are required to offer the core plan. Insurers must use
uniform language and format to outline the benefit options,
making it easier for beneficiaries to compare packages. All
Medigap policies are regulated by the state in which they are
sold. There are no Federal limits set regarding premium prices;
however, plans must return a certain percentage of the premiums
in the form of benefits. States are required to have a process
for approving premium increases proposed by insurers.
Other beneficiary protections include:
Before selling a Medigap policy to a
beneficiary, sellers must make certain that the policy
does not duplicate Medicare, Medicaid, or private
health insurance benefits to which a beneficiary is
otherwise entitled.
Medigap policies are required to be
guaranteed renewable.
Sellers are required to offer a 6-month open
enrollment period for persons turning 65; there is no
open enrollment guarantee for the under-65 disabled
population.
Sellers are permitted to limit or exclude
coverage of pre-existing conditions for no longer than
6 months. However, the law guarantees issuance of
specified plans without a pre-existing condition
exclusion for certain continuously enrolled
individuals. The plans, generally, are Plans A, B, C,
and F.
Medigap insurers are prohibited from
discriminating in policy pricing based on an
applicant's health status, claim experience, receipt of
health care, or medical condition.
B. ISSUES
A number of observers have stated that the Medicare program
is now at a critical juncture. One concern is that Medicare's
financing mechanisms will be unable to sustain it in the long
run. Many are also concerned that the program's structure has
failed to keep pace with the changes in the health care
delivery system. Some persons suggest that major structural
reforms are required, while others contend that the existing
system should be improved rather than replaced. In recent
years, the major focus has been on providing prescription drug
coverage for beneficiaries. On this issue, some observers state
that it would be inappropriate to add a new costly benefit
before structural reforms are enacted; others state that
seniors, particularly low-income seniors, should not have to
wait for drug coverage until the entire restructuring issue is
resolved.
1. Medicare Solvency and Cost Containment
Ensuring the solvency of the Medicare trust funds continues
to be a high priority issue in the Medicare reform debate. The
Part A (HI) trust fund is financed primarily by current workers
and their employers through a payroll tax. The Part B (SMI)
trust fund is financed by a combination of monthly premiums
levied on current beneficiaries (25 percent of program costs)
and Federal general revenues tax dollars (75 percent of program
costs). However, both the rapid rate of growth and the impact
of this growth on general revenue spending continue to be of
concern. Both funds are maintained by the Treasury and
evaluated each year by a board of trustees.
Since 1970, the Part A trustees have been projecting the
impending insolvency of the HI trust fund. At the present time,
income to the fund exceeds outgo. However, this situation is
predicted to reverse in the future. At some point, the assets
in the program will be insufficient to pay benefits. The 2001
trustees report projects that income will continue to exceed
expenditures for another 20 years. After that point, the
program would draw down on trust fund assets for 8 years until
the fund was depleted in 2029. These dates represent a
significant improvement over projections made in previous
years. This is due to a number of factors including robust
economic growth; lower expenditures reflecting, in part, the
implementation of changes made by the Balanced Budget Act of
1997; low increases in health care costs generally; continuing
fraud and abuse control efforts; and a decline in the use of
skilled nursing facility and home health services.
Despite the short term improvements, the long range (75
years) trust fund deficit is significant. A number of factors
affect the long-range solvency of the fund. Beginning in 2011,
the program will begin to experience the impact of major
demographic changes. First, baby boomers (persons born between
1946-1964) begin turning age 65. The baby boom population is
likely to live longer than previous generations. This will mean
an increase in the number of ``old old'' beneficiaries (i.e.,
those 85 and over). The combination of these factors is
estimated to increase the size of the aged Medicare population
from 34.2 million in 2000 to 38.7 million in 2010 and 61.0
million in 2025. Total Medicare enrollees will increase from
39.6 million in 2000 to 46.0 million in 2010 to 69.7 million in
2025. Second, there will be a shift in the number of covered
workers supporting each HI enrollee. In 2000, there were 4.0;
in 2030 there will only be an estimated 2.3. This number will
continue to decline.
The 2001 trustees' report stated that to achieve long-term
financial solvency, outlays would have to be reduced by 37
percent or income increased by 60 percent (or some combination
of the two) throughout the 75-year period. To achieve this, the
payroll tax rate for employees and employers combined would
have to be immediately increased from 2.9 percent to 4.87
percent. Many observers have recommended that reforms be
developed and enacted as rapidly as possible.
2. Program Modifications
Increasing Eligibility Age from 65 to 67.--Some observers
have suggested that the Medicare eligibility age should be
increased according to the same phase-in schedule established
for Social Security benefits under the Social Security Act
Amendments of 1983. This legislation provided that the full
retirement age be raised from 65 to 67 over the 2003 to 2027
period. Proponents of raising Medicare's eligibility age argue
that it would result in needed program savings, and is
reasonable given the increase in life expectancy and
improvements in health status which have occurred since
Medicare was created in 1965. In 1997, CBO estimated that such
a provision would have saved $10.2 billion over the FY2003-
FY2007 period. Opponents argue that it would place some seniors
at risk. They refer to problems faced by the population aged
62-64, 15 percent of whom were uninsured in 1998. Of these, 26
percent were poor and 52 percent were neither employed nor the
dependent spouse of an employed person characteristics that
would make it unlikely for them to afford health insurance.
Opponents suggest that some employers who currently offer
health insurance to their retirees might decide that it would
be too expensive to extend that coverage for additional years.
Raising the eligibility age would also have implications for
Medicaid. The program would (under current law) assume some of
the expenses previously assumed by Medicare, resulting in some
Medicare savings being transferred to Federal and state
Medicaid costs.
Means Testing.--Medicare is not a means-tested program.
There are no income or assets tests for eligibility and no
distinctions in benefits or cost-sharing requirements. The
Senate-passed version of BBA 97 would have provided for an
income-related Part B premium. It was estimated that
approximately 5 percent of the noninstitutionalized aged
beneficiaries would have been affected. The provision was
dropped in conference. The major issue during the debate was
how means-testing would be administered. Although the Internal
Revenue Service (IRS) maintains income information, there is no
such operational system in CMS. Some argued that establishing
such a system in CMS would require a large resource commitment
and that the IRS should administer an income-related premium.
Others were concerned that, if the IRS administered the income-
related premium, it would be perceived as a tax.
Increased Beneficiary Cost-Sharing.--Various proposals have
been offered to increase beneficiary cost-sharing, including
increasing Part B coinsurance from 20 to 25 percent, increasing
the Part B deductible from $100 to a level more comparable to
that in private insurance plans ($200 to $250), and imposing
coinsurance on services not currently subject to such charges
(such as home health care and lab services). It is argued that
increased cost-sharing would make beneficiaries more cost
conscious in their use of services. However, some observers are
concerned that those most likely to be affected by increased
cost-sharing are beneficiaries who have the traditional fee-
for-service coverage with no supplementary insurance. Many of
these individuals have incomes above the levels which would
qualify them for government assistance programs, but not high
enough to afford supplementary coverage.
Medigap Modifications.--Beneficiaries with Medigap or other
supplemental coverage tend to perceive services as free at the
point when they are actually receiving them; thus they use more
services and cost Medicare more money than those without such
coverage. Some observers have suggested that incentives to use
care present in current Medigap policies should be revised.
Specifically, two Medigap plans offer identical coverage as
Plans F and J except that they have high deductibles in
exchange for lower premiums. Some have suggested that this
approach be extended to some or all of the standard 10 Medigap
packages, prohibiting insurers from covering the Part B
deductible. This could have the effect of making beneficiaries
more aware of their medical expenditures and could lower
Medigap premium rates.
3. Program Restructuring
A number of observers have suggested that more than program
modifications are necessary to address Medicare's problems.
They argue that Medicare, originally designed to reflect the
structure of private insurance in 1965, has not kept pace with
changes in the health care delivery system as a whole. Some
suggest redesigning the benefit package to reflect current
employment-based coverage. This might include a prescription
drug benefit or a catastrophic limit on out-of-pocket expenses.
However, such expansions have the potential for significantly
increasing Medicare's costs. A number of options for
restructuring have been discussed.
Premium Support/Defined Contribution.--The premium support
concept is a leading proposal for restructuring Medicare. Under
this system, a predetermined payment amount, consistent for all
participants, would be given to beneficiaries. They would use
this payment to subsidize the premiums they pay for privately
purchased health insurance coverage available from a set of
competing plans; the premiums for the plans would vary based on
the benefits offered. More generous plans would presumably have
higher premiums. The beneficiary would pay the plan the
difference between the Federal contribution and the plan's
premium; low-income beneficiaries' payments would be
subsidized. The goal of the premium support approach is to
shift risk from the Federal Government to private insurers
while giving individuals flexibility to choose the health
insurance coverage that best meets their medical needs, along
with incentives to choose plans that are the best value for
them within their financial ability to supplement the premium
support subsidy. A number of issues must be decided in order to
implement a premium support program, including the degree to
which plans should cover the same benefits, determining an
appropriate Federal contribution (a fixed dollar amount or a
fixed percentage of a weighted national average), and ensuring
that plans continue to participate in the program. Proponents
of a defined contribution system argue that it would enable the
Federal Government to control aggregate Federal outlays and
would enable beneficiaries to purchase coverage more tailored
to their individual needs. Critics suggest that the system may
place individual beneficiaries at undue risk if the per capita
payment fails to keep pace with the rising costs of plans.
Fee-for-Service (FFS) Modernizations.--Some have suggested
that Medicare's FFS program should incorporate certain managed
care techniques which are currently used by private insurers.
Some examples are:
disease and case management programs that
identify and enroll individuals with certain health
conditions in order to provide higher quality of care
at lower costs. The programs would employ tools such as
data analysis to help identify and target
beneficiaries, bundled payments to physicians and other
providers, and prior authorization or review of
services.
selective contracting or providing
beneficiaries with incentives to use selected
providers. This might entail restricting beneficiaries
to providers who meet certain cost or quality
standards, or giving them financial incentives to
choose preferred providers.
competitive pricing or improved procurement
practices when paying for both health care and
administrative services. Private health plans use their
buying power in the marketplace to realize savings in
the cost of goods and services through negotiated
pricing. The Medicare program currently uses different
rate-setting methods rather than competition between
health care providers.
Combine Parts A and B.--Many have suggested that Medicare's
two-part structure is no longer appropriate. They note that the
vast majority of beneficiaries enroll in both programs and,
indeed, in the case of the M+C program, they are required to
enroll in both. Further, efforts to reform one part of the
Medicare program necessarily involves the other part as well.
For example, if a benefit were added under Part B (e.g., an
additional preventive care service), while it might raise
expenditures under that part, it could result in fewer
hospitalizations, thus lowering costs under Part A. Under the
current system, Part B would not realize these cost savings.
Combining the two parts could allow savings in one area to
offset costs in another and thus more flexibility in adjusting
benefits packages. A number of problems must be considered,
however. Of particular concern are the two different financing
structures. Under current law, no general revenue financing is
available for Part A. Combining the programs could potentially
alter this situation. Many are concerned that if general
revenues were available to both parts, there would be less
incentive to control costs. Alternatively, requiring general
revenue financing for both parts could weaken the commitment of
legislators to maintain the entitlement nature of the program.
4. Prescription Drugs
Medicare provides very limited prescription drug coverage.
The cost of prescription drugs is included in the payments made
for inpatient stays in hospitals or skilled nursing facilities.
Physicians are paid for drugs which cannot be self-
administered, i.e., generally those administered by injection.
(The payment rate is 95 percent of the average wholesale
price.) However, if the injection is generally self-
administered (such as insulin), it is not covered. Coverage for
some self-administered outpatient drugs are specifically
authorized by law:
Erythropoietin (EPO), used by end-stage
renal disease (ESRD) patients for the treatment of
anemia, which often is a complication of chronic kidney
failure;
drugs used in immunosuppressive therapy,
such as cyclosporin, after an individual receives a
Medicare-approved organ transplant;
oral anti-cancer drugs used in chemotherapy,
provided they have the same indications as a
chemotherapy drug that could not be self-administered;
acute oral anti-emetic (anti-nausea) drugs
used as part of an chemotherapeutic regimen.
hemophilia clotting factors
Many Medicare beneficiaries have other supplemental
coverage that includes prescription drug benefits. In 2000,
approximately 92 percent of Medicare beneficiaries enrolled in
Medicare managed care organizations had some level of
prescription drug coverage; about 16.5 percent of beneficiaries
were enrolled in these organizations. Beneficiaries who get
their supplementary coverage through employer-based plans (36.1
percent) may also have drug coverage. However, the number of
employers who offer these plans has been declining in recent
years. Some employers exclude drug coverage from the plan they
offer Medicare-eligible retirees. Beneficiaries may also
purchase one of the Medigap policies that offers partial
prescription drug coverage (Plans H, I, and J). However, these
plans require a $250 deductible. Plans H and I then cover 50
percent of the next $2500 up to the maximum benefit of $1,250;
Plan J covers 50 percent of the next $6,000 up to the maximum
benefit of $3,000. Approximately 43 percent of Medigap
enrollees had drug coverage in 1998. About 6.8 percent of
Medicare beneficiaries have no other coverage and rely strictly
on the limited coverage provided under the traditional fee-for-
service program.
Beneficiaries also can receive drug coverage through
Federal and state government programs. Those who are eligible
for full Medicaid coverage have prescription drug coverage
through that program. Those with a military service connection
may receive coverage through the Department of Defense or
Department of Veterans Affairs programs. This coverage was
considerably expanded by legislation passed in 2000, which
allowed Medicare-eligible military retirees access to TRICARE,
the military health care system. Some beneficiaries also have
coverage through state-sponsored pharmaceutical assistance
programs. In April 2000, there was some type of program
operational in 24 states; programs were authorized in two
additional states.
The cost of prescription drugs can significantly affect the
elderly. Although 73 percent of beneficiaries had some drug
coverage in 1998, they paid approximately 44 percent of their
total drug expenses out-of-pocket. The total average annual
drug expenditure for beneficiaries living in the community was
$878 in 1998. Total spending for persons with some drug
coverage was $999 compared with $546 for those with no
coverage. Out-of-pocket costs were higher for those without
coverage ($546) than those with coverage ($325).
A prescription drug benefit for Medicare beneficiaries has
been considered in the past. A limited benefit was included in
the Medicare Catastrophic Coverage Act of 1988. The Act was
repealed in 1989. During consideration of the Health Security
Act in 1994, the debate was again taken up. The efforts of the
National Bipartisan Commission on the Future of Medicare,
created by BBA 97 to make recommendations on a number of
program issues, drew attention to the lack of a drug benefit. A
number of bills were introduced in the 106th Congress that
would have added a prescription drug benefit to the Medicare
program itself; others would have created a separate benefit
outside the program. Some bills would have limited the benefit
to the low-income Medicare population. In the 107th Congress,
these efforts continue.
There are a number of design issues facing the development
of a drug benefit. These include organizational and
administrative issues: whether a benefit should be added before
or as a part of reforming the Medicare program; whether the
benefit should be part of the Medicare program itself or a
separate program; and the degree of involvement for the private
sector, both for administering the benefit and assuming a
portion of the financial risk. The design of the benefit must
also be addressed: whether it should cover the entire Medicare
population or be limited to specific groups such as low-income
persons or those with catastrophic expenses; the level and
structure of beneficiary cost-sharing; the level of assistance
for low-income beneficiaries; and the definition of covered
drugs. Finally, the cost of the program must be considered as
well as what cost-control strategies might be implemented.
CHAPTER 9
LONG-TERM CARE
OVERVIEW
Long-term care encompasses a wide range of health, social,
and residential services for persons who have lost some
capacity for self-care. Many Americans are under the false
impression that Medicare or their traditional health insurance
will cover long-term care costs. Too often it is only when a
family member becomes disabled that they learn that these
expenses will have to be paid for out-of-pocket. Furthermore,
individuals whose long-term care needs arise as a result of a
sudden onset of a stroke or other illness do not have adequate
time to plan for the set of services that best meets their
needs. With the average cost of institutionalized care at about
$40,000 per year, or $110 per day,\1\ long-term care expenses
can be unaffordable to most families.
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\1\ The American Health Care Association website. Facts and Trends
http://www.ahca.org/secure/top15.htm October 17, 2000.
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Among many older people, and other persons with
disabilities, there is a drive for change in how long-term care
is financed and delivered. Perhaps the most compelling argument
for change is the fact that the expense of long-term care,
especially nursing home care, can bankrupt a family. At the
same time, many older people and their families prefer to
receive services in home and community-based settings. Support
for this approach has also been expressed by groups who affirm
that aging-in-place and living in community-based settings
enable elderly and disabled individuals to maximize their
independence and lead more meaningful lives. Some health care
practitioners and policymakers also purport that the expansion
of home and community-based care may be a more affordable
alternative to institutional care, if such care can assist
families in their caregiving efforts.
Most long-term care assistance, including assistance in an
individual's home, is provided by unpaid caregivers. Almost 60
percent of the functionally impaired elderly receiving care,
for example, rely exclusively on informal, unpaid assistance.
Data from the 1994 National Long-Term Care Survey (NLTCS)
sponsored by the Department of Health and Human Services (DHHS)
indicate that over 7 million persons provide 120 million hours
of unpaid care to about 4.2 million functionally disabled older
persons each week. Typically, this care is provided by adult
children to elderly parents (41 percent) and by other relatives
(26 percent). Spouses (24 percent) and non-relatives (9
percent) also volunteer to provide care to frail elderly
individuals.\2\
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\2\ Doty, Pamela. Caregiving: Compassion in Action. U.S. Department
of Health and Human Services, 1998. P. 13. This estimate is based on
elderly persons who need assistance with ADL or IADL limitations.
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Despite efforts by family members to care for their older
family members at home and help pay for uncovered expenses,
many older Americans eventually rely on Medicaid to pay for
their long-term care. Medicaid, a joint Federal/state matching
entitlement program that pays for medical assistance for low-
income persons, has increasingly become the primary payer of
long-term care costs. According to the Center for Medicare and
Medicaid Services (CMS) Office of the Actuary, in 1999 Federal,
state and local spending for nursing home care, mostly through
the Medicaid program, was $90 billion; and an additional $33.1
billion was spent for home care.\3\ For many states long-term
care has become the fastest growing part of State budgets. In
the wake of increasing long-term care costs, as a result of the
aging of the baby boom generation and general increases in
longevity throughout the population, both Federal and State
governments recognize the urgency in controlling the ever-
growing costs of Medicaid long-term care.
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\3\ CMS is the agency formerly known as the Health Care Finance
Administration (HCFA).
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Policymakers have not reached consensus as to how to
finance long-term care. With the trend toward reducing the
growth of entitlement programs and the fact that institutional
long-term care costs are simply too high for most American
families to pay out-of-pocket, it seems likely that both public
and private financing will be critical in supporting the long-
term care needs of our nation's elderly population. Although in
recent years, there has been a growth in the private long-term
care insurance market (as of 2000, 6 million individual and
employer-sponsored policies had been sold), only a fraction of
the population is covered for these expenses. How long-term
care should be organized and delivered, how broadly it should
be defined, who should be eligible for publicly funded
services--all of these are policy issues confronting Congress
and State legislatures throughout the country.
This chapter will describe the various types of long-term
care services, the populations served, the settings in which
services are provided, and the providers and payers of long-
term care services. Some of the special issues addressed in
this chapter include inconsistency in the long-term care
system, the role of care management, especially as it pertains
to individuals with chronic illness, long-term care insurance,
and ethical issues.
A. BACKGROUND
1. What Is Long-Term Care?
Long-term care refers to a wide range of supportive and
health services for persons who have lost the capacity for
self-care due to illness, frailty, or a disabling condition. It
differs from other types of care in that the goal of long-term
care is not to cure an illness, but to allow an individual to
attain and maintain an optimal level of functioning. The need
for long-term care services ranges from skilled medical and
therapeutic services for the treatment and management of these
conditions to assistance with basic activities and routines of
daily living, such as bathing, dressing, eating, and
housekeeping. The provision of these services involves a
continuum of health and social services in a variety of
settings, ranging from care in nursing homes to care at home
through home health, personal care, homemaker services, and
services in the community, such as adult day care. It may also
be delivered in a variety of other settings that provide health
and supportive services along with housing, such as
intermediate care facilities for the mentally retarded (ICFs/
MR), assisted living and board and care facilities. For the
purposes of this section, long-term care includes a continuum
of services of differing intensity. The following is a
description of the services most commonly included in the long-
term care continuum.
(a) Adult Day Care
Adult day care programs provide health and social services
in a group setting to frail older persons and other persons
with physical, emotional, or mental impairments on a part-time
basis. Adult day care programs have grown from a handful of
federally supported research and demonstrations projects in the
late 1960's and early 1970's to key components in community-
based long-term services today.
The National Adult Daycare Services Association of the
National Council on Aging (NADSA/NCOA), a voluntary
organization of adult day care providers, defines adult day
care as a community-based group program designed to meet the
needs of adults with functional and/or cognitive impairments
through an individual plan of care. Day care is a structured,
comprehensive program that provides health, social and related
support services in a protective setting on less than a 24-hour
a day basis (usually around 8-10 hours per day). Services that
are generally provided include client assessment; nursing;
social services; personal care; physical, occupational, and
speech therapies; rehabilitation; nutrition; counseling; and
transportation.
Adult day care is supported by participant fees and private
funds, as well as by a variety of Federal and state funding
sources. The average funding breakdown is estimated to be: one-
third from third-party reimbursements (including all state and
Federal reimbursement programs as well as private insurance
reimbursement); one-third from contributions, donations, and
grants; and one-third from private payers.
Although adult day care centers are supported by Federal
funds, Federal standards for adult day care centers do not
exist. Thirty-four states do offer licensing and/or
certification for adult day centers; however, requirements for
licensure and certification vary widely among states.
Additionally, many states have requirements for licensure and/
or certification to assess the eligibility of centers.
Other sources of Federal support are the Older Americans
Act, the Social Services Block Grant, the Department of
Veterans Affairs, Medicare (under limited circumstances), and
the U.S. Department of Agriculture child and adult care food
programs. However, Medicare and Medicaid and the Department of
Veterans Affairs fund some services that are offered in adult
day care centers only if they are licensed to participate in
the programs. Medicaid does not fund it at all. Despite the
popularity of adult day care as a means to assist frail older
persons and persons with disabilities to remain in their own
homes, some believe that the fragmented nature of funding
sources may hamper the development of new programs.
(b) Home Care
In general, home care refers to services that are provided
to individuals in their homes. Patients requiring home care may
or may not require medical care, but almost always require
assistance with activities of daily living (ADLs), including
bathing, eating, dressing, toileting, transferring, and
continence. Other categories of services provided in home
settings, include skilled nursing, various types of
rehabilitative therapy and assistance with instrumental
activities of daily living (IADLs), including shopping, light
housework, telephoning, money management, and meal preparation.
Not all of the above services are provided exclusively in the
home. For example, personal assistance services for individuals
with disabilities can be provided in any setting, including a
workplace.
In addition to the critical role played by unpaid
caregivers in the provision of home care, Medicare, Medicaid,
other government programs and the private sector (such as
private health insurance) provide a variety of paid services to
individuals in their homes. In 1999, Medicare was the largest
single payer of home care services, comprising about 26 percent
(about $8.6 billion) of total home health care payments made to
home health agencies in 1999 ($33 billion). Medicaid payments
comprised about 17 percent ($5.6 billion). Out-of-pocket and
private health insurance payments to home health agencies
totaled 27 percent ($8.9 billion) and 19 percent ($6.3 billion)
respectively. The remaining 11 percent ($3.6 billion) was paid
for by other public and private sources, such as local
charities.\4\
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\4\ The sum of percentages pertaining to payments made to home
health agencies does not total 100 percent due to rounding. Data
source: Centers for Medicare and Medicaid Services, Office of the
Actuary, National Health Statistics Group, 1999.
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According to the National Association for Home Care, there
were over 20,000 home care agencies in the United States as of
1999. Of those agencies, 9,655 are Medicare-certified home
health agencies, 2,287 are Medicare-certified hospices. The
rest are home health agencies, home care aide organizations,
and hospices that do not participate in Medicare.
A variety of other Federal programs also support home care,
including long-term care services funded through the Older
Americans Act, the Social Services Block Grant and the
Department of Veterans Affairs. In addition, many states
provide supplementary services through programs that are often
paid for through state general revenue allocations. In general,
these programs target specific groups of low-income elderly and
disabled persons. The majority of state-only funded programs
provide such services as personal care, homemaker, home health
aid, home-delivered meals, chore, respite, case management,
adult day care and transportation.
(c) Respite Care
Respite care is intermittent care provided to a disabled
person to provide relief to the regular caregiver. Care can be
provided for a range of time periods, from a few hours to a few
days. Care can also be provided in the individual's home, in a
congregate setting such as a senior center or drop-in center,
or in a residential setting such as a nursing home or other
facility. Unlike other forms of long-term care which are aimed
at benefiting the frail individual, respite care is a service
to the caregiver, usually a family member. In November 2000,
Congress reauthorized the Older Americans Act (P.L. 106-501)
and created a new National Caregiver Support Program funded at
$125 million in fiscal year 2001. Respite services to provide
families temporary relief from caregiving responsibilities is
one of the services that states are allowed to provide with
this funding. In addition, some states provide respite care to
certain individuals or families using state-only funds. Because
respite care is not universally available, and has few sources
of public funding, many innovative options for the delivery of
respite care have taken shape across the country, including the
pooling of time and resources by family caregivers of patients
with Alzheimer's Disease to provide voluntary services.
(d) Supportive Housing
There is a lack of uniformity in defining the different
types of housing-with-services options in the long-term care
continuum. This is partly because there are many funding
sources and partly because housing options have developed
without due consideration being given to the linkages between
housing and supportive services for the elderly and disabled.
Some of the names given to the different types of supportive
housing are congregate living, retirement community, sheltered
housing, foster group housing, protective housing, residential
care, and assisted living.
The various supportive housing options are characterized by
the availability of services to frail residents on an as-needed
basis. Many such facilities offer certain congregate services
such as meals and recreational activities. Residents normally
live in separate quarters. Laundry and housekeeping services
are generally provided, and other services that can be provided
on an as-needed basis are personal care, medication management,
and other home care-type services.
Assisted living is being given a great deal of attention as
a relatively new option with the potential to meet the needs of
many older people. Generally, assisted living facilities are
residential settings that offer a variety of services,
including room and board, personal care, and supportive
services for persons needing assistance due to functional or
cognitive impairments while also providing some health-related
care. They range from tony, hotel-like buildings to small group
homes providing services to persons with low income. In large
part, assisted living facilities have developed because service
providers are recognizing that the medical model of providing
long-term care does not meet the needs of many disabled
individuals needing assistance. Advocates are hopeful that
there will be an increase in availability of assisted living
options for persons with moderate incomes. However, there has
been concern regarding quality of care in some assisted living
facilities. Only states, not the Federal Government, regulate
assisted living facilities. Residents must pay out-of-pocket
for most of the cost of assisted living and other supportive
housing. The high costs of such housing, can quickly lead
residents to deplete their life savings and then, if they are
unable to find a nursing home willing to take a Medicaid
patient, have no funds or any place to go. A GAO report
entitled Assisted Living found that there is little protection
from eviction if residents run out of money.\5\ Assisted living
and other private housing facilities may summarily evict a
resident if the administration decides that they are no longer
able to care for the individual.
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\5\ Assisted Living: Quality-of-Care and Consumer Protection Issues
in Four States. GAO/HEHS-99-27. April 1999. (Hereafter cited as
Assisted Living, GAO.)
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(e) Continuing Care Retirement Communities
Continuing care retirement communities (CCRCs) are special
housing which covers the entire spectrum of long-term care.
Older people enter a CCRC by paying an entrance fee and then
pay a monthly fee. In exchange for these payments, residents,
who are typically able to live independently at the time of
admission, are guaranteed that the CCRC will provide services
needed from an agreed-upon menu of services specified in the
entrance agreement. The menu of services can include skilled
nursing care. When additional services are needed, there may be
additional charges, depending upon the specific arrangement
made by the community. CCRCs are an option only for those older
people who can afford the fees, which are beyond the reach of
older people with low and moderate incomes.
(f) assisted living
There is no common definition for ALFs. Generally, they are
residential settings that offer a variety of services,
including room and board, personal care, and supportive
services for persons needing assistance due to functional or
cognitive impairments while also providing some health-related
care. They range from tony, hotel-like buildings to small group
homes that provide services to persons with low income.
Assisted living evolved during the 80's from ``board-and-
care'' facilities that basically served low-income persons with
disabilities, including the elderly, persons with mental
retardation or cognitive impairments, and alcohol or drug
abusers. Board-and-care facilities provide housekeeping, meals,
some protective oversight, but often doesn't offer the health-
related services like assisted living facilities (ALFs). Nearly
two-thirds of persons in board-and-care are elderly.\1\ These
facilities are generally small (4-25 residents) ``mom and pop''
operations in a group home setting with shared rooms.
---------------------------------------------------------------------------
\1\ U.S. Department of Health and Human Services. Office of the
Assistant Secretary and Planing and Evaluation (ASPE). Licensed Board
and Care Homes: Preliminary Finds from the 1991 National Health
Provider Inventory. May 1993.
---------------------------------------------------------------------------
Today, a range of senior residential facilities that offer
supportive services are referred to as assisted living. These
include: congregate housing (apartment rentals or ownership);
independent living (upscale apartments/condominiums for
younger, healthier seniors); \2\ and residential care
facilities (provide support/supervision, optional services for
additional fees, have individual rooms). Generally, little or
no medical care is provided in these facilities. Residents
usually don't have cognitive or functional impairments or
qualify for admission to a nursing home. In addition,
continuing care retirement communities (CCRCs) often provide
independent living, assisted living, and nursing home care all
in one location, and residents move from one level to another
as their health needs change.
---------------------------------------------------------------------------
\2\ Retiree Living web page at www.retiree-living.com.
---------------------------------------------------------------------------
A typical resident is female, frail, but mobile, averaging
83 years of age, and needs help with two or more activities of
daily living (ADL), such as bathing or dressing (nursing home
residents usually have four or more ADLs.). Residents need some
assistance, but generally are not in need of comprehensive
nursing care, needing the most help with managing medication
(about 70 percent) and bathing.
As of July 2000, states reported a total of 32,886 licensed
facilities with 795,391 units or beds Over 36 percent of beds
are located in three states: California, Florida, and
Pennsylvania.\3\
---------------------------------------------------------------------------
\3\ Mollica, Robert. State Assisted Living Policy: 2000. National
Academy for State Health Policy. July 2000. (Hereafter cited as
MOllica, State Assisted Living Policy 2000.)
---------------------------------------------------------------------------
Costs vary depending on size, service, and location. Rates
range from $1,000 to more than $4,000 per month. Nursing homes
can average $4,000 per month. Most ALFs usually offer basic
services that are included in the monthly fee, but the number
of such services will vary by facility. For example, some offer
bathing assistance once a week while others offer it twice
weekly. Medication reminders are usually included in the basic
rate, but actual dispensing of medication could be an
additional fee. A-la-carte service (the resident pays for each
service separately and as needed) are offered in addition to
basic service. ALFs may increase fees if the individual becomes
sicker, requires more services or staff time (often billed in
15-minute increments) such as medication reminders three times
a day instead of once or complete assistance with bathing
instead of stand-by service. Most residents pay out of pocket
for the cost of their care.
Medicare does not provide any funds for assisted living. As
of June, 2000, 38 states used Medicaid to provide assistance
\4\ to persons in ALFs, generally through Medicaid home and
community-based waiver programs (HCBWs) or through optional
services offered under a state's Medicaid plan. Medicaid is the
Federal-state, means-tested health program for low-income
persons or persons who have become poor as a result of needing
medical and health-related care.
---------------------------------------------------------------------------
\4\ Ibid.
---------------------------------------------------------------------------
The HCBWs allow the Health Care Financing Administration
(HCFA) to waive certain Federal requirements so states may
cover ALF services for persons who would otherwise be eligible
for nursing home care. Costs may not exceed costs Medicaid
would pay for persons in nursing home care.
State Medicaid plans also cover services through their
``personal care'' benefit. Nursing home eligibility is not a
requirement, although states require that a minimum level of
functional impairments be present for persons to become
eligible.
Medicaid pays for room and board and service costs in
nursing homes (and hospitals), but Medicaid only pays for the
personal and supportive care costs in assisted living. Room and
board in ALFs is paid by the resident usually using their
Supplemental Security Income (SSI) benefit. Only 58,544
Medicaid beneficiaries were served in ALFs as of April 2000.
This is the result of a number of factors. As noted, Medicaid
is a means-tested program and requires beneficiaries to have
low incomes and assets. In addition, ALFs may not be satisfied
with rates paid by the Medicaid program.
Other Federal involvement includes the FY2000 Veterans
Administration (VA) and Housing and Urban Development (HUD)
appropriations law (P.L. 106-74) which earmarked $50 million
for grants to convert existing HUD Section 202 projects to
assisted living facilities.
Unlike for nursing homes, there are no Federal regulations
governing ALFs. Each state defines the level of need to be
provided by facilities and services offered. Most require that
residents have stable medical conditions, not need 24-hour
skilled nursing care, or not have specific conditions (such as
be ventilator-dependent, need tube feeding, or intravenous
medication).\5\
---------------------------------------------------------------------------
\5\ Mollica, Robert L. Regulation of Assisted Living Facilities:
State Policy Trends. Generations, v. 2 no. 4, winter 1997/98.
---------------------------------------------------------------------------
Many ALFs allow residents eligible for nursing home care to
stay when their health declines because evolving regulations
have allowed providers to make more services available.
However, state regulations generally define the level at which
an individual must leave an ALF and enter a nursing
facility.\6\
---------------------------------------------------------------------------
\6\ Assisted Living, GAO.
---------------------------------------------------------------------------
GAO found that about 90 percent of residents pay out of
pocket. A hearing by the Special Committee on Aging revealed
that nearly two-thirds of persons aged 75 and older had incomes
below $15,000 in 1997 and could not afford the most common rate
of $1,458 per month or $17,496 per year for assisted living.\7\
ALFs found to be affordable for this income group offered low
service/low privacy or minimal service/minimal privacy.\8\
---------------------------------------------------------------------------
\7\ Testimony of Catherine Hawes, Myers Research Institute, at
hearing before the Senate Special Committee on Aging, Shopping for
Assisted Living: What Consumers Need to Make the Best Buy. April 26,
1999.
\8\ A National Study of Assisted Living for the Frail Elderly.
Myers Research Institute. Prepared for the Department of Health and
Human Services. Office of Disability, Aging and Long-Term Care and AARP
Policy, and Public Policy Research Group. April 16, 1999.
---------------------------------------------------------------------------
There are no Federal requirements regarding quality of care
in ALFs. State departments of health do periodic inspections
and state licensing agencies and adult protective services also
investigate complaints. The Long-Term Care Ombudsmen Program,
authorized by the Older Americans Act, provides advocates for
the elderly in every state. They are required to investigate
and resolve complaints of residents of nursing homes and other
adult care facilities. They receive complaints from residents,
family or friends or may initiate complaints based on their own
observations.
(g) Nursing Homes
Nursing homes typically represent the high end of the long-
term care spectrum in both cost and intensity of services
provided. Nursing home residents are typically very frail
individuals who require nursing care and round-the-clock
supervision or are technology-dependent. Nursing homes are
defined as facilities with three or more beds that routinely
provide skilled nursing and other health and supportive
services. They can have special units to manage certain
illnesses like Alzheimer's Disease or other types of dementia.
Facilities may participate in Medicare, or Medicaid or receive
only private funding. As of 1997, there were about 1.5 million
elderly nursing home residents living in about 17,000 nursing
homes nationwide.\6\ Because of mounting costs, many States
have instituted measures to limit nursing home construction,
and are using gatekeeping measures to limit nursing home
placement to individuals who need round-the-clock skilled care.
Nursing homes have begun to concentrate more on post-acute care
patients and to work aggressively to transition residents into
other forms of care, especially care that is provided in the
community.
---------------------------------------------------------------------------
\6\ Gabrel, M.S., Celia S. Characteristics of Elderly Nursing Home
Current Residents and Discharges: Data from the 1997 National Nursing
Home Survey. National Center for Health Statistics, Centers for Disease
Control and Prevention, U.S. Department of Health and Human Services,
Number 312, April 25, 2000. Gabrel, M.S., Celia S. An Overview of
Nursing Home Facilities: Data from the 1997 National Nursing Home
Survey. National Center for Health Statistics, Centers for Disease
Control and Prevention, U.S. Department of Health and Human Services,
Number 311, March 1, 2000.
---------------------------------------------------------------------------
(h) Access Services
A host of other services are considered to be part of the
long-term care continuum because they enable individuals to
access the long-term care services they need. Examples of these
services are transportation, information and referral, and case
management. These services deserve mention in this section
because as Federal, State, and local policymakers work to
fashion long-term care systems, they are increasingly taking
these other services into account. In rural areas,
transportation is an essential link to community-based long-
term care services. Transportation is also an issue in the
suburbs, where many of today's and tomorrow's older populations
reside. Suburbs, with their strip zoning and separation of
residential, commercial, and service areas, were built with the
automobile in mind. Older people who do not drive can find the
suburbs to be an extremely isolating place.
Information and referral is also a key linkage service.
This service is essential because the sometimes conflicting
funding streams and lack of consistent long-term care policy
have sometimes resulted in a confusing array of services with
multiple entry points and differing eligibility requirements.
Both information and referral and case management are keys to
sorting out this complex system for older people and their
families. The role of case management will be discussed in
greater detail later in this chapter.
(i) Nutrition Services
Nutrition services, including both congregate and home-
delivered meals, are also considered to be a part of the long-
term care continuum because they support older people living in
the community by providing one to three nutritious meals per
day. The Older Americans Act enables 240 million congregate and
home-delivered meals to be distributed to over 3 million older
persons annually. Meals are also provided to elderly
individuals by the Social Services Block Grant (SSBG), state-
funded programs and charitable non-profits. Meals are commonly
delivered hot, but can also be delivered cold or frozen to be
heated and consumed later. In a small number of hard-to-reach
rural areas, meal providers are experimenting with intermittent
deliveries of frozen meals which can be heated in pre-
programmed microwave ovens, which are also supplied by the meal
provider. These programs help ensure that frail older people,
particularly those living alone, have an adequate supply of
calories and important nutrients.
Congregate meals add a social component to the standard
nutrition service. In addition to providing a hot nutritious
meal, the dining site also offers socialization. Dining sites
in the congregate nutrition program are also important access
points for other services, e.g., health promotion activities,
insurance and financial counseling, and recreation activities.
2. Who Receives Long-Term Care?
In 2000, there were an estimated 35.5 million elderly
persons living in the United States age 65 and over. Of these
persons, approximately 7 million experienced a chronic
disability. This constitutes about 20 percent of the elderly
population, although not all of these individuals require long-
term care assistance.\7\ The need for long-term care is often
measured by assessing limitations in a person's capacity to
manage certain functions or activities. For example, a chronic
condition may result in the need for assistance with ADLs, and
may require hands-on assistance, or direction, instruction, or
supervision from another individual.
---------------------------------------------------------------------------
\7\ Manton, Kenneth G. and Gu, XiLiang. Changes in the Prevalence
of Chronic Disability in the United States Black and Nonblack
Population Above Age 65 from 1982 to 1999. Center for Disability
Studies. Due University, Durham, North Carolina, March 27, 2001. See
www.pnas.org/cgi/doi/10.1073/pnas.111152298
---------------------------------------------------------------------------
Another set of limitations that reflect lower levels of
disability is used to describe difficulties in performing
household chores and social tasks. These are referred to as
limitations in ``instrumental activities of daily living,'' or
IADLs, and include such functions as meal preparation,
cleaning, grocery shopping, managing money, and taking
medicine. Limitations in ADLs and IADLs can vary in severity
and prevalence. Persons can have limitations in any number of
ADLs or IADLs, or both. An estimated 5.3 million elderly
persons required assistance with ADLs or IADLs in 1994.\8\
---------------------------------------------------------------------------
\8\ CRS Report: Long-Term Care Chart Book: Persons Served, Payors,
and Spending. Prepared under contract with the Urban Institute in
Collaboration with the Congressional Research Service, May 5, 2000.
---------------------------------------------------------------------------
Long-term care services are usually differentiated by the
settings in which they are provided, with services provided
either in nursing homes and other institutions or in home and
community-based settings. The great majority of elderly needing
long-term care reside in the community. In 1994, an estimated
3.9 million elderly, or almost 74 percent of the total 5.3
million elderly receiving long-term care assistance, live in
their own homes or other community-based settings. Among these
individuals, an estimated 1.2 million elderly persons
experienced severe disabilities. These individuals need help
with at least three ADLs or require substantial supervision due
to cognitive impairment or other behavioral problems.\9\
---------------------------------------------------------------------------
\9\ Ibid.
---------------------------------------------------------------------------
The need for long-term care assistance by the elderly is
expected to become more pressing in years to come. Demographic
projections show growth in the elderly population at record
rates. By 2020, the population age 65 and older is expected to
increase by about 50 percent--from 35.5 million persons in 2000
to 52.6 million persons. This number is expected to more than
double over the next half century. The provision of long-term
care will be most greatly influenced however by the expected
increase in the size of the population age 85 and older. This
group is at greatest risk of needing long-term care assistance.
The age 85 and older cohort is expected to increase by 26
percent, from 4.6 million persons in 2000 to 5.8 million
persons in 2020. By 2050, it will more than triple to 14
million persons.\10\
---------------------------------------------------------------------------
\10\ Ibid.
---------------------------------------------------------------------------
These snapshot estimates are one way of looking at the
prevalence of nursing home use among the elderly. Another way
to look at this issue is to predict future nursing home use for
a given cohort of elderly people. From the standpoint of public
policy and personal planning, this provides a more important
look into the need for nursing home care. While only 4 percent
of the elderly reside in nursing homes (1.5 million as of
1994),\11\ research has shown that many more are expected to
use nursing home care at some time in their lives. Researchers
estimate that short-term nursing home placement rates for
elderly individuals is about 2.4 percent and 3.8 percent per
year and long-term care placement rates for elderly individuals
ranges from 1.9 percent to 4.6 percent per year.\12\
---------------------------------------------------------------------------
\11\ 1994 National Long-Term Care Survey from W. Spector, J.
Fleishman, L. Pezzin, and B. Spillman. Characteristics of Long-Term
Care Users. Prepared from the Committee on Improving Quality in Long-
Term Care, Institute of Medicine, 1998.
\12\ Estimates are based on data from the National Long-Term Care
Survey. Miller M.P.A., M.A., Edward Allan, and Weissert Ph.D., William
G. Incidence of Four Adverse Outcomes in the Elderly Population:
Implications for Home Care Policy and Research. Report from the
Department of Health Management and Policy, School of Public Health,
University of Michigan, July 11, 2001.
---------------------------------------------------------------------------
Analysis of nursing home utilization has found a high
degree of variance in length-of-stay patterns among nursing
home residents. In recent years, hospitals have increased the
practice of discharging medically complex patients or
individuals needing intensive rehabilitation to less costly,
skilled nursing facilities. These individuals use nursing homes
as a source of extended care, following hospitalization, and
tend to have shorter lengths of stay than those individuals
with chronic disabilities and little prospect of improvement.
Individuals using nursing homes following hospitalization tend
to stay for less than 1 year, about 290 days as of 1997. The
average length of stay for those individuals who use nursing
homes for the purpose of caring for their chronic conditions
was about 2.4 years, as of 1997. Nursing home residents are
more likely to be very old and female. In 1997, residents age
85 and older comprised 50.4 percent of the nursing home
population, and 74 percent of elderly residents (over age 65)
were female.\13\
---------------------------------------------------------------------------
\13\ National Center for Health Statistics. Characteristics of
Elderly Nursing Home Current Residents and Discharges: Data from the
1997 National Nursing Home Survey. Number 312. Centers for Disease
Control and Prevention, U.S. Department of Health and Human Services.
April 25, 2000.
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3. Where Is Long-Term Care Delivered?
Long-term care services are often differentiated by the
settings in which they are provided. In general, services are
provided either in nursing homes or in home and community-based
settings. Most settings are community settings, since the great
majority of elderly persons needing long-term care reside in
the community. In addition, many elderly individuals prefer to
receive long-term care assistance in the community as they and
their advocates affirm that aging-in-place (i.e. in one's home
or in a community setting) enables the elderly to maximize
their independence and lead more meaningful lives.
Because of the growth in demand for services all along the
long-term care continuum, services are now offered in a vast
array of settings. Outside of the nursing home, there are many
options in service settings. Nutrition services can be
delivered in the home, as in the case of home-delivered meals,
or in congregate dining sites. Sites can be located in senior
centers and other community focal points, senior housing
facilities, churches, schools, and government buildings. Adult
day care centers can be located in nursing homes, hospitals, or
in community-based settings such as senior centers, churches,
senior housing facilities, and other focal points. Home health
services are delivered in the recipient's home, whether it is a
free-standing dwelling, apartment, board and care home,
assisted living facility, or other type of group housing
option. Respite care can be delivered in the client's home, or
in a congregate setting such as an adult day care center, a
senior center or drop-in center, or in a residential setting
such as a nursing home or other facility.
4. Who Provides Long-Term Care?
Because of the wide assortment of long-term care services
available to elderly individuals, it is difficult to present a
comprehensive breakdown of all personnel delivering these
services across the entire long-term care continuum. However,
the majority of paid direct care providers include registered
nurses (RNs), licensed practical nurses (LPNs) and
paraprofessionals (home health aides, nursing aides, personal
care and home care aides).
As of 1998, there were nearly 2.1 million licensed
registered nurses in the United States.\14\ Registered nurses
are responsible for assisting physicians, administering
medications, and helping patients in the convalescence and
rehabilitation processes. Most RNs (60 percent) work in
hospitals and 7 percent work in nursing/personal care and
private facilities. An estimated 8 percent work in physicians'
offices, 6 percent work in home health care services and the
remaining 19 percent work in a diverse range of public/
community and private settings, such as educational
organizations, private homes, and schools.\15\
---------------------------------------------------------------------------
\14\ U.S. Department of Health and Human Services. Bureau of Health
Profession. Division of Nursing. The Registered Nurse Population.
National Sample Survey of Registered Nurses--March 2000 Preliminary
Findings. February 2001.
\15\ U.S. Bureau of Labor Statistics. Occupation-Industry Matrix
derived from the Occupational Employment Survey which queries
employers.
---------------------------------------------------------------------------
In 1998, there were more than 692,000 licensed practical
nurses (LPNs). LPNs provide routine care (taking vital signs,
applying dressings, supervising the care provided by nursing
assistants) under the direction of physicians and RNs. They may
also help develop care plans. Thirty-two percent worked in
hospitals, 28 percent in nursing facilities, 26 percent in home
health agencies and residential care facilities, and 14 percent
in doctors' offices and clinics.\16\
---------------------------------------------------------------------------
\16\ Ibid.
---------------------------------------------------------------------------
Long-term care paraprofessionals include home health aides,
personal care aides, and nurse aides. They work in a variety of
settings and play an important role in the provision of long-
term care, providing eight out of every 10 hours of paid long-
term care.\17\ In 1998, more than 746,000 home health aides,
personal care attendants, and home care aides provided a
variety of long-term care services to individuals living in the
community and 1.4 million nurses aides provided personal and
health-related services to patients in hospitals and nursing
homes.\18\ Home health and nurse aides' responsibilities
include taking temperatures, assisting individuals with
bathing, dressing, eating, toileting and other services under a
physician's or nurse's orders.\19\
---------------------------------------------------------------------------
\17\ Direct-Care Health Workers: The Unnecessary Crisis in Long-
Term Care. The Aspen Institute, January 2001, p. 1.
\18\ U.S. Department of Labor. Bureau of Labor Statistics.
Occupational Outlook Handbook (2000-2001 Edition), 2001.
\19\ Nursing Staff in Hospitals and Nursing Homes: Is it Adequate?
Institute of Medicine, 1996, p. 68 and Improving the Quality of Care in
Nursing Outcomes, p. 52.
---------------------------------------------------------------------------
In recent years, there have been widespread accounts of
hospitals, nursing homes and other facilities having great
difficulty attracting and retaining nursing and
paraprofessional personnel. This problem may be the result of a
variety of factors, including the strong economy which has
increased competition among providers within the health care
sector and expanded opportunities for work in other sectors.
Studies have shown that such difficulties can also be
attributed to relatively low wages, limited or no employee
benefits, and insufficient opportunities for professional
development (such as promotions and training opportunities)
offered to paraprofessionals.\20\ These problems are especially
acute in the long-term care sector where nursing homes and home
health agencies play a major role.\21\
---------------------------------------------------------------------------
\20\ President's Advisory Commission on Consumer Protection and
Quality in the Health Care Industry. Quality First: Better Health Care
for All Americans, Final Report to the President. 1999. North Carolina
Division of Facility Services. Comparing State Efforts to Address the
Recruitment and Retention of Nurse Aide and Other Paraprofessional Aide
Workers, September, 1999.
\21\ Other long-term care providers, whose nurses and
paraprofessionals are not regulated under Medicare or Medicaid, include
assisted living facilities and other congregate residential facilities.
---------------------------------------------------------------------------
Any discussion of individuals who deliver long-term care
services would be incomplete without a discussion of unpaid
informal caregivers. This is because most long-term care is
provided by these caregivers. Despite substantial public
spending for long-term care, families provide the bulk of long-
term care services to family members with physical and
cognitive disabilities. Research has documented the enormous
responsibilities that families face in caring for relatives who
have significant impairments. For example, data from the 1994
National Long-Term Care Survey (NLTCS) sponsored by the
Department of Health and Human Services (DHHS) found that
caregivers of the elderly with certain functional limitations
provide an average of 20 hours of unpaid help each week. The
study also found that over 7 million persons provide 120
million hours of unpaid care to about 4.2 million functionally
disabled older persons each week. Typically, this care is
provided by adult children to elderly parents (41 percent) and
by other relatives (26 percent). Spouses (24 percent) and non-
relatives (9 percent) also volunteer to provide care to frail
elderly individuals. About 37 million caregivers provide
informal, or unpaid, care to family members of all ages. Unpaid
work, if replaced by paid home care, would cost an estimated
$45 billion to $94 billion annually.\22\
---------------------------------------------------------------------------
\22\ Doty, Pamela. Caregiving: Compassion in Action. U.S.
Department of Health and Human Services, 1998. P. 13. This estimate is
based on elderly persons who need assistance with ADL or IADL
limitations.
---------------------------------------------------------------------------
5. Who Pays for Long-Term Care?
A variety of Federal programs assist persons with long-term
care problems, either directly or indirectly, through cash
assistance, in-kind transfers, or the provision of goods and
services. While the attention to long-term care financing has
grown in the past few years, policymakers have been struggling
with various aspects of the issue for the past twenty years.
Examples of issues which have arisen as a result of the payment
structure are access problems and the bias toward a high-cost
medical model for delivering long-term care services.
Creation of Federal task forces on long-term care issues,
as well as Federal investment in research and demonstration
efforts to identify cost-effective ``alternatives to
institutional care,'' date back to the late 1960's and early
1970's when payments for nursing home care began consuming a
growing proportion of Medicaid expenditures. The awareness that
public programs provided only limited support for community-
based care, as well as concern about the fragmentation and lack
of coordination in Federal support for long-term care, led to
the development of a number of legislative proposals in
previous Congresses.
The issue of financing long-term care costs has been
heightened by the desire of Congress to slow the growth of
entitlement programs such as Medicaid and Medicare. The table
below indicates that the Nation already spends a great deal of
money on long-term care for the elderly, about $123 billion in
1999. Federal and State governments account for the bulk of
this spending, about $70 billion or 57 percent of the total.
Table 1. Personal Health Care Expenditures, by Type of Expenditures and
Source of Funds, 1999 [in billions]
------------------------------------------------------------------------
Nursing Home Health
Source of funds Home Care Care
------------------------------------------------------------------------
Total Long-Term Health Care Expenditures For $90 33.1
Services.....................................
Out-of-Pocket................................. 23.9 9
Third-Party Payments.......................... 66.1 24.1
Private Health Insurance...................... 7.5 6.3
Other Private................................. 4.5 1.7
Federal....................................... 35.6 11.9
Medicare...................................... 9.6 8.7
Medicaid...................................... 24 3.0
Other......................................... 1.9 0.1
State and Local............................... 18.6 4.2
Medicaid...................................... 18.3 2.6
Other......................................... 0.2 1.7
------------------------------------------------------------------------
Source: Centers for Medicare and Medicaid Services, Office of the
Actuary, National Health Statistics Group, 1999.
Approximately 73 percent of long-term care spending for the
elderly is for nursing home care. Examination of the sources of
payment for nursing home care reveals that the elderly face
significant uncovered liability for this care. Two sources of
payment--the Medicaid program and out-of-pocket payments
account for nearly 74 percent of this total.
Medicaid is a Federal-State matching entitlement program
that provides medical assistance for certain groups of low-
income individuals. The program was established under Title XIX
of the Social Security Act in 1965 and has become the largest
single source of financing both private and public for long-
term care \23\ and medical services for the elderly who are
low-income or who have depleted their income and assets on
medical and long-term care expenses.\24\ Of the 40.3 million
individuals who received services under Medicaid in fiscal year
1998 (FY98), approximately 4 million (10.1 percent) qualified
on the basis of being elderly.
---------------------------------------------------------------------------
\23\ Long-term care offers a wide range of personal, social, and
medical support services through institutions and community-based
programs.
\24\ Medicaid also plays a significant role in the provision of
preventive, primary and acute care for millions of low-income children,
families and pregnant women. For more information on eligibility
criteria for these groups, see forthcoming CRS report Medicaid: An
Overview.
---------------------------------------------------------------------------
Medicaid program data show that spending for the elderly is
driven largely by its coverage of people who have become poor
as the result of depleting assets and income on the cost of
nursing home care. In most States, this ``spend-down''
requirement means that a nursing home resident without a spouse
cannot have more than $2,000 in countable assets before
becoming eligible for Medicaid coverage of their care. This is
not difficult for persons needing nursing home care, with the
average cost in excess of $40,000 per year. It is largely the
impoverishing consequences of needing nursing home care that
has led policymakers over the years to try to look for
alternative ways of financing long-term care.
Table 1 indicates that nearly all private spending for
nursing home care is paid directly by consumers out-of-pocket.
At present, private insurance coverage for long-term nursing
home care is very limited, with private insurance payments
amounting to 8.3 percent of total spending for nursing home
care in 1999. This pattern of private spending for nursing home
care is also a driving force in the long-term care debate. The
only way individuals have been able to pay privately for
expensive nursing home care is with their own accumulated
resources and/or income. Some policymakers, especially during
the last decade, have looked for alternative sources of private
sector funding, through such mechanisms as private insurance,
to provide protection against the risk of catastrophic nursing
home expenses.
While most persons needing long-term care live in the
community and not institutions, many fewer public dollars are
available to finance the home and community-based services that
the elderly and their families prefer. In 1999, spending for
home care services for the elderly amounted to $33.1 billion,
or almost 27 percent of total long-term care spending for the
elderly in that year. This spending does not take into account
the substantial support provided to the elderly informally by
family and friends. Data from the 1994 National Long-Term Care
Survey (NLTCS) sponsored by the Department of Health and Human
Services (DHHS) indicate that over 7 million persons provide
120 million hours of unpaid care to about 4.2 million
functionally disabled older persons each week. Research has
shown that about 95 percent of the functionally impaired
elderly living in the community receive at least some
assistance from informal caregivers, but about two-thirds rely
exclusively on unpaid sources, generally family and friends,
for their care. Caregiving frequently competes with the demands
of employment and requires caregivers to reduce work hours,
take time off without pay, or quit their jobs.
Table 1 also reveals that Medicare plays a relatively small
role in financing nursing home care services. Medicare, the
Federal health insurance program for the elderly and disabled,
is focused primarily on coverage of acute health care costs and
was never envisioned as providing protection for long-term
care. Coverage of nursing home care is limited to short-term
stays in certain kinds of nursing homes (referred to as skilled
nursing facilities) and only for those people who demonstrate a
need for daily skilled nursing care or other skilled
rehabilitation services following a hospitalization. Many
people who require long-term nursing home care do not need
daily skilled care, and, therefore, do not qualify for
Medicare's benefit. As a result of this restriction, Medicare
paid for only about 11 percent of the elderly's nursing home
spending in 1999.
For similar reasons, Medicare covers only limited, albeit
rapidly growing, amounts of community-based long-term care
services through the program's home health benefit that
impaired elderly persons could use. To qualify for home health
services, the person must be in need of skilled nursing care on
an intermittent basis, or physical or speech therapy. Most
chronically impaired people do not need skilled care to remain
in their homes, but rather nonmedical supportive care and
assistance with basic self-care functions and daily routines
that do not require skilled personnel. When added together,
Medicare's spending for nursing home and home health care for
the elderly amounted to approximately 15 percent of total
public and private long-term care spending in 1999, as shown on
Table 1.
Three other Federal programs the Social Services Block
Grant (SSBG), the Older Americans Act, and the Supplemental
Security Income (SSI) program--provide support for community-
based long-term care services for impaired elderly people. In
addition to these Federal programs, a number of States devote
significant State funds to home and community-based long-term
care services. The three major Federal programs are described
below:
Title XX of the Social Security Act
authorizes Social Services Block Grants (SSBG) to
states to help them provide a wide range of social
services for the elderly, as well as for younger adults
and children with disabilities. Using SSBG funds,
states may provide home-based services, adult day care,
home-delivered meals, case management services, health
related and home health services, transportation as
well as a variety of other support services that are
not part of the long-term care continuum. Funds are
allotted to states on the basis of state population
demographics and do not require state matching funds.
In 1999, SSBG programs received $3 billion in Federal
appropriation funding. Funding has decreased in each
year since 1998. In 2001, the SSBG Federal
appropriation decreased to $1.7 billion.
The Older Americans Act (OAA) is the major
vehicle for the delivery of social and nutrition
services for older persons. Originally enacted in 1965,
the Act supports a wide range of services for older
persons, a community service employment program, and
research, training, and demonstration activities, among
other programs. Authorization of appropriations for the
Act were extended through FY2005 by P.L. 106-501 signed
into law on November 13, 2000. For FY2001, $1.7 billion
was appropriated for OAA programs administered by the
Departments of Labor, Health and Human Services, and
Agriculture. The Older Americans Act also funds a broad
range of in-home services for the elderly, including
home-delivered meals and respite care, and authorizes a
specific program for other in-home supportive services
for the frail elderly; and
The Supplemental Security Income (SSI)
program, authorized by Title XVI of the Social Security
Act, is a means-tested income assistance program
financed from general tax revenues. Under SSI,
disabled, blind, or aged individuals who have low
incomes and limited resources are eligible for benefits
regardless of their work histories. In November 2000,
about 6.6 million individuals received SSI benefits. In
FY2000, total SSI benefits were $34.4 billion. The
maximum Federal SSI benefit for an individual living
independently is $530 per month and $796 per month for
a couple in 2001. Many states, recognizing that the SSI
benefit standard may provide too little income to meet
an individual's living expenses, supplement SSI with
additional cash assistance payments made solely with
state funds. These supplemental payments may be used by
individuals to pay for a range of community-based care,
such as adult foster care.
Since funding available for these three programs is
limited, their ability to address the financing problems in
long-term care is also limited. Recent decreases in Federal
funding for the SSBG have affected States' abilities to support
home care services for the frail elderly. The Older Americans
Act National Family Caregiver Program will assist some families
in their caregiving efforts; however, many advocates want to
see the program's funding increase.
B. FEDERAL PROGRAMS
Although a substantial share of long-term care costs are
paid out-of-pocket, the Federal programs that pay for long-term
care are important in that they have established the framework
for how long-term care is provided in the United States.
Federal expenditures make up the majority of long-term care
spending in the Nation, with the remaining expenditures paid
for by individuals and private insurance. The following is a
discussion of the primary public sources of Federal long-term
care financing: Medicaid, Medicare, the Older Americans Act,
and Social Services Block Grants. No one of these programs can
provide a comprehensive range of long-term care services. Some
provide primarily medical care, others focus on supportive or
social services. In addition, eligibility criteria for services
under these programs vary, resulting in a patchwork of covered
services provided to diverse groups of individuals. Many
advocates for the elderly contend that these differences
contribute to the fragmented and uncoordinated nature of the
long-term care system in this country.
1. Medicaid
(A) INTRODUCTION
Title XIX of the Social Security Act is a Federal-State
matching entitlement program that pays for medical assistance
for certain vulnerable and needy individuals and families with
low incomes and resources. This program, known as Medicaid,
became law in 1965, and is jointly funded by Federal and State
Governments. Each State designs and administers its own
Medicaid Program, determining eligibility and benefit packages
within broad Federal guidelines. Medicaid is the largest of the
joint Federal/State entitlement programs and can be thought of
as three distinct programs one program funds long-term care for
chronically ill, disabled and aged; another program provides
comprehensive health insurance for low-income children and
families; and, finally, Medicaid's disproportionate share (DSH)
program assists hospitals with the cost of uncompensated care.
In FY1998, CMS estimates that Medicaid enrolled 40.3 million
persons at a total cost of almost $176.9 billion. The Federal
share of the cost was $99.9 billion.\25\ Combined Federal and
State expenditures in FY2000 total $206.7 billion, with the
Federal share nearly $117.4 billion.\26\
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\25\ Estimates prepared by Congressional Research Service (CRS)
based on analysis from Centers for Medicare and Medicaid Services, Form
2082. CRS Product RL 30733: Medicaid Expenditures and Beneficiaries,
1998.
\26\ Data on enrollees in FY2000 is not yet available.
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Although Medicaid was originally intended to provide basic
medical services to the poor and disabled, it has become the
Nation's single largest payer for nursing home care, accounting
for nearly 50 percent of the total $90 billion spent by the
Nation for this care in 1999. The aged and disabled totaled
about 27 percent of Medicaid recipients, but accounted for
about 67.5 percent of spending for covered services in FY1998.
This disparity is due largely to Medicaid's coverage of long-
term care services, the fact that elderly and disabled persons
need and use these services more than younger groups, and the
high cost of these services. Because of the enormous role of
the Medicaid program in financing nursing home care for the
elderly, a section of this chapter provides an in-depth
discussion of Medicaid.
Though Medicaid's long-term care payments are primarily for
institutional care (including nursing home care for the
elderly), some coverage of home and community-based care is
provided mostly through the Section 2176 waiver program, also
called the Section 1915(c) waiver program. Congress established
these waiver programs in 1981, giving HHS the authority to
waive certain Medicaid requirements to allow the States the
option of offering targeted community-based long-term care
services to qualifying individuals who prefer community-based
rather than institutional care. Services covered under the
Section 1915(c) waivers include case management, homemaker,
home health aide, personal care services, adult day care,
rehabilitation, respite, and others.
Other community-based long-term care services provided
through Medicaid include home health and personal care. States
are required to provide home health services to persons who
qualify for Medicaid based on being elderly or disabled and who
meet all requirements for nursing facility coverage except for
the level-of-care criteria. In order to receive Federal
reimbursement, home health services must be medically necessary
and ordered by a physician under a plan of care. In addition,
States have the option of offering personal care services in
their benefit packages for Medicaid beneficiaries who need
assistance with ADLs and IADLs. Personal care services are
defined as services furnished to an individual at home or in
another location (excluding hospital, nursing facility, ICF/MR,
or institution for mental diseases) that are authorized by a
physician, or at state option, otherwise authorized under a
plan of care.
Due to the high costs of long-term care, many States have
imposed cost containment measures to control their Medicaid
expenditures. For example, most States use a form of
prospective reimbursement for nursing home care which is a
predetermined fixed payment nursing homes receive for each day
of care needed by a Medicaid enrollee. This payment is intended
to cover all costs of care provided to the nursing home
resident; if costs exceed the payment, the nursing home
receives no additional amount and the nursing home faces a
loss. The Omnibus Budget Reconciliation Act of 1987 (OBRA 87)
nursing home reforms require all States to screen current and
prospective residents for mental illness or mental retardation,
based on the premise that nursing homes are inappropriate for
such persons. These screening programs are intended to identify
those mentally disabled people who could be cared for in
specialized facilities or their own homes or in the community
if appropriate services were available, and to assure that
nursing home beds are available for those who have medical
needs. The certificate of need process, in which a provider
must apply to the State in order to expand or construct new
beds or risk becoming ineligible for Medicare or Medicaid
reimbursement, is seen as a Medicaid cost-containment measure
in some States.
(B) MEDICAID AVAILABILITY AND ELIGIBILITY
In general, Medicaid is a means-tested entitlement program;
it covers certain groups of persons such as the aged, blind,
disabled, members of families with dependent children, and
certain other pregnant women and children if their incomes and
resources are sufficiently low. Medicaid recipients are
entitled to have payment made by the State for covered
services. States then receive matching funds from the Federal
Government to pay for covered services. There is no Federal
limit on aggregate matching payments. Allowable claims are
matched according to a formula which varies inversely with a
State's per capita income. Therefore States with higher per
capita income will receive a lower percentage of Federal
matching funds and vice versa. The established minimum matching
rate is 50 percent and may not exceed 83 percent. For FY2001, 9
States had matching rates of 50 percent. Sixteen States had
matching rates between 50 percent and 60 percent. Twelve States
and the District of Columbia had matching rates at or above 70
percent. Mississippi had the highest rate in effect, 76.82
percent. Overall, in FY2000 the Federal Government finances
about 57 percent of all Medicaid costs.
Each State establishes its own eligibility rules within
broad Federal guidelines. States must cover certain population
groups such as recipients of Supplemental Security Income
(SSI), i.e., the aged, the blind and disabled, and have the
option of covering others. Historically, Medicaid eligibility
for poor families (generally women with dependent children) was
linked to receipt of cash welfare payments. In recent years,
Medicaid's ties to welfare benefits have been loosened. This
trend culminated in creation of the Temporary Assistance for
Needy Families (TANF) program in 1996. The new welfare law
includes provisions severing the automatic link with Medicaid
but allows States to maintain the link as an option. Medicaid
does not cover everyone who is poor, reaching only 39 percent
of persons in poverty in 1999.\27\ Eligibility is also subject
to categorical restrictions; benefits are available only to
members of families with children and pregnant women, and to
persons who are aged, blind, or disabled.
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\27\ U.S. Census Bureau. Health Insurance Detailed Table: 1999--
Table 2. Type of Health Insurance and Coverage Status, Poor People:
1998 and 1999. November 3, 2000. http://www.census.gov/hhes/hlthin99/
dtable2.html
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Special eligibility rules apply to persons receiving care
in nursing facilities and other institutions. Many of these
persons have incomes well above the poverty level but qualify
for Medicaid because of the high cost of their health care.
Medicaid has thus emerged as the largest source of third-party
funding for long-term care.
The State-by-State variation in eligibility that Medicaid
allows can mean persons with identical circumstances may be
eligible to receive Medicaid benefits in one State, but not in
another State. State officials have made the case that some
individuals are likely to choose their State of residence
according to how generous Medicaid benefits are.
States are required under their Medicaid plans to cover
certain services and have the option of covering others. Some
of the mandatory services include: physicians' and hospital
services, and care in nursing facilities. Some of the optional
services include: prescription drugs; eyeglasses; and services
in an intermediate care facility for the mentally retarded.
States may also limit the amount, duration and scope of
coverage of services; e.g., they may limit the number of
covered hospital days. Within broad Federal guidelines, states
set payment methodologies and determine the payment rates for
services provided. Therefore, state reimbursement levels to
providers of Medicaid covered services vary from State to
State. Medicaid law requires states to publish their rates as
well as the underlying methodologies and justifications for the
rates.
(C) Low-Income Beneficiaries Also Eligible for Medicare
Because the Medicare program requires beneficiaries to pay
a portion of the cost of acute health care services themselves
in the form of cost-sharing charges as well as a monthly
premium for enrollment in Part B, such charges posed a
potential hardship for some persons especially those who did
not have supplementary protection through an individually
purchased Medigap policy or employer-based coverage.
Federal law specifies several population groups that are
entitled to Medicaid coverage of some or all of Medicare's
costs-sharing and premium charges.\28\ These are qualified
Medicare beneficiaries (QMBs), specified low income
beneficiaries (SLIMBs), and certain qualified individuals. QMBs
and SLIMBs may be entitled to full Medicaid coverage under
their state's Medicaid program. Persons entitled to full
Medicaid protection generally have all of their health care
expenses met by a combination of Medicare and Medicaid. For
these ``dual eligibles'' Medicare pays first for services both
programs cover. Medicaid picks up Medicare cost-sharing charges
and provides protections against the costs of services
generally not covered by Medicare. Other groups, including
qualifying individuals, are not entitled to full Medicaid
benefits. The following is a description of the four coverage
groups:
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\28\ The Qualified Medicare Beneficiary (QMB) Program was enacted
in 1988. Additional categories were added by the Balanced Budget Act of
1997.
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Qualified Medicare Beneficiaries (QMBs).--QMBs are aged and
disabled persons with incomes at or below the Federal poverty
line ($8,832 for a single individual and $11,856 for a couple
in 1999) and assets below $4,000 for an individual and $6,000
for a couple.\29\ QMBs are entitled to have their Medicare
cost-sharing charges, including the Part B premium, paid by the
Federal-State Medicaid program. Medicare Part B provides
coverage for physicians' services, laboratory services, durable
medical equipment, hospital outpatient department services, and
other medical services. Medicaid protection is limited to
payment of Medicare cost-sharing charges (i.e., the Medicare
beneficiary is not entitled to coverage of Medicaid plan
services) unless the individual is otherwise entitled to
Medicaid.
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\29\ The Federal poverty level in Alaska is $10,980 for an
individual per year and $14,760 for a couple. For Hawaii, the Federal
poverty level is 845 for an individual and 10,140 for a couple.
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Specified Low-income Medicare Beneficiary.--SLMB benefits
are available to Medicare recipients whose income is no greater
than 120 percent of FPL. In 2001, this means that income at or
below $879 per month for an individual and $1,181 for a
couple.\30\ The asset test is the same as that for QMB. Under
this Medicaid pathway, benefits include only the monthly
Medicare Part B premiums.
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\30\ The Federal poverty level in Alaska is $1,093 for an
individual per year and $1,471 for a couple. For Hawaii, the Federal
poverty level is $1,009 for an individual per year and $1,356 for a
couple.
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Medicaid coverage for QMBs and SLMBs is limited to Medicare
cost-sharing charges. Other Medicaid plan services, such as
nursing facility care, prescription drugs and primary and acute
care services, are not covered for these individuals unless
they qualify through other eligibility pathways into Medicaid
(e.g. via SSI, medically needy or special income rule).
Qualifying Individual (QI-1).--These are persons who meet
the QMB criteria, except that their income is between 120
percent and 135 percent of poverty. Further, they are not
otherwise eligible for Medicaid. Medicaid protection is limited
to payment of the Medicare Part B premium.\31\
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\31\ In general, Medicaid payments are shared between the federal
government and the states according to a matching formula. However,
expenditures under the QI-1 and QI-2 programs are paid for 100 percent
by the federal government (from the Medicare Part B trust fund) up to
the state's allocation level. A state is only required to cover the
number of persons which would bring its spending on these population
groups in a year up to its allocation level. Any expenditures beyond
that level are paid by the state. Total allocations are $200 million in
FY 1998, $250 million for FY 1999, $300 million for FY 2000, $350
million for FY 2001, and $450 million for FY 2002. Assistance under the
QI-1 and QI-2 programs is available for the period January 1, 1998 to
December 31, 2002.
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Qualifying Individuals (QI-2).--These are persons who meet
the QMB criteria, except that their income is between 135
percent and 175 percent of poverty. Further, they are not
otherwise eligible for Medicaid. Medicaid protection is limited
to payment of that portion of the Part B premium attributable
to the gradual transfer of some home health visits from
Medicare Part A to Medicare B ($3.09 in 2001).
For purposes of the QMB program, income includes but is not
limited to Social Security benefits, pensions, and wages.
Assets subject to the $4,000 limit for a single individual
include bank accounts, stocks, and bonds. Certain items such as
an individual's home and household goods are always excluded
from the calculation.
Participation rates in the QMB program have been lower than
anticipated. According to a 1998 report by Families USA,
``nationally, between 3.3 and 3.9 million low-income senior
citizens and disabled individuals were eligible for QMB and
SLMB benefits but were not receiving it.'' Many low-income
elderly and disabled were unaware of the program. CMS has
embarked on an outreach program to enroll those who may be
eligible and CMS also screens newly entitled Medicare
beneficiaries to determine their QMB eligibility.
(D) Spousal Impoverishment
Rules are used to prevent what is often referred to as
spousal impoverishment--a situation that leaves the spouse who
lives at home in the community with little or no income or
resources when the other spouse requires institutional or home
and community-based long-term care.\32\ Spousal impoverishment
was largely a concern before Congress passed the Medicare
Catastrophic Coverage Act (MCCA) of 1988. Before MMCA, states
could consider all of the assets of the community spouse, as
well as the institutionalized spouse, available to pay for the
cost of medical care for an institutionalized spouse under
Medicaid. This rule created hardships for the spouse living in
the community who was forced to spend down virtually all of the
couple's assets to Medicaid eligibility levels so that the
institutionalized spouse could qualify for Medicaid. MCCA
established new rules for the treatment of income and resources
of married couples to determine how much income or resources a
community spouse must contribute toward the cost of care for
the spouse requiring the care, and how much of the
institutionalized spouse's income and resources is actually
protected for use by the community spouse.\33\
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\32\ The need for nursing home care--whose average cost can be in
excess of $40,000 per year--can rapidly deplete the lifetime savings of
elderly couples.
\33\ Report of the Special Committee on Aging United States.
Developments in Aging: 1997 and 1998 Volume 1. Pursuant to S. Res. 54,
Sec. 19(c), February 13, 1997, 106th Congress, 2nd Session. Senate
Report 106-229, February 7, 2000.
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Treatment of Resources.--The spousal impoverishment
resource eligibility rules require States under their Medicaid
programs to use a specific method of counting a couple's
resources in initial eligibility determinations. Under these
rules, States must assess a couple's combined countable
resources, when requested by either spouse, at the beginning of
a continuous period of institutionalization, defined as at
least 30 consecutive days of care. CMS' guidance on
implementing spousal impoverishment law requires that nursing
homes advise people entering nursing homes and their families
that resource assessments are available upon request. The
couple's home, household goods, personal effects, and certain
burial-related expenses are excluded from countable resources;
however, States are required to recover from individuals'
estates amounts paid by Medicaid for long-term care nursing
home and home and community-based care as well as other
services. Recovery may only be made after the death of the
beneficiary and his or her surviving spouse, if any, and only
at a time when there is no surviving child under age 21 or a
child who is blind or permanently and totally disabled.
From the combined resources, an amount is required to be
protected for the spouse remaining in the community. This
amount is the greater of an amount equal to one-half of the
couple's resources at the time the institutionalized spouse
entered the nursing home, up to a maximum of $87,000 in 2001,
or the state standard. Federal law stipulates that state
standards may be no lower than $17,400 in 2001. Maximum and
minimum Community Spouse Resource Allowance (CSRA) amounts are
adjusted annually at the Federal level by the same percentage
as the consumer price index (CPI). When the community spouse's
half of the couple's combined resources is less than the State
standard, the institutionalized spouse transfers resources to
the community spouse to bring that spouse up to the State
standard. In other cases, the community spouse may be required
to apply resources to the nursing home spouse's cost of care.
Treatment of Income.--Spousal impoverishment law also
established new post-eligibility rules for determining how much
of the nursing home spouse's income must be applied to the cost
of care. The rules require that States recognize a minimum
maintenance needs allowance for the living expenses of the
community spouse. As of 2001, the minimum is $1,451.25 per
month. States can set the maintenance needs allowance as high
as $2,175 per month. States can increase this amount, depending
on the amount of the community spouse's actual shelter costs
and whether the minor or dependent adult children or certain
other persons are living with the community spouse. Both of
these minimum and maximum amounts are adjusted at the Federal
level to reflect increases in the CPI. To the extent that
income of the community spouse does not meet the State's
maintenance need standard and the institutionalized spouse
wishes to make part of his or her income available to the
community spouse, the nursing home spouse may supplement the
income of the community spouse to bring that spouse up to the
State standard.
(E) Personal Needs Allowance for Medicaid Nursing Home Residents
Medicaid law allows nursing home residents to retain a
small portion of their income for personal needs. This personal
needs allowance (PNA) covers each month a wide range of
expenses not paid for by Medicaid. On July 1, 1988, the PNA was
increased from $25 to $30 per month. Prior to this, the PNA had
not been increased or adjusted for inflation since Congress
first authorized payment in 1972. As a result, the $25 PNA was
worth less than $10 in 1972 dollars. States have the option of
supplementing the Federal minimum PNA with state funds. As of
November 2000, 35 States did, with the combined PNA plus State
supplement ranging from $35 in Florida, Nevada and New Jersey
to $76.80 in Arizona.\34\ Personal Needs Allowances are not
adjusted to reflect changes in the annual cost of living,
although some states, Connecticut and Minnesota, increase their
PNA levels annually. There is no provision for a cost-of-living
adjustment (COLA) in the PNA, even though noninstitutionalized
recipients of Social Security and SSI benefits have received
annual COLAs to their benefits since 1974.
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\34\ Congressional Research Survey of Selected Medicaid Eligibility
and Post-Eligibility for Aged, Blind, Disabled (ABD) Groups, November
2000. State reported responses via email, telephone and fax.
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For impoverished nursing home residents, the PNA represents
the extent of their ability to purchase basic necessities like
toothpaste and shampoo, eyeglasses, clothing laundry,
newspapers, and phone calls. In addition to personal needs,
many nursing home residents may have medical needs that are not
covered by State Medicaid programs. Although the PNA is not
intended to cover medical items, these residents may have to
save their PNA's over many months to pay for costs for items
such as hearing aids and dentures.
If a nursing resident enters a hospital, a daily fee must
be paid to the nursing facility to reserve a bed for her
return. PNA funds are often used for this payment. A number of
Medicaid programs will make payments to reserve a bed for a
pre- determined amount of days for hospitalization or
``therapeutic leave'' such as a home visit, or vacation days
and all other absent days are considered noncovered expenses.
When a resident cannot pay this fee, he/she is likely to lose
his/her place in the nursing home. Those Medicaid plans that
don't make payments will not guarantee the nursing home
resident a bed to come back to. As a result of this and various
other expenses not covered by many Medicaid programs, many
advocates of the Nation's nursing home residents believe the
$30 PNA is inadequate to meet the needs of most residents.
Asset Transfer
Under the Medicaid transfer of assets provisions, States
must deny eligibility to persons who need various long-term
care services when they dispose of their assets for less than
fair market value in order to qualify for Medicaid. These
provisions apply when assets are transferred by individuals
seeking Medicaid coverage for nursing home care or home and
community-based waiver services, or by their spouses, or
someone else acting on their behalf.
States must ``look back'' to find transfers of assets for
36 months prior to the date the individual is institutionalized
or, if later, the date he or she applies for Medicaid. For
certain trusts, this look-back period extends to 60 months.
If a transfer of assets for less than fair market value is
found, the State must withhold payment for nursing facility
care (and certain other long term care services) for a period
of time referred to as the penalty period. The length of the
penalty period is determined by dividing the value of the
transferred asset by the average monthly private-pay rate for
nursing facility care in the State. For example: A transferred
asset worth $90,000, divided by a $3,000 average monthly
private-pay rate, results in a 30-month penalty period. There
is no limit to the length of the penalty period.
For certain types of transfers, these penalties are not
applied. The principal exceptions are: transfers to a spouse,
or to a third party for the sole benefit of the spouse,
transfers by a spouse to a third party for the sole benefit of
the spouse, transfers to certain disabled individuals, or to
trusts established for those individuals, transfers for a
purpose other than to qualify for Medicaid, and transfers where
imposing a penalty would cause undue hardship.
Estate Recovery Provision
The estate recovery law requires States to claim a portion
of the estates belonging to certain Medicaid recipients in
order to recover funds Medicaid paid for the recipient's health
care. Beneficiaries are notified of the Medicaid estate
recovery program during their initial application for Medicaid
eligibility and their annual redetermination process.
Individuals in medical facilities (who do not return home) are
sent a notice of action by their county Department of Social
Services informing them of any intent to place a lien/claim on
their real property. The notice also informs them of their
appeal rights. Estate recovery procedures are initiated after
the beneficiary's death.
In addition, for individuals age 55 or older, States are
required to seek recovery of payments from the individual's
estate for nursing facility services, home and community-based
services, and related hospital and prescription drug services.
States have the option of recovering payments for all other
Medicaid services provided to these individuals. In addition,
States that had State plans approved after May 14, 1993 that
disregarded assets or resources of persons with long-term care
insurance policies must recover all Medicaid costs for nursing
facility and other long- term care services from the estates of
persons who had such policies. California, Connecticut,
Indiana, Iowa, and New York are not required to seek adjustment
or recovery from the estates of persons who had long-term care
insurance policies. These States had State plans approved as of
May 14, 1993 and are exempt from seeking recovery from
individuals with long-term care insurance policies. For all
other individuals, these States are required to comply with the
estate recovery provisions as specified above. States are also
required to establish procedures, under standards specified by
the Secretary for waiving estate recovery when recovery would
cause an undue hardship.
The Center for Medicare and Medicaid Services reported in
1999 that states recovered approximately $200 million through
their Medicaid Estate Recovery programs.\35\ At the national
level, this comprised about one tenth of 1 percent of total
Medicaid expenditures for covered benefits.\36\
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\35\ Third Party Liability Savings Trend Analysis, Collection,
1999. Center for Medicare and Medicaid Services. Data provided to
Congressional Research Service by CMS on March 28, 2001.
\36\ Recovered funds in FY 1999 are based on Medicaid expenditures
during beneficiaries' lifetimes, and are not limited to amounts spent
by the program in FY 1999. Total Medicaid expenditures for FY 1999
refer to expenditures made during that federal fiscal year. There is
therefore not a one-to-one correspondence between dollars spent in 1999
to dollars recovered in 1999.
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(F) 1915(c) Waiver Program
Despite the availability of home health and personal care
attendants under Medicaid's general program, the majority of
community-based care is provided under 1915(c) and (d) Home and
Community-Based Services Waiver (HCBW) program. Prior to 1981,
Federal regulations limited Medicaid home care services to the
traditional acute care model. To counter the institutional bias
of Federal long-term care spending, Congress in 1981 enacted
new authority to waive certain Medicaid requirements to allow
States to broaden coverage for a range of community-based
services and to receive Federal reimbursement for these
services. Specifically, Section 2176 of the Omnibus Budget
Reconciliation Act of 1981 authorized the Secretary of the
Department of Health and Human Services to approve ``Section
2176 waivers'' for home and community-based services known as
Medicaid Home and Community-Based Services Waiver for a
targeted group of individuals who without such services, would
require the level of care provided in a hospital, nursing
facility, or intermediate care facility for the mentally
retarded, or who are already in such a facility and need
assistance returning to the community. These waivers are also
called ``1915(c) waivers.'' The target population may include
the aged, the disabled, the mentally retarded, the chronically
mentally ill, persons with AIDS, or any other population
defined by the State as likely to need extended institutional
care. Community-based services under the waiver include case
management, homemaker/home health aide services, personal care
services, adult day care services, habilitation services,
respite care, and other community-based services.
States use diverse models of care delivery, management and
financing for waiver programs. There are three Medicaid
requirements that may be waived: (1) statewideness; (2)
comparability of services; and (3) income and resource
eligibility rules. Unlike other Medicaid services, HCBW
authority enables states to target specific groups of
individuals who live within a defined geographical area, such
as a county.\37\ Despite the implementation of waiver programs,
service availability remains uneven both within and across
states. This is partly a result that states have a great deal
of flexibility in the design of their waiver programs;
therefore, the populations covered by the waivers vary greatly
among states.
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\37\ For more information see CRS Report RL31163: Long-Term Care: A
Profile of 1915(c) Home and Community-Based Services Waivers, by Carol
O'Shaughnessy and Rachel Kelly.
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The number of waivers and expenditures under them continue
to grow dramatically, despite a lack of documentation on the
effects of these waivers on cost, quality of care, or quality
of life. According to CMS, in FY2000, total expenditures for
HCBW were $12 billion, a $10.2 billion increase from FY1990
expenditures of $1.2 billion. In 1997, aged and disabled
individuals comprised the largest group of waiver recipients--
326,615 people (58.2 percent of all recipients). This is a 95
percent increase from 1992's aged and disabled recipients of
167,779.
2. Medicare
(a) introduction
The Medicare program, which insures almost all older
Americans without regard to income or assets, primarily
provides acute care coverage for those age 65 and older,
particularly hospital and surgical care and accompanying
periods of recovery. Medicare does not cover either long-term
or custodial care. However, it does cover care in a skilled
nursing facility (SNF), home health care, and hospice care in
certain circumstances.
(b) the skilled nursing facility benefit
In order to receive reimbursement under the Medicare SNF
benefit, which is financed under Part A of the Medicare
program, a beneficiary must be in need of daily skilled nursing
care and rehabilitation services following a
hospitalization.\38\ The program does not cover custodial care.
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\38\ Part A Medicare covers inpatient hospital services, SNF care,
home health services, and hospice care. Almost all persons over age 65
are automatically entitled to Part A. Part B is voluntary, and covers
physicians' services, laboratory services, durable medical equipment,
outpatient hospital services, and other medical services. Over 96
percent of Part A-covered beneficiaries elect Part B coverage.
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Coverage is provided for up to 100 days per spell of
illness.\39\ Beneficiaries are required to pay a daily
coinsurance charge for days 21-100 ($97 in 2000). To be
eligible for SNF care, a beneficiary must have been an
inpatient of a hospital for at least three consecutive days and
must be transferred to a SNF, usually within 30 days of
discharge from the hospital. A physician must certify that the
beneficiary needs daily skilled rehabilitation services that
are related to the hospitalization, and that these services, as
a practical matter, can only be provided on an inpatient basis.
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\39\ A spell of illness is that period which begins when a
beneficiary is furnished inpatient hospital or covered SNF care and
ends when the beneficiary has not been an inpatient of a hospital or in
a Part A covered SNF stay for 60 consecutive days. A beneficiary may
have more than one spell of illness per year.
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Covered SNF services include the following: nursing care
provided by or under the supervision of a registered nurse;
room and board; physical or occupational therapy or speech-
language pathology; medical social services; drugs,
biologicals, supplies, appliances, and equipment ordinarily
furnished by a SNF for the care of patients; and other services
necessary to the health of patients as are generally provided
by SNFs.
Medicare spending for SNFs, which totaled less than $1
billion in 1988, increased dramatically beginning in 1989,
rising at an average annual rate of 17 percent, and $13.5
billion in 1998. This was due, in large part, to two events.
First, before 1988, due to a lack of Federal guidance, regional
administration of the program led to inconsistencies in
coverage decisions. Therefore, many SNFs were hesitant to
accept Medicare beneficiaries. In 1988, new coverage guidelines
became effective which clarified beneficiary qualifying
criteria, thus alleviating this problem.
Second, with passage of the Medicare Catastrophic Act (P.L.
100-360, MCCA), effective beginning in 1989, the requirement
that beneficiaries have a prior hospitalization was eliminated.
Although the hospitalization requirement was reinstated the
following year, studies suggest that the temporary MCCA
expansions and the coverage guidelines causes a long-run shift
in nursing home industry toward accepting Medicare patients.
The number of beneficiaries receiving SNF care has increased
measurably, rising from 384,000 in 1988 to 1,630,000 in 1998.
Other factors affecting this spending growth and increased
SNF care use include declining lengths of stay in hospitals
leading to increased admissions to SNFs, and an increase in the
number of participating facilities. Between 1989 and 1997, the
number of SNFs participating in the program increased from
8,638 to 14,619.
Prior to passage of the Balanced Budget Act of 1997 (BBA
97, P.L. 105-33), Medicare reimbursed the great bulk of SNF
care on a retrospective cost-based basis. This meant that SNFs
were paid after services were delivered for the reasonable
costs (as defined by the program) they had incurred for the
care they provided. BBA 97 changed the reimbursement system to
a prospective payment system (PPS) for SNFs, beginning a 3-year
phase-in which started July 1, 1998.
Prospective payment for SNF care involves setting a rate
for a specific amount of services before the service is
provided. It uses a day of care as the unit of payment. Under
this daily rate system, the facility receives a fixed payment
for each Medicare-covered day a beneficiary spends in a SNF.
The amount of the Federal per diem payment is based on the
national average cost of resources (type and intensity of care)
SNF residents use per day as determined by CMS analysis of SNF
cost data.
Because SNFs would know in advance what payments they could
expect and would have to keep their costs within these limits
or incur losses, prospective payment is expected to improve
provider efficiency. The PPS established by BBA 97 incorporates
the costs of all covered service categories: (1) routine
services costs that include nursing, room and board,
administration, and other overhead; (2) ancillary services,
such as physical and occupational therapy and speech language
pathology, laboratory services, drugs, supplies and other
equipment; and (3) capital-related costs. It does not cover
costs associated with approved educational activities. Covered
services also includes services provided to SNF residents
during a Part A-covered stay for which payment previously had
been made under Part B (excluding physician services, certain
non-physician practitioner services, and certain services
related to dialysis).
BBA 97 provided the basis for establishing a per diem
Federal payment rate which includes adjustments for case-mix
and geographic variations in wages. In addition, BBA 97
included requirements for reimbursing the SNF for covered Part
B services provided to beneficiaries who are residing in SNFs
but who are no longer eligible for coverage under Part A. Under
this requirement, known as ``consolidated billing,'' the SNF
bills Medicare for all items and services received by its
residents, regardless of whether the item or service was
furnished by the facility, by others under arrangement, or
under any other contracting or consulting arrangement. Payments
for Part B services are based on existing fee schedules.
(c) the home health benefit
Medicare beneficiaries may qualify for Medicare coverage of
home health care services if they are homebound and a physician
determines the services are medically reasonable and necessary
for the treatment of illness or injury. Homebound individuals
are eligible for intermittent skilled nursing care, physical
therapy, or speech-language pathology services. Beneficiaries
needing one or more of these three services may also receive
occupational therapy, the services of a medical social worker,
or a home health aide if such additional services are ordered
by the physician. Occupational therapy may continue to be
provided after the need for skilled nursing care, physical
therapy ends, but social work or aide services may not.
A homebound individual is defined as one who cannot leave
home without a considerable and taxing effort and only with the
aid of devices such as a wheelchair, a walker, or through use
of special transportation. Absences from home may occur
infrequently for short periods of time for such purposes as to
receive medical treatment or to attend a licensed adult day
care program for therapeutic, psychosocial, or medical
treatment purposes. (Participation in adult day care was
included in the Benefits Improvement and Protection Act,
``BIPA'' of 2000.)
Although the number of home health visits a beneficiary may
receive is unlimited, services must be provided pursuant to a
plan of care that is prescribed and reviewed by a physician at
least every 60 days. In general, Medicare's home health benefit
is intended to serve beneficiaries needing acute medical care
that is prescribed and reviewed by a physician at least every
60 days. It was never envisioned as benefit that would provide
coverage for the nonmedical supportive care and personal care
assistance needed by chronically impaired persons. Although
Medicare's home health benefit is part of the continuum of care
provided to frail or disabled elderly individuals, it does not
provide long-term assistance for non-acute medical or personal
care needs.
Prior to enactment of the Balanced Budget Act of 1997 (BBA
97), Medicare reimbursed home health agencies on a
retrospective cost-based basis. In an effort to control the
growth of the benefit, BBA 97 provided for the establishment of
a prospective payment system (PPS). Under this system, the unit
of payment is a 60-day episode of care ordered by a physician
and provided by an HHA. Payment for an episode of care covers
an HHA's costs for all home health services and all visits
provided within the 60-day period. There is no limit to the
number of 60-day episodes that may be prescribed by a physician
as long as the individual continues to be homebound and
continues to need intermittent skilled nursing and/or therapy
services.
Since the enactment of BBA 97, Congress has been concerned
about the effects of PPS on access to home health care under
Medicare. In July 2001, the Office of Inspector General,
Department of Health and Human Services, produced a report
based on a 2001 national survey of hospital discharge planners.
In response to a series of questions concerning access to home
health care, 89 percent of discharge planners reported being
able to place all of their Medicare beneficiaries who were
discharged from the hospital and 7 percent reported being able
to place all but 5 percent of Medicare patients. Of all
discharge planners who responded to the survey (including rural
and urban), 4 percent reported being unable to place more than
5 percent of Medicare patients who were discharged. In
addition, OIG also found that the rate at which discharge
planners could place Medicare beneficiaries in home health care
were similar to those rates before the enactment of BBA 97.
Finally, urban and rural hospitals were found to have similar
rates of home health care placement.\40\
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\40\ Department of Health and Human Services Office of Inspector
General. Access to Home Health Care After Hospital Discharge 2001. July
2001.
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In a second investigation on home health care since BBA 97,
the OIG found that 93 percent of Medicare beneficiaries who
began receiving home health care in January 2001 reported being
satisfied with their care. Of all OIG's survey respondents,
most reported a positive relationship with their home health
caregivers and 4 percent reported concerns about the quality or
adequacy of their home health care. These concerns generally
pertain to problems with missed appointments or inconsistencies
among home health workers. Among survey respondents, 20 percent
believe they need more services then they are receiving,
although many of these individuals are not eligible for the
services they want, or they want services that are not covered
by Medicare.\41\
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\41\ Department of Health and Human Services Office of Inspector
General. Medicare Beneficiary Experiences with Home Health Care. July
2001.
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For a number of years the home health benefit was one of
Medicare's fastest growing benefits. Home health spending rose
from $2.1 billion in 1988 to $18.1 billion in 1996, an average
annual increase of over 31 percent. This growth in spending was
driven by the increase in the number of beneficiaries served
and the average number of visits per beneficiary serviced. The
number of beneficiaries nearly doubled during this time period.
Due in part to the new interpretation that a beneficiary could
receive daily visits for part of a day, the average number of
visits per home care patient increased more than threefold,
from 23 visits in each of 1987 and 1988 to 82 visits in 1997.
The number of home health agencies participating in Medicare
also increased sharply, growing from 5,686 agencies in 1989 to
10,492 in 1997.
The Balanced Budget Act (BBA) of 1997 made several changes
to home health eligibility, coverage, and payment rules. In
general, through these changes, Congress sought to curtail the
steep annual rates of increase in the volume of Medicare home
health services and payments. By 1998, Medicare payments for
home health decreased by 33.4 percent, from $17 billion in 1997
to $12 billion in 1998. In 2000, Medicare paid $8.5 billion for
home health care, about 53 percent less than in 1997.
(d) the hospice benefit
Medicare also covers a range of home care services for
terminally ill beneficiaries. These services, authorized in
1982 and referred to as Medicare's hospice benefit, are
available to beneficiaries with a life expectancy of 6 months
or less. Hospice care emphasizes palliative medical care, that
is, relief from pain, and supportive social and counseling
services for terminally ill and their families. Services are
provided primarily in the patient's home.
Hospice care benefits include nursing care, outpatient
drugs, therapy services, medical social services, home health
aide services, physician services, counseling, and short term
inpatient care, and any other item or service that is specified
in the hospice plan for which Medicare payment may otherwise be
made. Hospice services that are not necessary for the
alleviation or management of terminal illness are not covered.
The beneficiary must give up the right to have Medicare pay for
any other Medicare services that are related to the treatment
of the terminal condition. However, the custodial care and
personal comfort items which are excluded from other Medicare
services are included in the hospice benefit.
Although a small portion of total Medicare outlays (an
estimated 1.1 percent in 2001), the benefit has grown in recent
years. The number of Medicare-certified hospices increased from
553 in 1988 to 2,293 in 1998. Medicare outlays for hospices has
increased from $118.4 million in 1988 to an estimated $2.7
billion in 2001. Medicare beneficiaries receiving hospice
services has increased from 40,356 in 1988 to 401,140 in 1998.
Beneficiaries may elect to receive hospice benefits for two
90-day periods, followed by an unlimited number of 60-day
periods. A beneficiary may revoke a hospice care election
before a period ends and thus become eligible for regular
Medicare benefits. After having revoked an election, a
beneficiary is free to re-elect hospice care.
Payments to providers for covered services are subject to a
cap for each beneficiary served, which was $15,916.98 for the
period November 1, 2000, through October 31, 2001. This cap is
calculated annually at the aggregate, rather than individual,
level by each hospice provider. Enrollees are liable for
limited copayments for outpatient drugs and respite care.
(e) Program for All-Inclusive Care for the Elderly
The Balanced Budget Act of 1997 (P.L. 105-33) made a
permanent benefit category under Medicare and an option for
States under Medicaid to create the Program for All-Inclusive
Care for the Elderly (PACE) for low-income individuals who
would otherwise require nursing home care. This program allows
eligible persons, generally very elderly frail individuals, to
receive all health, medical, and social services they need in
return for a prospectively determined monthly capitated
payment. This care is provided largely through day health
centers and in persons' homes but also includes care provided
by hospitals, nursing homes and other practitioners determined
necessary by the PACE provider.
As part of the program, each participants' plan of care is
overseen by a case management team. These teams consist of
physicians, nurses, social workers, dietitians, physical and
occupational therapists, activity coordinators, and other
health and transportation workers. PACE providers receive
Medicare and Medicaid payments only through the PACE agreement,
and must make available all items and services covered under
both Titles XVIII and XIX without amount, duration or scope
limitations, and without application of any deductibles,
copayments or other cost sharing.
PACE programs are designed to keep people in their homes
and out of institutions for as long as possible. According to
the National PACE Association, as of July 2000, there were 19
states operating 36 PACE programs. As of December 2000, PACE
programs reported a census of 7,956.
3. Social Services Block Grant
Title XX of the Social Security Act authorizes
reimbursement to states for social services, distributed
through the Social Services Block Grant (SSBG). Among other
goals, the SSBG is designed to prevent or reduce inappropriate
institutional care by providing for community-based care, and
to secure referral or admission for institutional care when
other forms of care are inappropriate.
Although the SSBG is the major social services program
supported by the Federal Government, its ability to support the
long-term care population is limited. Because it provides a
variety of social services to a diverse population, the Title
XX program has competing demands and can only provide a limited
amount of care to the older population.
Funds are allotted to states on the basis of relative state
populations and do not require state matching funds. Because
there are no requirements on the use of funds, States decide
how to use their funds to respond to the social services needs
of the eligible population. On June 9, 1998, President Clinton
signed the Transportation Equity Act (TEA) into law (P.L. 105-
178), which permanently reduces the SSBG entitlement ceiling to
$1.7 billion, beginning in FY2001(however, the appropriation
for FY2001 (H.R. 4577) exceeded $1.7 by $25 million.)
National data on the use of SSBG funds are scarce. States
have been required to submit pre-expenditure reports to HHS on
their planned use of funds, but these reports are not prepared
in a uniform format and do not indicate the states' actual use
of funds. An analysis of the state expenditure reports for
FY1999 by the DHHS showed that of the states' FY1999 funds of
$1.89 billion, 11 percent was spent for home-based services for
both adults and children, 7.7 percent for special services for
the disabled, less than 1 percent was spent for adult day care
services, and less than 1 percent was spent for home-delivered
meals. Of the many services supported by the SSBG, the largest
spending categories are for child day care (13 percent of
FY1999 funds) and child foster care services (11 percent of
FY1999 funds). Older persons with long-term care needs must
compete with other eligible population groups for SSBG
services.
C. SPECIAL ISSUES
1. Nursing Home Quality
The Senate Aging Committee, the committee responsible for
oversight of quality of care provided by nursing homes, held
hearings in 1999 on nursing home enforcement and complaint
investigations. During the hearings, Congressional Members
discussed the issues raised by a series of Office of the
Inspector General's (OIG) reports pertaining to quality of care
issues in nursing homes published in 1999. The reports found
that quality of care problems persist in nursing homes.\42\
Some of the problems found through OIG investigations included
inadequate supervision to prevent accidents, improper care to
prevent or treat pressure sores, and lack of proper assistance
with activities of daily living.
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\42\ Department of Health and Human Services. Quality of Care in
Nursing Homes: An Overview. Office of Inspector General, March 1999,
OEI-99-00060.
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Included in the findings in the 1999 OIG reports, was that
deficiencies in nursing homes could largely be attributed to a
lack of adequate staffing supervision to prevent accidents,
properly care for pressure sores, and assist resident in
conducting activities of daily living. Other personal care
problems in numerous nursing homes were also revealed--such as
lack of nutrition and poor care for incontinence. OIG also
found that the Long-Term Care Ombudsman Program, funded through
the Older Americans Act and state funds, was limited in its
effectiveness and reach largely because of inadequate funding
and staffing as well as a lack of common standards for
complaint responses and resolution, inconsistent advocacy
efforts, lack of support and limited collaboration with nursing
home surveyors. Among other findings, OIG also found weaknesses
in state efforts to protect nursing home residents from
abuse.\43\
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\43\ Department of Health and Human Services. Quality of Care in
Nursing Homes: An Overview. Office of Inspector General, March 1999,
OEI-02-99-00060; Nursing Home Survey and Certification Deficiency
Trends. March 1999, OEI-02-98-00331; Abuse Complaints of Nursing Home
Patients. May 1999, OEI-06-98-00340.
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In March 1999, the Clinton Administration took action to
enforce current standards for the 1.5 million elderly and
disabled Americans in nearly 17,000 nursing homes. Under the
Administration, CMS strengthened complaint-investigation,
launched a national education campaign on how to identify,
report, and stop neglect in nursing homes and designed more
than 30 initiatives to improve the quality of care in America's
nursing homes. In June 2001, GAO published a report that
evaluated CMS' progress on achieving the goals outlined by the
initiatives.\44\ GAO reported that CMS had made progress on
only 3 initiatives. On the first, CMS reported that the
prevalence of restraints used in nursing homes decreased in
FY2000. On the second, CMS reported that it had established
performance targets for reducing the prevalence of pressure
sores among nursing home residents. On the third, CMS has set
out to improve the survey and certification budgeting process
of nursing homes. By developing national standard measures and
costs, CMS hopes to more effectively price each state's survey
workload to assess the quality of nursing home surveys
performed by each state.
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\44\ Department of Health and Human Services. Status of Achieving
Key Outcomes and Addressing Major Management Challenges. United States
General Accounting Office, Report to the Ranking Minority Member,
Committee on Governmental Affairs, U.S. Senate, June 2001, GAO-01-748.
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In another attempt to improve nursing home quality, some
states provide, or plan to provide, technical assistance to
nursing homes. Technical assistance involves providing nursing
homes with information about existing and potential violations
to state and Federal requirements as well as training in the
remediation of such problems. Controversy has arisen over the
role of the state agency in technical assistance. Whereas some
groups hope technical assistance will either replace the survey
and enforcement process or lessen its punitive measures, others
hope it will serve only as a supplement to a process that is
necessary in order to ensure quality patient care. As of July
2001, several states had created, or plan to create, technical
assistance programs, including Washington, New Jersey,
Wisconsin, Maryland, California, Florida and Texas.\45\
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\45\ Edelman, Toby. Draft of Providing Technical Assistance to
Facilities. Center for Medicare Advocacy, Washington, D.C. July 2001.
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In 1998, Congress enacted P.L. 105-277, giving nursing
facilities and home health care agencies the option to request
the U.S. Attorney General to conduct criminal background checks
of applicants for employment in facilities or agencies using
records from the Criminal Justice Information Services Division
of the Federal Bureau of Investigation. Under the law,
information regarding criminal history records of an applicant
shall be provided to the appropriate state agency and used only
for the purpose of determining the suitability of the applicant
for employment by the facility or agency in a position involved
in direct patient care. In recent years, most states have also
created their own laws. Although most of these laws require or
allow only home health agencies to investigate the backgrounds
of potential employees for previous criminal activities, some
also require or allow nursing homes to conduct investigations.
Even more recently, Congress has grown concerned that
inadequate staffing and training of nursing personnel may
impact patient health outcomes. The Department of Health and
Human Services' (DHHS) Inspector General confirmed that
staffing deficiencies and inadequate staff expertise were major
factors in many chronic and recurring quality problems in
nursing facilities.\46\ The current high turnover rates and
tight labor market for nurses and paraprofessionals combined
with the predicted increase in demands due to the aging of the
baby-boomers are important issues to Congress. Legislative
options to address staffing inadequacies include: changing
payment rates under Medicaid and Medicare; funding new programs
targeted toward specific goals; facilitating the use of foreign
nurses; and enhancing the role of family caregivers through tax
incentives.
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\46\ U.S. Department of Health and Human Services. Quality of Care
in Nursing Homes: An Overview. Office of Inspector General June Gibbs
Brown, March 1999.
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2. System Variations and Access Issues
One of the key issues in long-term care is the variation in
the way States have chosen to structure their systems. Because
long-term care has traditionally been a State, rather than a
Federal issue, States have developed widely varying systems.
This diversity can be a strength. The case can be made that the
same system would not work in each State. Indeed, within single
State, the same system will not necessarily work in each
community. Another recurring theme in long-term care policy is
the fragmentation created by the multitude of funding streams.
Several Federal programs contribute to long-term care. These
programs have differing eligibility requirements and the
agencies that administer them have historical relationships
with different agencies at the local level. There are also many
State programs for long-term care, some of which work hand-in-
hand with Federal programs and some which are special State-
only programs. Finally, communities differ widely in the extent
to which local governments and private foundations or
philanthropies help finance long-term care services.
The above-listed characteristics of the long-term care
system can work together to create, at best, a situation where
services are well-coordinated to meet each client's needs, and
at worst, a situation of fragmentation and inconsistency that
makes it difficult for individuals and families to access
services. Especially in the community-based services arena, it
is important to maintain and improve access so that older
people with chronic impairment receive the services they need
in the setting they prefer (such as their own homes) and
institutionalization, often undesirable and costly, can be
avoided.
3. The Role of Case Management
Case management, also called care management, generally
refers to ways of matching services to an individual's needs.
In the context of long-term care, case management generally
includes the following components: screening and assessment to
determine an individual's eligibility and need for a given
service or program; development of a plan of care specifying
the types and amounts of care to be provided; authorization and
arrangement for delivery of services; and monitoring and
reassessment of the need for services on a periodic basis.
Some State and local agencies have incorporated case
management as a basic part of their long-term care systems
development. The availability of Medicaid funds under the home
and community-based waiver (Section 1915(c)) programs has
spurred the development of case management services, but other
sources of funds also have been used by States to develop case
management systems, including State-only funds, the SSBG, and
the OAA programs.
Case management is carried out in a wide variety of ways.
Organizational arrangements may range from centralized systems
to those in which some case management functions are conducted
by different agencies. Case management may be provided by many
community organizations, including home health agencies, area
agencies on aging, and other social service or health agencies.
In some cases where statewide long-term care systems have been
developed, one agency at the community level has been
designated to perform case management functions, thereby
establishing a single point of access to long-term care
services.
Case management has received a great deal of attention in
recent years as a partial solution to the problem of December
20, 2001 coordination of long-term care services, particularly
in community settings. In communities where an older person
might save to contact three different agencies, with differing
eligibility criteria for providing services, it is easy to see
how a case manager's services can be needed to help individuals
negotiate their way through the system.
Case management is also important as a way of accomplishing
the policy aim of targeting services to those most in need. In
cases where a State has established a case management system to
coordinate entry into the long-term care system, it is much
easier to ensure that limited services are provided to those
most in need, and that clients have the services that best meet
their individual needs.
There are three basic models for case management, referred
to as the service management, broker, and managed care models.
In the service management model, the one most often used by
States, the case management agency has the authority to
allocate services to individuals, but is not at financial risk.
In the broker model, case managers help clients identify their
service needs and assist in arranging services, but do not have
authority over the actual services. The managed care model uses
a risk-based financing system to allocate funds to the case
management agency based on the anticipated number of eligible
clients who will seek assistance, and the amount of money
necessary to meet their needs.
Because of the fragmented nature of our long-term care
system, it is likely that the importance of case management
will continue to increase as Congress considers health care
reform.
CHAPTER 10
HEALTH BENEFITS FOR RETIREES OF PRIVATE SECTOR EMPLOYERS
A. BACKGROUND
Employer-based retiree health benefits were originally
offered in the late 1940's and 1950's as part of collective
bargaining agreements. Costs were relatively low, and there
were few retirees compared to the number of active workers.
Following the enactment of Medicare in the mid-1960's, the
prevalence of employer-sponsored retiree health benefit
packages increased dramatically. Employers could offer health
benefits to their retirees with the assurance that the Federal
Government would pay for many of the medical costs incurred by
company retirees age 65 and older. Retiree health benefits were
often included in large private employer plans and were a major
source of Medicare supplemental insurance for retirees.
In the late 1980's, however, retiree health benefits became
more expensive for employers, due to rising health care costs
and changing demographics of the work force. The United States
saw double-digit health care inflation, and employers
experienced higher retiree-to-active worker ratios as employees
retired earlier and had longer life expectancy. Older Americans
approaching or at retirement age consume a higher level of
medical services, and as a result, their health care is more
expensive. Employers also became more conscious of retiree
health plan costs since a financial accounting standard, known
as FAS106, began requiring recognition of post retirement
benefit liabilities on balance sheets. With the increase in
liability for health care costs, employers began to reduce or
eliminate health care coverage for retirees.
Employee benefit surveys have shown a significant decline
in employer sponsorship of retiree health benefits since the
early 1990's. The Mercer/Foster Higgins National Survey of
Employer-Sponsored Health Plans 2000 indicates that the
percentage of large employers (500+ employees) that provide
health coverage to retirees 65 or over has fallen from 40
percent in 1993 to 24 percent in 2000. For early retirees, not
yet eligible for Medicare, coverage declined from 46 percent in
1993 to 31 percent in 2000. (These figures refer to continuing
plans that will cover all future as well as current retirees.)
The Employer Health Benefits 2001 Annual Survey, conducted by
the Kaiser Family Foundation and Health Research and
Educational Trust (Kaiser/HRET), estimates that the percentage
of all large firms (200+ workers) that offers retiree health
coverage continued to fall from 37 percent in 2000 to 34
percent in 2001. The decline was even more dramatic for small
firms (3-199 workers), from 9 percent in 2000 to 3 percent in
2001. According to the Employee Benefits Research Institute
(EBRI), while it appears that employers are dropping retiree
health benefits, the decline can also be attributed to the
number of new large employers that never offer retiree health
benefits at all.
Employer-sponsored retiree health insurance benefits are
also eroding as employers tighten eligibility requirements or
shift costs to retirees. According to the Kaiser/HRET 2001
survey, over the last 2 years, 26 percent of companies have
increased the retiree's share of the premium, and 33 percent
indicate they have increased the amount enrollees pay for
prescription drugs. Employers are also considering providing a
defined employer contribution toward the cost of retiree health
insurance instead of paying the premiums for whatever plan
coverage an employee has chosen.
Some of these curtailments have prompted class-action
lawsuits from retirees who face higher costs and restrictions
on providers or have to obtain and pay for individual insurance
policies. By law, employers are under no obligation to provide
retiree health benefits, except to those who can prove they
were previously promised a specific benefit. Even if employees
are promised coverage, the scope of benefits and employer
premium contributions may not be specified and could erode over
time. In order to avoid court challenges over benefit changes,
almost all employers now explicitly reserve the right in plan
documents to modify those benefits. Companies are more likely
to change or terminate benefits for future rather than current
retirees. This reduces their future liability without causing a
large disruption in health coverage for those who are retired.
The Kaiser/HRET survey found that only 4 percent of companies
now offering retiree coverage are likely to eliminate that
coverage entirely in the next 2 years, but 7 percent will
eliminate retiree benefits for new employees or existing
workers.
1. Who Receives Retiree Health Benefits?
Though there has been a decline in employer sponsorship of
retiree health benefits since the early 1990's, the percentage
of retirees obtaining health benefits through a former employer
has remained relatively stable since 1994. According to
Employer Benefits Research Institute (EBRI) estimates of the
March 2000 Current Population Survey, about 36 percent of early
retirees (ages 55 to 64) have health benefits from prior
employment; 20 percent have employment coverage through another
family member. Almost 37 percent have another form of insurance
such as private policies, veteran's health care, or Medicaid;
and 17 percent are uninsured. For those age 65 and over in
1999, 96 percent were covered by Medicare or Medicaid, with 35
percent also covered by health benefits from prior employment.
(Percentages totaled more than 100 percent as retirees may have
more than one source of health insurance coverage.) The General
Accounting Office (GAO) and EBRI attribute this stability in
the percentage of retirees with health benefits through a
former employer to the tendency of firms to reduce coverage for
future rather than current retirees.
While near-elderly workers are not necessarily more likely
to be uninsured, if they should become unemployed because of
illness, disability, early retirement, or loss of a job, they
are less able than younger workers to obtain affordable health
insurance because of a greater prevalence of health problems.
According to a Monheit and Vistnes report in Health Affairs
March/April 2001, even when older workers with health problems
are insured and have access to needed health services, they
have average annual expenditures of $5,000, nearly twice the
level of their counterparts in excellent or very good health
($2,548).
Employment-based insurance spreads these costs over all
workers in the same plan, but private non-group insurance
premiums generally reflect the higher risk attributable to the
policyholder's age and health status. A 2001 Commonwealth Fund
study found that adults ages 50 to 64 who buy individual
coverage are likely to pay much more out-of-pocket for a
limited package of benefits than their counterparts who are
covered via their employers. An analysis of premium costs in 15
cities showed a median cost of nearly $6,000 for a 60-year-old
(Health Affairs July/August 2001). The cost of purchasing an
individual health care policy following retirement is often
prohibitive for many retirees who are not yet eligible for
Medicare, and uninsured 55-to-64 year olds are subject to
deteriorating health as a result of not having insurance
coverage.
For those 65 or older living on a fixed income, employer-
based benefits are an important source for filling coverage
gaps in Medicare, such as deductibles and copayments or
prescription drug benefits. Another recent Commonwealth Fund
study estimates that the elderly spent 22 percent of their
income, on average, for health care services and premiums in
2000. Seniors in poor health and without supplemental
insurance, however, spent about 44 percent of their income on
health care.
2. Design of Benefit Plans
Employers that provide coverage for retired employees and
their families in the company's group health plan may adjust
their plans to take account of the benefits provided by
Medicare once the retiree is eligible for Medicare at age 65.
(If the employee continues to work once they are eligible for
Medicare, the employer is required to offer them the same group
health insurance coverage that is available to other employees.
If the employee accepts the coverage, the employer plan is
primary for the worker and/or spouse who is over age 65, and
Medicare becomes the secondary payer.)
The method of integrating with Medicare can have
significant effects on the amount the employer plan pays to
supplement Medicare, as well as on retiree out-of-pocket costs.
When the Medicare program was first implemented, the most
popular method of integrating benefit payments with fee-for-
service Medicare was referred to as ``standard coordination of
benefits'' (COB). The employer plan generally paid what
Medicare did not pay, and 100 percent of the retiree's health
care costs were covered. COB led to higher utilization of
health care services, however, and a major change gradually
occurred in how plans integrate their benefit payments with
Medicare.
According to 2000 Hewitt Associates data, 57 percent of
large employers now use the ``carve out'' method in which
retirees have the same medical coverage as active employees
with the same out-of-pocket costs. The employer plan calculates
the retiree's health benefit under regular formulas as though
Medicare did not exist, and the Medicare payment is then
subtracted or ``carved out.'' This shift to carve out decreases
plan costs and increases retiree out-of-pocket-expenses.
Retirees who were used to having 100 percent of their health
care costs covered by the combination of retiree plan and
Medicare now have out-of-pocket costs that are comparable to
having the employer plan without Medicare.
Employers have also turned to the Medicare managed care
program to control rising retiree health care costs. Mercer/
Foster Higgins survey data indicate that among large employers
that provide retiree health coverage, the number that offer a
Medicare HMO increased from 7 percent in 1993 to 43 percent in
2000. Of Medicare-eligible retirees, 11 percent are enrolled in
one of these plans and are typically provided with additional
services such as routine physicals, immunizations, and
prescription drug coverage not available through traditional
Medicare. Cost sharing is also generally lower. This is not an
option, however, for retirees who travel extensively or live
for more than 90 days in an area not covered by the HMO. Recent
plan withdrawals from Medicare+Choice and premium increases are
also causing some beneficiaries to return to the traditional
Medicare program.
3. Recognition of Employer Liability
Companies that provide health benefits to their retirees
face substantial claims on their future resources. The
Financial Accounting Standards Board (FASB), the independent,
nongovernmental authority that establishes private sector
accounting standards in the United States, became concerned in
the 1980's that employers were not adequately accounting for
their post retirement health care liabilities. Companies'
financial statements reflected only actual cash payments made
to fund current retirees' benefits. The FASB was particularly
worried about investor ability to gauge the effect of
anticipated retiree medical benefits on the financial viability
of a company and to compare financial statements of different
companies.
After 8 years of debate, the FASB released final rules in
December 1990 requiring corporations to recognize accrued
expenses for retiree health benefits in their financial
statements. Companies must now include estimates of future
liabilities for retiree health benefits on their balance sheets
and must also charge the estimated dollar value of future
benefits earned by workers that year against their operating
income as shown on their income statements. The accounting
rules (known as FAS 106) initially went into effect for
publicly traded corporations with 500 or more employees for
fiscal years beginning after December 15, 1992. FAS 106
requirements became applicable to smaller firms after December
15, 1994. A similar requirement known as GASB-26 became
effective for state and local governments in June 1996.
While the new rules did not affect a company's cash-flow by
requiring employers to set aside funds to pay for future costs,
it made employers much more aware of the potential liability of
retiree health benefits. Some companies cited FAS 106 as a
reason for modifying retiree health benefits, including the
phasing out of coverage. Others have considered prefunding
retiree health benefits.
4. Prefunding
If a company could accumulate sufficient cash reserves that
could be set aside in a fund dedicated solely to paying retiree
health care costs, it would be able to finance the benefits out
of the reserves as obligations are incurred rather than out of
its operating budget. Such prefunding would also reduce the
problem created by an unfavorable ratio of active workers to
retirees, where the actives subsidize the costs of the retirees
through their premiums. Prefunding is not, however, a universal
solution, as companies may have better uses for the funds, and
some cannot afford to put money aside.
In contrast to pension plans, there is no requirement that
companies prefund retiree health benefits, and there is little
financial incentive for them to do so. Currently, there are two
major tax vehicles for prefunding retiree health benefits:
401(h) trusts and voluntary employees benefit association plans
(VEBAs) allow employers to make tax deductible contributions to
an account for health insurance benefits for retirees, their
spouses, and dependents and tax-deferred contributions to an
account for retiree and disability benefits. Account income is
tax exempt and benefit payments are excludable from recipients'
gross income.
The Omnibus Budget Reconciliation Act of 1990 (P.L. 101-
508) added Section 420 of the Internal Revenue Code, which
permits single employers to transfer excess pension assets into
a separate 401(h) account to pay for retiree health care
expenses and avoid a tax on reversion of qualified plan assets
to employers. Statutory restrictions and recordkeeping
requirements, however, have limited the attractiveness of
401(h) plans. Employer contributions must be ``subordinate'' or
``incidental'' to the retirement benefits paid by the employer
pension plan, and employers are limited to contributing to the
trust no more than 25 percent of annual total contributions to
retiree benefits. In addition, the pension plan has to remain
at least 125 percent funded; plan participants' accrued
benefits must be immediately and fully vested; and employers
have to commit that they will not reduce their expenditures for
retiree health care coverage for 5 years after the transfer.
Section 420 was extended by P.L. 103-465 through December 31,
2000, and again through 2005 by the Tax Relief Extension Act of
1999 (P.L. 106-170). Final regulations issued on June 19, 2001,
amended a ``Maintenance of Cost'' provision to prevent
employers from reducing the number of retirees eligible for
coverage and provide guidance on meeting this requirement if
subsidiaries or divisions are sold.
VEBAs are tax-exempt plans or trusts established under
501(c)(9) of the Internal Revenue Service Code. A VEBA provides
health and other benefits to members who share an ``employment-
related bond'' and must be controlled by its membership or
independent trustee. VEBAs used to be the principal mechanism
for prefunding retiree benefits. The tax code treated VEBAs
like qualified pension plans, but imposed fewer restrictions on
their use, thus potentially providing opportunities for abuse.
Congress was also concerned that tax dollars being spent to
fund retiree health and other employee benefit programs were
not of benefit to most taxpayers. Strict limits on the use of
VEBAs were included in the Deficit Reduction Act of 1984
(DEFRA) and, as a result, VEBAs lost much of their value as a
prefunding mechanism. Under the 1984 Act, deductions were
limited to the sum of qualified direct costs (essentially
current costs) and allowable additions to a qualified asset
account for health and other benefits, reduced by after-tax
income. While the asset account limit may include an
actuarially determined reserve for retiree health benefits, the
reserve may not reflect either future inflation or changes in
usage, which restricts its usefulness. Earnings on VEBA assets
beyond certain amounts may also be subject to taxes on
unrelated business income.
Prefunding of retiree health benefits will not become an
attractive option for employers unless tax incentives are
provided, similar to those available for pensions. The
Department of Labor's Advisory Council on Employee Welfare and
Pension Benefits recommended in November 1999 that Section 420
be expanded to allow prefunding of current retirees' entire
future medical obligations.
According to EBRI, some employers are interested in
prefunding retiree health benefits through a defined
contribution model. Active employees would accumulate funds in
an account to prefund retiree health benefits during their
working life. After workers retire, the funds in the account
could be used to purchase health insurance from their former
employer or union or directly from an insurer. Employers could
contribute a specified dollar amount to the account, rather
than offering coverage for a specific package of benefits.
B. BENEFIT PROTECTION UNDER EXISTING FEDERAL LAWS
1. Employee Retirement Income Security Act (ERISA)
Nothing in Federal law prevents an employer from cutting or
eliminating health benefits, and while ERISA protects the
pension benefits of retired workers, it offers only limited
Federal safeguards to retirees participating in a firm's health
plan. ERISA (P.L. 93-406) was enacted in 1974 to establish
Federal uniform requirements for employee welfare benefit
plans, including health plans. While ERISA protects the
pensions of retired workers, the law draws a clear distinction
between pensions and welfare benefit plans (defined to include
medical, surgical, or hospital care benefits, as well as other
types of welfare benefits). The content and design of employer
health plans was left to employers in negotiation with their
workforce, and there are no vesting and funding standards as
there are for pensions. Retiree health benefits are also less
protected as a result of ERISA's preemption of state laws
affecting employer-provided plans. Under ERISA, states can
regulate insurance policies sold by commercial carriers to
employers, but they are prohibited or ``preempted'' from
regulating health benefit plans provided by employers who self-
insure.
ERISA does, however, require that almost all employer
provided health benefit plans, including self-insured plans and
those purchased from commercial carriers, comply with specific
standards relating to disclosure, reporting, and notification
in cases of plan termination, merger, consolidation, or
transfer of plan assets. (Plans that cover fewer than 100
participants are partially exempt from these requirements.) In
addition, plan fiduciaries responsible for managing and
overseeing plan assets and those who handle the plan's assets
or property must be bonded. Fiduciaries must discharge their
duties solely in the interest of participants and
beneficiaries, and they can be held liable for any breach of
their responsibilities.
Plan participants and beneficiaries also have the right
under ERISA to file suit in state and Federal court to recover
benefits, to enforce their rights under the terms of the plan,
and to clarify their rights to future benefits. However, where
an employer has clearly stated that it reserves the right to
alter, amend, or terminate the retiree benefit plan at any
time, and communicates that disclaimer to employees and
retirees in clear language, the courts have sustained the right
of the employer to cut back or cancel all benefits.
2. Consolidated Budget Reconciliation Act of 1985 (COBRA)
Because losing access to employer-based coverage poses
major challenges for retirees, Congress has allowed COBRA
eligibility upon retirement and special COBRA extensions if
employers file for chapter 11 bankruptcy. The Consolidated
Budget Reconciliation Act of 1985 (P.L. 99-272) included
provisions requiring employers with 20 or more employees to
offer employees and their families the option to continue their
health insurance when faced with loss of coverage because of
certain events.
A variety of events trigger COBRA continuation of coverage,
including retirement, termination of employment for reasons
other than gross misconduct, or reduction in hours. When a
covered employee leaves his or her job, cuts back hours worked,
or retires, the continued coverage of the employee and any
qualified beneficiaries must be available for 18 months. The
significance of COBRA is that it provides retirees with
continued access to group health insurance for either 18 months
or until the individual becomes eligible for Medicare,
whichever comes first. Thus COBRA coverage allows some
individuals to retire at 63+ and continue with employer based
group coverage until they become Medicare-eligible at age 65.
COBRA offers no help, however, if the employer discontinues
the health plan for all employees, or if an employer terminates
or reduces benefits provided under its retiree health insurance
plan. The only event that triggers coverage for an individual
receiving health benefits under a retiree health plan is the
loss of health insurance coverage due to the former employer's
bankruptcy. In the 1986 Omnibus Budget Reconciliation Act (P.L.
99-509), Congress amended COBRA to require continuation
coverage for retirees in cases where the employer files for
bankruptcy under Chapter 11 of the U.S. Code. Retired employees
who lose coverage as a result of the employer's bankruptcy can
purchase continuation coverage for life. Those eligible for
COBRA coverage may also have to pay the entire premium plus an
additional 2 percent. For many individuals, the high cost of
COBRA coverage is a shock because their employer may have been
covering 70 percent to 80 percent of the premium before
retirement.
3. Health Insurance Portability and Accountability Act of 1996 (HIPAA)
Finally, HIPAA (P.L 104-191) may help some retirees obtain
private individual insurance upon the exhaustion of their COBRA
coverage or termination of their employer plan. HIPAA requires
that all individual policies be guaranteed renewable,
regardless of the health status or claims experience of the
enrollees, unless the policyholder fails to pay the premium or
defrauds the insurer. It also requires that individuals who
recently had group coverage be offered health insurance without
restrictions for pre-existing conditions. However, the Act
allows states to comply in a variety of ways. It does not limit
what insurers may charge for these policies, leaving that
regulatory authority to the states. Some states have
established high-risk pools for people who are hard to insure,
but according to a Commonwealth Fund report, even premiums for
high-risk pool participants range from 125 percent to as high
as 200 percent of the average standard rates for individual
policies outside the risk pool.
C. OUTLOOK
Many employers question whether they can continue providing
the current level of retiree health benefits in the face of
increasing health care costs and the fast approaching
retirement of the baby-boom generation. The 2000 Mercer/Foster
Higgins Survey found that, over the past 2 years, employer
costs for providing health benefits for pre-Medicare eligible
retirees rose 10.6 percent. For Medicare-eligible retirees,
this figure increased 17 percent. Much of the increase was
caused by rising prices for prescription drugs, which are not
covered by Medicare, and rising demand for services from an
aging population.
The impact of potential Medicare reform and other Federal
legislation on employer coverage of retiree health care is also
uncertain. The National Bipartisan Commission on the Future of
Medicare was established by the Balanced Budget Act of 1997 to
review the long-term financial condition of Medicare and make
recommendations for potential solutions. The Commission failed
to reach agreement on reform, but several of the proposals it
considered have served as the basis for subsequent discussion
of the issues.
Employers want the Medicare program to provide more
benefits, such as full prescription drug coverage, for all
their retirees, which would enable them to cut their expenses
for retiree health coverage. There are concerns, however, that
any expansion in Federal coverage might merely result in a
dollar-for-dollar offset in coverage provided by employers.
Under this scenario, Federal dollars might increase, but
overall benefits for beneficiaries would remain relatively
unchanged. Several prescription drug proposals have attempted
to address this concern by providing employers with financial
incentives to maintain their prescription drug programs and
have their retirees continue to receive services through these
plans rather than a new Federal program. Proposals to raise the
Medicare eligibility age from 65 to 67 might also exacerbate
the number of employers who restrict or drop coverage because
of increasing costs. While many employers now pay for health
benefits until retirees qualify for Medicare, these early
retirees are twice as expensive for employers to cover as older
retirees who receive Medicare.
Legislation has also been considered that would allow
people ages 62 through 64 to buy into Medicare if they do not
have access to employer-sponsored or Federal health insurance.
In addition, retirees ages 55 and over whose former employers
terminated or substantially reduced retiree health instance
would be permitted to extend their COBRA coverage until age 65.
The cost of buying into Medicare or continuing COBRA coverage,
however, may also exceed what most uninsured can afford and
questions have been raised about whether Medicare buy-ins would
result in costs to the Federal Government. Others feel that the
private sector should be encouraged to address health insurance
needs, perhaps with the implementation of tax incentives rather
than expanding a public program that is projected to face long-
term financial problems.
In the 107th Congress, the Emergency Retiree Health
Benefits Protection Act of 2001 (H.R. 1322) would more directly
address loss of retiree coverage by prohibiting employers from
making any changes to retiree health benefits once an employee
retires. The bill would require plan sponsors to restore
benefits for retirees whose health coverage was reduced before
enactment of the bill, but does not restrict employers from
changing retiree health benefits for current employees. This
could result in employers dropping retiree health insurance for
newly hired employees and providing protections for retirees
that do not exist for current workers.
Recent court cases and regulatory guidelines on the
application of the Age Discrimination in Employment Act (ADEA)
to employer-sponsored retiree health benefit plans could also
adversely affect retiree health care coverage. In August 2000,
the Third Circuit Court of Appeals held that Medicare-eligible
retirees have a valid claim of age discrimination under ADEA
when their employers provide them with health insurance
coverage inferior to that provided to retirees not yet eligible
for Medicare (Erie County, Pa. v. Erie County Retirees Assoc.)
The Equal Employment Opportunity Commission (EEOC) followed
with guidance that the ADEA is violated if retiree health plans
are reduced or eliminated on the basis of age or Medicare-
eligibility. In August 2001, however, the EEOC responded to
concerns from employers, employee, and labor groups and
announced that it was rescinding its policy, suspending
enforcement activities, and re-examining its policy. The EEOC
will ``focus on the development of a new policy, consistent
with the ADEA, that does not discourage employers from
providing this valuable benefit.''
The actual impact of the Erie County court case and the
EEOC decision is uncertain. While the legal ruling applies only
to employers in the Third Circuit (Pennsylvania, New Jersey,
Delaware, and the Virgin Islands), employers in other
jurisdictions may be wary of offering a benefit to older
workers that could potentially expose them to liability. At
this time, it is also not clear how employers can design
retiree health care plans without violating the ADEA. Companies
that want to encourage workers to retire early typically bridge
the gap between early retirement and Medicare by providing
coverage and then reducing or dropping it when the retiree
reaches 65. To comply, employers may either have to improve
benefits for Medicare-eligible retirees or add a new health
care plan for older retirees which would likely be expensive.
Most analysts believe that it is more likely that employers
would cut back on benefits for early retirees until the program
meets the ``equal cost'' or ``equal benefit'' safe harbor
provisions of ADEA. It could also include paying retirees the
same defined contribution to purchase retiree health coverage
whether or not they are Medicare-eligible, or eliminating
retiree health benefits entirely.
While the percentage of retirees who obtain health benefits
through a former employer is stable at this time, the rate of
uninsurance among the near elderly may become more evident as
the population ages. Many individuals may never qualify for
retiree health benefits if their employers offer coverage only
to workers hired before a specific date. Any proposed Federal
legislation will likely be considered in light of the possible
impact on the voluntary system of employer-provided benefits
and the relationship between current employee and retiree
benefits. The strength of the economy and employment levels
will also play an important part in employer decisions about
the value of offering retiree health benefits in recruiting and
retaining employees.
CHAPTER 11
HEALTH RESEARCH AND TRAINING
A. BACKGROUND
The general population is surviving longer. People with
disabilities are also surviving longer because of effective
vaccines, preventive health measures, better housing, and
healthier lifestyle choices. With the rapid expansion of the
Nation's elderly population, the incidence of diseases,
disorders, and conditions affecting the aged is also expected
to increase dramatically. The prevalence of Alzheimer's disease
and related dementias is projected to triple by the year 2050
if biomedical researchers do not develop ways to prevent or
treat it. A commitment to continue the expansion of aging
research could substantially reduce the escalating costs of
long-term care for the older population. The ratio of elderly
persons to those of working age will have nearly doubled
between 1990 and 2050. In addition, older Americans are living
longer. In fact, those aged 85 and older--the population most
at risk of multiple health problems that lead to disability and
institutionalization--are the fastest growing segment of our
population. They are projected to number 20 million by 2050.
Support of scientific and medical research, sponsored
primarily by the National Institutes of Health (NIH), is
crucial in the quest to control diseases affecting the elderly
population. Continuing the second and third years of a 5-year
effort to double the NIH budget, Congress gave NIH a fiscal
year 2000 appropriation of $17.8 billion, a 14.2 percent
increase over the fiscal year 1999 funding. In December 2000,
Congress voted a 14.3 percent increase for fiscal year 2001,
giving NIH $20.4 billion to spend this fiscal year.
The National Institute on Aging (NIA) is the largest single
recipient of funds for aging research. Fiscal year 2001 NIA
appropriations have increased 14.2 percent over fiscal year
2000 funding levels, from $688.0 million in fiscal year 2000 to
$785.6 million in fiscal year 2001. This increase in aging
research funding is significant not only to older Americans,
but to the American population as a whole. Research on
Alzheimer's disease, for example, focuses on causes,
treatments, and the disease's impact on care providers. Any
positive conclusions that come from this research will help to
reduce the cost of long-term care that burdens society as a
whole. In addition, research into the effects that caring for
an Alzheimer's victim has on family and friends could lead to
an improved system of respite care, extended leave from the
workplace, and overall stress management. Therefore, the
benefits derived from an investment in aging research apply to
all age groups.
Several other institutes at NIH are also involved in
considerable research of importance to the elderly. The basic
priority at NIA, besides Alzheimer's research, is to understand
the aging process. What is being discovered is that many
changes previously attributed to ``normal aging'' are actually
the result of various diseases. Consequently, further analysis
of the effects of environmental and lifestyle factors is
essential. This is critical because, if a disease can be
specified, there is hope for treatment and, eventually, for
prevention and cure. One area receiving special emphasis is
women's health research, including a multi-year, trans-NIH
study addressing the prevention of cancer, heart disease, and
osteoporosis in postmenopausal women.
B. THE NATIONAL INSTITUTES OF HEALTH
1. Mission of NIH
The National Institutes of Health (NIH) seeks to improve
the health of Americans by increasing the understanding of the
processes underlying disease, disability, and health, and by
helping to prevent, detect, diagnose, and treat disease. It
supports biomedical and behavioral research through grants to
research institutions, conducts research in its own
laboratories and clinics, and trains young scientific
researchers.
With the rapid aging of the U.S. population, one of the
most important research goals is to distinguish between aging
and disease in older people. Findings from NIH's extensive
research challenge health providers to seek causes, cures, and
preventive measures for many ailments affecting the elderly,
rather than to dismiss them as being the effects of the natural
course of aging. A more complete understanding of normal aging,
as well as of disorders and diseases, also facilitates medical
research and education, and health policy and planning.
2. The Institutes
Much NIH research on particular diseases, disorders, and
conditions is collaborative, with different institutes
investigating pathological aspects related to their
specialties. At least 19 of the NIH research institutes and
centers investigate areas of particular importance to the
elderly. They are:
National Institute on Aging
National Cancer Institute
National Heart, Lung, and Blood Institute
National Institute of Dental and Craniofacial
Research
National Institute of Diabetes and Digestive and
Kidney Diseases
National Institute of Neurological Disorders and
Stroke
National Institute of Allergy and Infectious Diseases
National Institute of Child Health and Human
Development
National Eye Institute
National Institute of Environmental Health Sciences
National Institute of Arthritis and Musculoskeletal
and Skin Diseases
National Institute on Deafness and Other
Communication Disorders
National Institute of Mental Health
National Institute on Drug Abuse
National Institute of Alcohol Abuse and Alcoholism
National Institute of Nursing Research
National Center for Research Resources
National Center for Complementary and Alternative
Medicine
National Center on Minority Health and Health
Disparities
(a) national institute on aging
The National Institute on Aging (NIA) was established in
1974 in recognition of the many gaps in the scientific
knowledge of aging processes. NIA conducts and supports a
multidisciplinary program of geriatric research, including
research into the biological, social, behavioral, and
epidemiological aspects of aging. Through research and health
information dissemination, its goal is to prevent, alleviate,
or eliminate the physical, psychological, and social problems
faced by many older people.
Specific NIA activities include: diagnosis, treatment, and
cure of Alzheimer's disease; investigating the basic mechanisms
of aging; reducing fractures in frail older people; researching
health and functioning in old age; improving long-term care;
fostering an increased understanding of aging needs for special
populations; and improving career development training
opportunities in geriatrics and aging research. NIA-sponsored
research has led to discovery of genetic mutations linked to
Alzheimer's disease, increased knowledge of the basic biology
of cellular aging, especially the role of oxidative damage, and
hope for future new approaches to treatment of such common
conditions as osteoporosis, cancer, heart disease, and
diabetes.
The longest running scientific examination of human aging,
the Baltimore Longitudinal Study of Aging (BLSA), is being
conducted by NIA at the Nathan W. Shock Laboratories,
Gerontology Research Center (GRC) in Baltimore, MD. Started in
1958, the study includes more than 1,000 men and women, ranging
in age from their twenties to nineties, who participate every 2
years in more than 100 physiological and psychological
assessments, which are used to provide a scientific description
of aging. The study seeks to measure biological and behavioral
changes as people age, and to distinguish normal aging
processes from those associated with disease or environmental
effects. The study has established that aging does not
necessarily result in a general decline of all physical and
psychological functions, but that many of the so-called age
changes might be prevented.
NIA has collaborated with the National Advisory Council on
Aging and other groups to develop a 5-year strategic plan for
aging research, identifying scientific areas of most promise.
Another NIA strategic plan, on reducing health disparities
among older Americans of different racial and ethnic
backgrounds, will also influence all areas of research.
(b) national cancer institute
The National Cancer Institute (NCI) conducts and sponsors
basic and clinical research relating to the cause, prevention,
detection, and treatment of cancer. In 1999, 71 percent of all
persons in the U.S. who died of cancer were 65 years of age or
over.
The incidence of cancer increases with age. Aging may not
be a cause of cancer, but it is an important risk factor for
many types of cancer. Over the past 20 years, mortality rates
for many cancers have stayed steady or declined in people
younger than 65 while increasing in people over 65. Meanwhile,
cardiovascular mortality in those 65 and over has declined from
45 percent of deaths in 1973 to 34 percent of deaths in 1999.
Because cancer is primarily a disease of aging, longer life
expectancies and fewer deaths from competing causes, such as
heart disease, are contributing to the increasing cancer
incidence and mortality for people aged 65 and over.
NCI has recently reported progress in treating the most
common form of adult leukemia, use of hormonal therapy for
prostate cancer, discovery of genetic markers for lung cancer,
and development of a new diagnostic imaging system. In addition
to basic and clinical, diagnostic, and treatment research, NCI
supports prevention and control programs, such as programs to
stop smoking.
(c) national heart, lung, and blood institute
The National Heart, Lung, and Blood Institute (NHLBI)
focuses on diseases of the heart, blood vessels, blood and
lungs, and on the management of blood resources. Three of the
most prevalent chronic conditions affecting the elderly--
hypertension, heart conditions, and arteriosclerosis--are
studied by NHLBI. In 1999, approximately 1.2 million deaths
were reported from all of the diseases under the purview of the
Institute (half of all U.S. deaths that year). The projected
economic cost in 2002 for these diseases is expected to be $456
billion.
Research efforts focus on cholesterol-lowering drugs, DNA
technology, and genetic engineering techniques for the
treatment of emphysema, basic molecular biology research in
cardiovascular, pulmonary, and related hematologic research,
and regression of arteriosclerosis. In 1997, NHLBI took over
administration of the Women's Health Initiative, a 15-year
research project established in 1991 to investigate the leading
causes of death and disability among postmenopausal women.
NHLBI also conducts an extensive professional and public
education program on health promotion and disease prevention,
particularly as related to blood pressure, blood cholesterol,
and coronary heart disease. This has played a significant role
in the decline in stroke deaths and heart disease deaths since
1970.
(d) national institute of dental and craniofacial research
The National Institute of Dental and Craniofacial Research
(NIDCR) supports and conducts research and research training in
oral, dental, and craniofacial health and disease. Major goals
of the Institute include the prevention of tooth loss and the
preservation of the oral tissues. Other research areas include
birth defects affecting the face, teeth, and bones; oral
cancer; infectious diseases; chronic pain; epidemiology; and
basic studies of oral tissue development, repair, and
regeneration.
The Institute sponsors research on many conditions that
affect older adults. Oral cancers, with an average age at
diagnosis of 60 years, cause about 7,800 deaths each year and
often involve extensive and disfiguring surgery. The Institute
has ongoing collaborations with the National Cancer Institute
and other institutes in studies of head and neck cancer. In
several research areas, development of animal models has
facilitated the study of the mechanisms of disease. These
include salivary gland dysfunction, bone and hard tissue
disorders, including osteoporosis, and arthritis.
(e) national institute of diabetes and digestive and kidney diseases
The National Institute of Diabetes and Digestive and Kidney
Diseases (NIDDK) conducts and supports research and research
training in diabetes, endocrinology and metabolic diseases;
digestive diseases and nutrition; and kidney, urologic and
blood diseases.
Diabetes, one of the Nation's most serious health problems
and the largest single cause of renal disease, affects 17
million Americans, or 6.2 percent of the population. Among
Americans age 65 and older, 7 million or 20 percent of people
in this age group have diabetes, with the highest prevalence in
minority groups. The Institute is studying the genetic factors
that contribute to development of diabetes, and methods of
prevention of diabetes with diet, exercise, or medication. The
Institute also has a long-range plan for research on the
treatment and prevention of kidney disease and kidney failure,
which affect a growing number of elderly persons, especially
diabetics.
Benign prostatic hyperplasia (BPH), or prostate
enlargement, is a common disorder affecting older men. NIDDK is
currently studying factors that can inhibit or enhance the
growth of cells derived from the human prostate. NIDDK also
supports research on incontinence and urinary tract infections,
which affect many postmenopausal women.
(f) national institute of neurological disorders and stroke
The National Institute of Neurological Disorders and Stroke
(NINDS) supports and conducts research and research training on
the cause, prevention, diagnosis, and treatment of hundreds of
neurological disorders. This involves basic research to
understand the mechanisms of the brain and nervous system and
clinical research.
Most of the disorders studied by NINDS result in long-term
disabilities and involve the nervous system (including the
brain, spinal cord, and peripheral nerves) and muscles. NINDS
is committed to the study of the brain in Alzheimer's disease.
In addition, NINDS research focuses on stroke, Parkinson's
disease, and amyotrophic lateral sclerosis, as well as
conditions such as chronic pain, epilepsy, and trauma that
affect the elderly. NINDS is also conducting research on
neuroimaging technology and molecular genetics to determine the
etiology of Alzheimer's disease.
NINDS research efforts in Parkinson's disease include work
on causes, such as environmental and endogenous toxins; genetic
predisposition; altered motor circuitry and neurochemistry, and
new therapeutic interventions such as surgical procedures to
reduce tremor. A 5-year NIH Parkinson's Disease Research Agenda
was released in March 2000.
Strokes, the Nation's third-leading cause of death and the
most widespread neurological problem, primarily affects the
elderly. New drugs to improve the outlook of stroke victims and
surgical techniques to decrease the risk of stroke currently
are being studied.
(g) national institute of allergy and infectious diseases
The National Institute of Allergy and Infectious Diseases
(NIAID) focuses on two main areas: infectious diseases and
diseases related to immune system disorders.
Influenza can be a serious threat to older adults. NIAID is
supporting and conducting basic research and clinical trials to
develop treatments and to improve vaccines for high-risk
individuals. Work is also ongoing on new- generation
pneumococcal vaccines, on a shingles vaccine, and on vaccines
to protect against often fatal hospital-associated infections,
to which older persons are particularly vulnerable.
(h) national institute of child health and human development
The National Institute of Child Health and Human
Development (NICHD) supports research that has implications for
the entire human lifespan. Examples of aging-related research
include: the effect of maternal aging on reproduction;
variation in women's transition to menopause; the use of
hormone replacement therapy in women with uterine fibroids;
treatments to improve motor function after stroke; the genetics
of bone density; and the natural history of dementia in
individuals with Down syndrome.
(i) national eye institute
The National Eye Institute (NEI) conducts and supports
research and research training on the prevention, diagnosis,
treatment, and pathology of diseases and disorders of the eye
and visual system. The age 65 and older population accounts for
one-third of all visits for medical eye care. Glaucoma,
cataracts, and aging-related maculopathy, which are of
particular concern to the elderly, are being studied by NEI.
Some of this research is intended to serve as a foundation for
future outreach and educational programs aimed at those at
highest risk of developing glaucoma. A particular focus is age-
related macular degeneration, the leading cause of new
blindness in persons over age 65. Research is exploring both
the genetic basis of the disease and methods of preventing
complications with laser treatments. In October 1999, NEI
launched its Low Vision Education Program, aimed at helping
people with visual impairment, primarily the elderly, to make
the most of their remaining sight.
(j) national institute of environmental health sciences
The National Institute of Environmental Health Sciences
(NIEHS) conducts and supports basic biomedical research studies
to identify chemical, physical, and biological environmental
agents that threaten human health. A number of diseases that
impact the elderly have known or suspected environmental
components, including cancer, immune disorders, respiratory
diseases, and neurological problems.
Areas of NIEHS research include the genetic relationship of
smoking and bladder cancer; environmental and genetic effects
in breast cancer; suspected environmental components in
autoimmune diseases such as scleroderma, multiple sclerosis,
lupus, diabetes, and rheumatoid arthritis; and the role of
environmental toxicants in Parkinson's disease, Alzheimer's
disease, amyotrophic lateral sclerosis, and other
neurodegenerative disorders.
(k) national institute of arthritis and musculoskeletal and skin
diseases
The National Institute of Arthritis and Musculoskeletal and
Skin Diseases (NIAMS) investigates the cause and treatment of a
broad range of diseases, including osteoporosis, the many forms
of arthritis, and numerous diseases of joints, muscles, bones,
and skin. The Institute supports 34 specialized and
comprehensive research centers.
Approximately 43 million Americans are affected by the more
than 100 types of arthritis and related disorders. Older adults
are particularly affected. Half of all persons over age 65
suffer from some form of chronic arthritis. An estimated 10
million Americans, most of them elderly, have osteoporosis,
with another 34 million at increased risk for the disease. It
is estimated that by the year 2020, nearly 60 million Americans
will be affected by arthritis and other rheumatic conditions.
The most common degenerative joint disease is
osteoarthritis, which is predicted to affect at least 70
percent of people over 65. Among other approaches, NIAMS is
sponsoring studies on the death of cartilage cells, on improved
imaging techniques, and on the usefulness of alternative
therapies such as glucosamine and chondroitin sulfate.
In rheumatoid arthritis research, scientists are studying
clusters of genes that seem to influence susceptibility to
rheumatoid arthritis and other autoimmune diseases. Progress is
also being made on the goal to use gene therapy to treat
rheumatoid arthritis.
(l) national institute on deafness and other communication disorders
The National Institute on Deafness and Other Communication
Disorders (NIDCD) conducts research into the effects of
advancing age on hearing, vestibular function (balance),
speech, voice, language, and chemical and tactile senses.
Presbycusis (the age-related loss of ability to perceive or
discriminate sounds) is a prevalent but understudied disabling
condition. One-third of people age 65 and older have
presbycusis serious enough to interfere with speech perception.
Studies of the influence of factors, such as genetics, noise
exposure, cardiovascular status, systemic diseases, smoking,
diet, personality and stress types, are contributing to a
better understanding of the condition.
NIDCD has recently collaborated with the Department of
Veterans Affairs to test new types of hearing aids, and with
NIDCR to research the genes that control taste.
(m) national institute of mental health
The National Institute of Mental Health (NIMH) is involved
in extensive research relating to Alzheimer's and related
dementias, and the mental disorders of the elderly. NIMH is
working on identifying the nature and extent of structural
change in the brains of Alzheimer's patients to better
understand the neurochemical aspects of the disease.
Depression is a relatively frequent and often unrecognized
problem among the elderly. Nearly five million elderly persons
suffer from a serious and persistent form of depression.
Research has shown that nearly 40 percent of the geriatric
patients with major depression also meet the criteria for
anxiety, which is related to many medical conditions, including
gastrointestinal, cardiovascular, and pulmonary disease.
Clinical depression often leads to suicide. According to
the Centers for Disease Control and Prevention, elderly suicide
is emerging as a major public health problem. After nearly four
decades of decline, the suicide rate for people over 65 began
increasing in 1980 and has been growing ever since. It is
particularly high among white males aged 85 and older--about
six times the national U.S. rate.
NIMH has identified disorders of the aging as among the
most serious mental health problems facing this Nation and is
currently involved in a number of activities relevant to aging
and mental health.
(n) national institute on drug abuse
The National Institute on Drug Abuse (NIDA) researches
science-based prevention and treatment approaches to the public
health and public safety problems posed by drug abuse and
addiction. For many people, addictions established in the
younger years, notably nicotine addiction, may carry on into
old age. NIDA-supported research has begun to clarify the
biological mechanisms in the brain that underlie the process of
addiction, leading to hope for future prevention and treatment.
Other research has shown that nicotine and nicotine-like
compounds may have beneficial effects in treating neurological
diseases such as Parkinson's and Alzheimer's disease.
(o) national institute of alcohol abuse and alcoholism
The National Institute of Alcohol Abuse and Alcoholism
(NIAAA) supports and conducts biomedical and behavioral
research on the causes, consequences, treatment, and prevention
of alcoholism and alcohol-related problems. Alcoholism among
the elderly is often minimized due to low reported alcohol
dependence among elderly age groups in community and population
studies. Also, alcohol-related deaths of the elderly are
underreported by hospitals. Because the elderly population is
growing at such a tremendous rate, more research is needed in
this area.
Although the prevalence of alcoholism among the elderly is
less than in the general population, the highest rates of
alcohol abuse and dependence have been reported among older
white men.
(p) national institute of nursing research
The National Institute of Nursing Research (NINR) conducts,
supports, and disseminates information about basic and clinical
nursing research through a program of research, training, and
other programs. Research topics related to the elderly include:
preserving cognition and ability to function; depression among
patients in nursing homes to identify better approaches to
nursing care; physiological and behavioral approaches to combat
incontinence; initiatives in areas related to Alzheimer's
disease, including burden-of-care; osteoporosis; pain research;
the ethics of therapeutic decisionmaking; and end-of-life
palliative care.
(q) national center for research resources
The National Center for Research Resources (NCRR) is the
Nation's preeminent developer and provider of the resources
essential to the performance of biomedical research funded by
the other entities of NIH and the Public Health Service.
NCRR grantees of the General Clinical Research Centers
(GCRC) program have found that short-term estrogen treatment is
helpful in decreasing vascular stiffness and lowering blood
pressure in older women, and that lower doses of estrogen may
be just as effective as higher doses in preventing post-
menopausal osteoporosis. Another grantee discovered that many
older people have too little vitamin D in their bodies, which
can lead to fractures and other muscle and bone problems.
Research studies on older monkeys have shown that many common
geriatric diseases appear to be caused by old age and
predisposing genetic factors rather than environmental or
lifestyle factors.
(r) national center for complementary and alternative medicine
Newly operational in 1999, the National Center for
Complementary and Alternative Medicine (NCCAM) is the focus at
NIH for the scientific exploration of complementary and
alternative medicine (CAM) and healing practices. Since many
CAM therapies are associated with chronic conditions, NCCAM
research addresses conditions particularly impacting the
elderly population, including dementia, arthritis, cancer,
cardiovascular disease, and pain. Current studies exploring CAM
use by the elderly find that, like the population at large,
about 40 percent of seniors report using CAM, but that most do
not disclose their use of CAM therapies to their physicians.
NCCAM tries to increase awareness of CAM among conventional
physicians.
(s) national center on minority health and health disparities
Legislation at the end of 2000 provided for the
establishment of the new National Center on Minority Health and
Health Disparities (NCMHD). Effective in January 2001, the
programs of the Office of Research on Minority Health were
transferred from the Office of the NIH Director to the new
Center. NCMHD is responsible for coordinating all NIH research
that seeks to reduce the disproportionately high incidence and
prevalence of disease, burden of illness, and mortality among
some groups of Americans, including racial and ethnic
minorities, and urban and rural poor. Health status and health
disparities among senior citizens of various socioeconomic
levels will be of interest to the Center.
C. ISSUES AND CONGRESSIONAL RESPONSE
1. NIH Appropriations
Congress has passed a fiscal year 2001 appropriation for
NIH of $20.4 billion. The agency has enjoyed strong bipartisan
support for many years, reflecting the interest of the American
public in promoting medical research. Even in the face of
pressure to reduce the deficit, Congress approximately doubled
NIH's appropriation in the decade between FY1988 and FY1998.
Starting with the FY1999 appropriation, Congress has for 3
years increased NIH's budget at an even faster rate,
approaching a pace to double in 5 years. From the FY1998 level
of $13.6 billion, the appropriation increased by $2.0 billion
or 14.6 percent to $15.6 billion in FY1999. For FY2000, the
increase was $2.2 billion or 14.2 percent to a total of $17.8
billion, and for FY2001, the appropriation was $20.4 billion,
an increase of $2.6 billion or 14.3 percent.
In their reports accompanying the FY2001 appropriation, the
appropriations committees discussed their high regard for NIH
and its accomplishments, and their intent to distribute the
appropriations largely according to NIH's recommendations. To
this end, specific amounts were not provided for particular
diseases or funding mechanisms, although report language
relating to some areas of research in some institutes is quite
detailed.
NIH's own budget documents had highlighted a number of
activities slated to receive additional resources. They
represent opportunities across all institutes and centers for
new scientific knowledge and applications to strategies for
diagnosing, treating, and preventing disease. These areas of
research potential include: (1) genetic medicine/exploiting
genomic discoveries (DNA sequencing, identification of disease
genes, development of animal models); (2) reinvigorating
clinical research (strengthening clinical research centers,
clinical trials, and clinical training); (3) infrastructure and
enabling technologies, including interdisciplinary research
(advanced instrumentation, biocomputing and bioinformatics,
engaging other scientific disciplines in medical research on
drug design, imaging studies, and biomaterials); and (4)
eliminating health disparities in minorities and other
medically underserved populations.
Programs receiving particular emphasis by Congress in the
FY2001 appropriation include grants to institutions in states
with historically low levels of NIH support, research on
complementary and alternative medicine, and research on
Parkinson's disease and autism.
Out of its total appropriation of $20.36 billion for fiscal
year 2001, NIH estimates that it will spend $1.66 billion on
research related to aging. Appropriations levels for the NIH
institutes, including estimates for aging research, are as
follows:
FISCAL YEAR 2001 APPROPRIATIONS FOR NIH
[Dollars in millions]
------------------------------------------------------------------------
Fiscal year
Fiscal year 2001 Aging
Institute or Center 2001 Research
Appropriation (Estimates)
------------------------------------------------------------------------
National Institute on Aging............. $785.6 $785.6
National Cancer Institute............... 3,754.5 105.0
National Heart, Lung, and Blood 2,298.5 97.0
Institute..............................
National Institute of Dental and 306.2 11.6
Craniofacial Research..................
National Institute of Diabetes and 1,302.7 90.0
Digestive and Kidney Diseases..........
National Institute of Neurological 1,175.9 152.0
Disorders and Stroke...................
National Institute of Allergy and 2,041.7 74.5
Infectious Diseases....................
National Institute of General Medical 1,535.4 ..............
Sciences...............................
National Institute of Child Health and 975.8 8.0
Human Development......................
National Eye Institute.................. 510.4 100.3
National Institute of Environmental 564.8 9.5
Health Sciences........................
National Institute of Arthritis and 396.5 52.6
Musculoskeletal and Skin Diseases......
National Institute on Deafness and Other 300.4 18.2
Communication Disorders................
National Institute of Mental Health..... 1,106.3 96.8
National Institute on Drug Abuse........ 780.8 1.1
National Institute of Alcohol Abuse and 340.5 4.9
Alcoholism.............................
National Institute of Nursing Research.. 104.3 12.7
National Human Genome Research Institute 382.1 ..............
National Center for Research Resources.. 817.3 29.1
National Center for Complementary and 89.1 8.1
Alternative Medicine...................
National Center on Minority Health and 130.1 2.8
Health Disparities.....................
Fogarty International Center............ 50.5 0.4
National Library of Medicine............ 246.4 ..............
Office of the Director.................. 211.8 0.5
Buildings and Facilities................ 153.8 ..............
-------------------------------
Total, NIH........................ $20,361.1 $1,660.7
------------------------------------------------------------------------
2. NIH Authorizations and Related Issues
Congress has provided the first three ``installments'' for
the 5-year doubling of the NIH budget, putting it on a path to
a fiscal year 2003 target of approximately $27.2 billion. The
new resources have been accompanied by much debate over the
degree to which Congress should direct scientific exploration
and influence the setting of research priorities. In the last
two decades, often after lobbying by disease advocacy groups,
Congress has created seven new institutes and centers at NIH
and has added numerous mandates for support of specific types
of research, including use of particular funding mechanisms,
such as centers of excellence.
At the end of the 106th Congress, several acts were passed
which collectively provided NIH with many new authorities. The
laws addressed children's health and pediatric research (P.L.
106-310); clinical research enhancement and research laboratory
infrastructure (P.L. 106-505); minority health and health
disparities research, with creation of the new Center (P.L.
106-525); and creation of a new National Institute of
Biomedical Imaging and Bioengineering (P.L. 106-580). In
addition, report language accompanying the appropriations bills
shapes NIH's research priorities, although almost always
without specific dollar earmarks.
Sponsors and advocates for such legislation see it as a
legitimate way to ensure that NIH is responding to the public's
health needs; critics warn that attempts to micromanage NIH's
research portfolio may divert funding from the most promising
scientific opportunities. The Senate appropriations report
accompanying the FY2001 Labor-HHS bill questioned the
proliferation of new entities at NIH and expressed concern
about the current NIH structure and organization. Funds were
provided for a study of the NIH structure, due 1 year after
confirmation of a new NIH Director (the post has been vacant
since January 2000).
Potential topics for debate in the next Congress include
whether to place restrictions on some types of research that
hold promise for combating disease, but which raise contentious
ethical issues. These include stem cell research, the use of
human fetal tissue or human embryos in research, and attempts
to prohibit human cloning research.
3. Alzheimer's Disease
Alzheimer's disease (AD) is a progressive and, at present,
irreversible brain disorder that occurs gradually and results
in memory loss, behavior and personality changes, and a decline
in cognitive abilities. AD patients eventually become dependent
on others for every aspect of their care. On average, patients
with AD live for 8-10 years after they are diagnosed, though
the disease can last for up to 20 years. Scientists do not yet
fully understand what causes AD, but it is clear that the
disease develops as a result of a complex cascade of events,
influenced by genetic and environmental factors, taking place
over time in the brain. These events lead to the breakdown of
the connections between nerve cells in a process that
eventually interferes with normal brain function.
AD is the most common form of dementia among people age 65
and older. It represents a major public health problem in the
United States because of its enormous impact on individuals,
families, and the health care system. An estimated four million
Americans now suffer from AD. Epidemiologic studies indicate
that the prevalence of AD approximately doubles every 5 years
beyond the age of 65. Lifestyle improvements and advances in
medical technology in the decades ahead will lead to a
significant increase in the number of people living to very old
age and, therefore, the number of people at risk for AD. Unless
medical science can find a way to prevent the disease, delay
its onset, or halt its progress, it is estimated that 14
million Americans will have Alzheimer's disease by the year
2050.
Caring for a person with AD can be emotionally, physically,
and financially stressful. More than two-thirds of AD patients
live at home, where families provide most of their care.
According to the 1996 National Caregiver Survey, dementia
caregivers spend significantly more time on caregiving tasks
than do people caring for those with other types of illnesses
and experience greater employment complications, mental and
physical health problems, and caregiver strain than do those
engaged in other types of caregiving activities. The annual
cost of caring for an AD patient at home is estimated at
$12,500. Nursing home care for dementia patients, by
comparison, costs an average of $42,000, according to the
Alzheimer's Association. Overall, AD costs the Nation an
estimated $100 billion a year in medical expenses, round-the-
clock care, and lost productivity.
Major developments in genetic, molecular, and epidemiologic
research over the past decade, almost all of it funded by NIH,
have rapidly expanded our understanding of AD. In FY2001, NIH
will spend an estimated $521 million on AD research. The
National Institute on Aging (NIA) accounts for about three-
quarters of NIH's Alzheimer's research funding and coordinates
AD-related activities throughout NIH. Other institutes at NIH
that conduct AD research include the National Institute of
Neurological Disorders and Stroke (NINDS), the National
Institute of Mental Health (NIMH), the National Institute of
Allergy and Infectious Diseases (NIAID), and the National
Institute of Nursing Research (NINR). With Congress on track to
double NIH's budget over a 5-year period beginning in FY1998,
AD research funding is expected to total about $650 million by
FY2003.
AD is characterized by two abnormal structures in the
brain: amyloid plaques and neurofibrillary tangles. The plaques
consist of deposits of beta-amyloid--a protein fragment snipped
from a larger cell-surface protein called amyloid precursor
protein (APP)--intermingled with the remnants of glial cells,
which support and nourish nerve cells. Plaques are found in the
spaces between the brain's nerve cells. Although researchers do
not yet know whether the plaques themselves cause AD or are a
by-product of the disease, there is increasing evidence that
beta-amyloid deposition may be a central process in the
development of AD. Neurofibrillary tangles, the second hallmark
of AD, consist of abnormal collections of twisted threads found
inside nerve cells. The principal component of these tangles is
a protein called tau, which is an important component of the
nerve cell's internal support structure. In AD tau is changed
chemically and this alteration causes it to tangle, which leads
to a breakdown in communication between nerve cells.
Researchers have identified four genes linked to AD. One of
the genes is associated with the typical late-onset form of the
disease that strikes the elderly. The other three genes are
linked to the rare (about 5-10 percent of cases) early onset
disease that generally affects people aged 30 to 60.
Identification of these genes has led to other insights into
biochemical pathways that appear to be important in the early
preclinical stages of AD development. For example, one of the
early onset AD genes codes for the APP protein. A number of
transgenic mouse models of AD have been developed by inserting
mutated human APP genes into mice. These mice express features
of the human disease, including formation of beta-amyloid
plaques.
In an important recent development, researchers isolated
three enzymes--alpha, beta, and gamma secretase--that are
involved in clipping beta-amyloid out of APP. Studies strongly
suggest that gamma secretase is the product of one of the other
early onset AD genes. The discovery of these enzymes, together
with the availability of animal models of AD, will be critical
to the development and testing of effective and safe amyloid-
preventing drugs. Research on tau, the protein that forms
neurofibrillary tangles, is also yielding important clues about
the pathology of AD and creating new opportunities for
developing drug treatments. Mutations in the tau gene have been
shown to cause other (non-AD) forms of late-onset dementia. In
the past year, a transgenic mouse strain has been developed
that expresses one of the human tau mutations and develops AD-
like tangles.
In 1999, at the instruction of Congress, the NIH
established the AD Prevention Initiative to accelerate basic
research and the movement of research findings into clinical
practice. The core goals of the initiative are to invigorate
discovery and testing of new treatments, identify risk and
protective factors, enhance methods of early detection and
diagnosis, and advance basic science to understand AD. The
initiative also seeks to improve patient care strategies and to
alleviate caregiver burden.
The ability to determine the effectiveness of early
treatments or interventions, such as those being tested in the
AD Prevention Initiative, depends crucially on being able to
identify patients in the initial stages of AD. Recent advances
in imaging and patient assessment have focused on identifying
patients with mild cognitive impairment (MCI), a condition
characterized by significant memory deficit without dementia.
In one study, 80 percent of persons diagnosed with MCI
developed AD within 8 years. The NIA is supporting several
large-scale clinical trials to evaluate the effectiveness of
various agents in slowing or stopping the conversion from MCI
to AD. Many of the agents being tested in these trials have
been suggested as possible interventions based on basic
research findings and long-term epidemiological studies. Agents
currently under study include aspirin, antioxidants such as
vitamin E, estrogen, anti-inflammatory drugs, and ginkgo
biloba.
While there is no effective way to treat or prevent
Alzheimer's disease, the FDA has approved three drugs for the
treatment of AD: tacrine (Cognex); donepezil (Aricept); and
rivastigmine (Exelon). These drugs help boost level of
acetylcholine--the chemical messenger involved in memory--which
falls sharply as AD progresses. The three drugs have been shown
to produce modest improvements in cognitive ability in some
patients with mild to moderate symptoms, though they do not
alter the underlying course of the disease. Several new drugs
are currently under development, targeting specific pathways in
plaque and tangle formation, and dysfunction and death of brain
cells.
To help facilitate AD research and clinical trials, the NIA
funds 28 AD Centers (ADCs) at major medical research
institutions across the country. The centers provide clinical
services to Alzheimer's patients, conduct basic and clinical
research, disseminate professional and public information, and
sponsor educational activities. Many of the ADCs have satellite
clinics that target minority, rural, and other under-served
groups in order to increase the number and diversity of
patients who participate in research protocols and clinical
drug trials associated with the parent center. The NIA has also
established the AD Cooperative Study, an organizational
structure that enables ADCs across the country to cooperate in
developing and running clinical trials. Finally, the National
Alzheimer's Coordinating Center, created by the NIA in 1999,
provides for the analysis of combined data collected from all
the ADCs as well as other sources.
Recent epidemiological studies have focused attention on
cardiovascular risk factors such as high blood pressure in
middle age and elevated cholesterol as possible risk factors
for AD. Further animal and humans studies and clinical trials
will be required to determine if AD and cardiovascular disease
share common risk factors. Socioeconomic and environmental
variables in early life may affect brain growth and
development, perhaps influencing the development of AD in later
life. Exposure to environmental toxins or head traumas may also
increase susceptibility to cognitive decline and
neurodegenerative disease later in life.
While research on the prevention and treatment of AD is
progressing rapidly, there is also a critical need to develop
more effective behavioral and therapeutic strategies to help
maintain function, prevent illness, and limit disability among
AD patients, and to alleviate caregiver burden. Two clinical
trials are testing whether drugs can reduce agitation and sleep
disturbance, two of the major behavioral problems in AD
patients that increase caregiver burden. As part of the AD
Prevention Initiative, the NIA, in collaboration with the NINR,
is supporting the Resources for Enhancing Alzheimer's Caregiver
Health (REACH) program. This large, multi-site intervention
trial is testing the effectiveness of different culturally
sensitive home and community-based interventions for families
providing care to AD patients. The interventions include
psychological education support groups, behavioral skills
training, environmental modifications, and computer-based
information and communications systems. About 1,000 families
are enrolled in the REACH program, including large numbers of
African-Americans and Hispanics.
In addition to the AD research programs supported by NIH,
two other Federal agencies support AD programs. First, the
Alzheimer's Disease Demonstration Grants to States program,
which is administered by the Administration on Aging, provides
funds to 15 states to develop model practices for serving
persons with AD and their families. A recent national
evaluation of the program found that it had proven very
successful in expanding support services to AD patients and
family caregivers, especially hard-to-reach minority, low-
income, and rural families. Second, the Safe Return Program,
funded by the Justice Department, works with local law
enforcement agencies throughout the country to assist in
locating AD patients who wander and become lost.
The Alzheimer's Association [http://www.alz.org] funds
research and provides information and assistance to AD patients
and their families through its nationwide network of
approximately 200 local chapters. The Association has organized
its advocacy efforts around four issues: increasing Federal AD
research funding; developing a national caregiver support
program that builds on existing state and community respite,
adult day care, and caregiver support programs; reforming
Medicare to cover prescription drugs and pay for the chronic
health care needs of AD patients; and financing long term care.
The Alzheimer's Disease Education and Referral (ADEAR)
Center, a service of the NIA, provides information on
diagnosis, treatment issues, patient care, caregiver needs,
long-term care, education and training, research activities,
and ongoing programs, as well as referrals to resources at both
national and state levels. ADEAR, which may be accessed
online at [http://www. alzheimers.org], produces and
distributes a variety of educational materials such as
brochures, fact sheets, and technical publications.
4. Arthritis and Musculoskeletal Diseases
The National Institute of Arthritis and Musculoskeletal and
Skin Diseases (NIAMS) conducts the primary Federal biomedical
research for arthritis and osteoporosis. Additional research on
these disorders is also carried out by the National Institute
of Allergy and Infectious Diseases, the National Institute of
Dental and Craniofacial Disorders, the National Institute of
Diabetes and Digestive and Kidney Diseases, the National Heart,
Lung, and Blood Institute, and the National Institute on Aging,
among others.
Osteoporosis is a disease characterized by exaggerated loss
of bone mass and disruption in skeletal microarchitecture which
leads to a variety of bone fractures. It is a symptom less,
bone-weakening disease, which usually goes undiscovered until a
fracture occurs. Osteoporosis is a major threat for an
estimated 44 million Americans, 10 million of whom already have
osteoporosis. The other 34 million have low bone mass and are
at increased risk for the disease. Osteoporotic and associated
fractures are estimated to cost the Nation $17 billion in 2001.
Medical costs will increase significantly as the population
ages and incidence increases. Research holds the promise of
significantly reducing these costs if drugs can be developed to
prevent bone loss and the onset of osteoporosis, and to restore
bone mass to those already affected by the disease.
Research initiatives to address osteoporosis are underway
in several NIH institutes, and also involve other agencies
through the Federal Working Group on Bone Diseases, coordinated
by NIAMS. The NIH Women's Health Initiative is currently
studying osteoporosis and fractures to determine the usefulness
of calcium and vitamin D supplements. Other research is
investigating the genes and molecules involved in the formation
and resorption of bone, the role of estrogen as a bone
protector, and the use of combinations of drugs as therapy for
osteoporosis. NIAMS has recently funded additional specialized
centers for research in osteoporosis. The Institute was also
one of several sponsors of a consensus development conference
on osteoporosis to develop recommendations for future
diagnosis, prevention, and treatment approaches. The NIH
Osteoporosis and Related Bone Diseases? National Resource
Center is a joint Federal-nonprofit sector effort to enhance
information dissemination and education on osteoporosis to the
public.
In addition to research in osteoporosis, NIAMS is the
primary research institute for arthritis and related disorders.
The term arthritis, meaning an inflammation of the joints, is
used to describe the more than 100 rheumatic diseases. Many of
these disorders affect not only the joints, but other
connective tissues of the body as well. Approximately 43
million Americans, one in every six persons, has some form of
rheumatic disease, making it one of the most prevalent diseases
in the United States and the leading cause of disability among
adults age 65 and older. That number is expected to climb to
nearly 60 million, or 18 percent of the population, by the year
2020, due largely to the aging of the U.S. population. Besides
the physical toll, arthritis costs the country nearly $65
billion annually in medical costs and lost productivity.
Although no cure exists for the many forms of arthritis,
progress has been made through clinical and basic
investigations. The two most common forms of arthritis are
osteoarthritis and rheumatoid arthritis.
Osteoarthritis (OA) is a degenerative joint disease,
affecting more than 20 million Americans. OA causes cartilage
to fray, and in extreme cases, to disappear entirely, leaving a
bone-to-bone joint. Disability results most often from disease
in the weight-bearing joints, such as the knees, hips, and
spine. Although age is the primary risk factor for OA, age has
not been proven to be the cause of this crippling disease. NIH
scientists are focusing on studies that seek to distinguish
between benign age changes and those changes that result
directly from the disease. This distinction will better allow
researchers to determine the cause and possible cures for OA.
Other areas of research involve using animal models to study
the very early stages of OA, work on diagnostic tools to detect
and treat the disease earlier, genetic studies to elucidate the
role of inheritance, and development of comprehensive treatment
strategies. NIAMS is collaborating with NCCAM to study the
efficacy of the dietary supplements glucosamine and chondroitin
sulfate for the treatment of OA of the knee.
Rheumatoid arthritis (RA), one of the autoimmune diseases,
is a chronic inflammatory disease affecting more than 2.1
million Americans, over two-thirds of whom are women. RA causes
joints to become swollen and painful, and eventually deformed.
The cause is not known, but is the result of the interaction of
many factors, such as a genetic predisposition triggered by
something in the internal or external environment of the
individual.
There are no known cures for RA, but research has
discovered a number of therapies to help alleviate the painful
symptoms. Current treatment approaches involve both lifestyle
modifications, such as rest, exercise, stress reduction, and
diet, as well as medications and sometimes surgery. To further
their understanding of RA, researchers are studying basic
abnormalities in the immune system of patients, genetic
factors, the relationships among the hormonal, nervous, and
immune systems, and the possible triggering role of infectious
agents. A new research registry on RA in the African-American
population has recently been funded.
5. Geriatric Training and Education
The Health Professions Education Partnerships Act of 1998
amended the Public Health Service Act (PHSA) to consolidate and
reauthorize health professions and minority and disadvantaged
health education programs. Section 753 of the PHSA authorizes
the Secretary of the Department of Health and Human Services
(DHHS) to award grants or contracts for: (1) Geriatric
Education Centers (GECs); (2) Geriatric Training Regarding
Physicians and Dentists, and Behavioral and Mental Health
Professionals; and (3) Geriatric Faculty Fellowships under the
Geriatric Academic Career Awards (GACA) Program. The programs
are administered by the Bureau of Health Professions at the
Health Resources and Services Administration (HRSA) of DHHS.
A GEC is a program that: (1) improves the training of
health professionals in geriatrics, including geriatric
residencies, traineeships, or fellowships; (2) develops and
disseminates curricula relating to treatment of health problems
of elderly individuals; (3) supports the training and
retraining of faculty to provide instruction in geriatrics; (4)
supports continuing education of health professionals who
provide geriatric care; and (5) provides students with clinical
training in geriatrics in nursing homes, chronic and acute
disease hospitals, ambulatory care centers, and senior centers.
Under the program for geriatric training for physicians and
dentists, the Secretary may make grants to, and enter into
contracts with, schools of medicine, schools of osteopathic
medicine, teaching hospitals, and graduate medical education
programs, for the purpose of providing support (including
residencies, traineeships, and fellowships) for geriatric
training projects to train physicians, dentists and behavioral
and mental health professionals who plan to teach geriatric
medicine, geriatric behavioral or mental health, or geriatric
dentistry.
The GACA program provides geriatric faculty fellowship
awards to eligible individuals to promote the career
development of such individuals to serve on school faculties as
academic geriatricians.
HRSA reported in its Justification of Estimates for
Appropriations Committees for FY2002 that the goal of the three
geriatric programs was to increase access to health care for
America's elderly by competently training health professionals
in geriatrics who may come from a variety of disciplines. To
date the GECs have trained over 385,000 practitioners in 27
health-related disciplines and developed over 1,000 curricular
materials on topics such as adverse drug reactions, Alzheimer's
disease, depression, elder abuse, ethnogeriatrics, and
teleconferencing.
Concerned alliances for the elderly have estimated the
number of geriatricians needed by the year 2030 to be 36,000.
There are 9,000 physicians currently trained in geriatrics and
this is a declining number due to physician retirements.
Currently, the GECs produce around 100 new fellowship-trained
geriatricians each year, which is not enough to replace those
that die or retire.
Approximately 230 fellows have completed the Geriatric
Faculty Fellowship Program, of which 90 percent hold faculty
positions and 84 percent work with underserved populations.
Appropriations for FY2001 totaled $12.4 million for
geriatric training programs.
6. Social Science Research and the Burdens of Caregiving
Most long-term care is provided by families at a tremendous
emotional, physical, and financial cost. The NIA conducts
extended research in the area of family caregiving and
strategies for reducing the burdens of care. The research is
beginning to describe the unique caregiving experiences by
family members in different circumstances; for example, many
single older spouses, are providing round-the-clock care at the
risk of their own health. Also, adult children are often trying
to balance the care of their aged parents, as well as the care
for their own children.
Families must often deal with a confusing and changing
array of formal health and supportive services. For example,
older people are currently being discharged from acute care
settings with severe conditions that demand specialized home
care. Respirators, feeding tubes, and catheters, which were
once the purview of skilled professionals, are now commonplace
in the home. Research has shown that caregiver stress can be
decreased by providing skills training in assessing and
monitoring patients' problems, managing symptoms, and taking
care of the caregiver's own health.
The employed caregiver is becoming an increasingly common
long-term care issue. This issue came to the forefront several
years ago during legislative action on the ``Family and Medical
Leave Act.'' While many thought of this only as a child care
issue, elderly parents are also in need of care. Adult sons and
daughters report having to leave their jobs or take extended
leave due to a need to care for a frail parent.
While the majority of families do not fall into this
situation, it will be a growing problem. Additional research is
needed on ways to balance work obligations and family
responsibilities. A number of employers have begun to design
innovative programs to decrease employee caregiver problems.
Some of these include the use of flex-time, referral to
available services, adult day care centers, support groups, and
family leave programs.
While clinical research is being conducted to reduce the
need for long-term care, a great need exists to understand the
social implications that the increasing population of older
Americans is having on society as a whole.
D. CONCLUSION
Within the past 50 years, there has been an outstanding
improvement in various measures of the health and well-being of
the American people. Some once-deadly diseases have been
controlled or eradicated, and the mortality rates for victims
of heart disease, stroke, and some cancers have improved
dramatically. Much credit for this success belongs to the
Federal Government's longstanding commitment to the support of
biomedical research.
The demand for long-term care will continue to grow as the
population ages. Alzheimer's disease, for example, is projected
to more than triple by the year 2050 if biomedical researchers
do not develop ways to prevent or treat it. For the first time,
however, Federal spending for Alzheimer's disease research will
surpass the $500 million mark. The increased support for this
debilitating disease indicates a recognition by Congress of the
extreme costs associated with Alzheimer's disease. It is
essential that appropriation levels for aging research remain
consistent so that promising research may continue. Such
research could lead to treatments and possible prevention of
Alzheimer's disease, other related dementias, and many other
costly diseases such as cancer and diabetes.
Various studies have highlighted the fact that although
research may appear to focus on older Americans, benefits of
the research are reaped by the population as a whole. Much
research, for example, is being conducted on the burdens of
caregiving on informal caregivers. Research into the social
sciences needs to be expanded as more and more families are
faced with caring for a dependent parent or relative.
Finally, research must continue to recognize the needs of
special populations. Too often, conclusions are based on
research that does not appropriately represent minorities and/
or women. Expanding the number of grants to examine special
populations is essential in order to gain a more complete
understanding of such chronic conditions as Alzheimer's
disease, osteoporosis, and Parkinson's disease.
CHAPTER 12
HOUSING PROGRAMS
OVERVIEW
Relatively few low-income households receive assistance.--
Nearly 5 million low-income households now receive Federal
rental assistance. This represents only about 25 percent of the
low-income households who are eligible to receive help with
their rent. There is an added concern: the number of households
with worst case needs has continued to increase during the
1990's despite relatively favorable economic conditions.
The most pressing housing issue.--Finding enough funds to
continue assisting those renters currently being helped is the
largest housing issue facing the 107th Congress. In addition,
Congress is searching for ways to provide affordable housing
with supportive services for low-income elderly tenants, so
that they may continue to live independently as long as
possible. In the near future, there will be a very large and
increasing number of rental assistance contracts with private
landlords coming up for renewal under HUD's Section 8 program
(discussed below). In fiscal year 2000 the nearly 2.6 million
units up for renewal will require budget authority of $13.6
billion, according to HUD. This will increase to 2.7 million
units and $15.7 billion in fiscal year 2002.
Housing reform bills.--In the 105th Congress, a new reform
bill was introduced. This bill, H.R. 2, The Housing Opportunity
and Responsibility Act of 1997, addressed public housing and
project-based Section 8 admission preferences who should get
priority. The matching Senate bill, S. 462, The Public Housing
Reform and Responsibility Act of 1997, addressed similar
issues. Resident participation would be encouraged in the
development of the public housing authority operating plan and
incentives for implementing anti-crime policies. It promoted
increased residential choice and mobility by increasing
opportunities for residents to use tenant-based assistance
(vouchers), and it instituted reforms such as ceiling rents,
earned income adjustments, and minimum rents which encourage
and reward work. Conferees on the two bills began informal
discussions on their differences, and by Fall of 1998, they
believed they had worked out an acceptable compromise. To
assure passage of this housing authorization bill, it was
included in the VA-HUD Appropriations bill for fiscal year 1999
as Title V, The Quality Housing and Work Responsibility Act of
1998. The overall thrust of this authorization bill was greater
flexibility for local housing authorities, more demolitions of
obsolete public housing units, and a merger of the Section 8
voucher and certificate programs.
Preserving Section 8 projects.--In addition to expiring
Section 8 contracts, there are two important related issues
known as the ``portfolio re-engineering'' and ``preservation''
programs. Both have to do with Section 8 projects, many with
excessive costs and deteriorated physical conditions. Many
projects have mortgages insured by HUD's Federal Housing
Administration (FHA) for more than the buildings are now worth.
HUD is under strong pressure to reduce the excessive costs, but
at the same time, avoid driving landlords into foreclosure. A
foreclosure would not only be costly to the FHA insurance
program, but would be disruptive to the low-income tenants in
these projects. Congress has initiated a restructuring program
called ``mark-to-market'' to test for a satisfactory resolution
to this problem. Under the restructuring program, rents would
be reduced in return for the government forgiving some of the
mortgage debt. HUD has created a new office within its agency
to oversee this restructuring, the Office of Multifamily
Housing Assistance Restructuring (OMHAR). This office had some
difficulty at the beginning of its organization and the
restructuring program did not progress as quickly as HUD had
anticipated. The program is scheduled to sunset on September
30, 2001, but it is expected to be reauthorized.
Also among the Section 8 landlords are those that have the
contractual right after 20 years to prepay the remaining debt
on their subsidized mortgages and end their obligation to rent
to low income households. Here too, Congress is wrestling with
the design of a ``preservation'' program that protects existing
low-income tenants, while reducing excessive costs.
Low-income housing not a priority.--Housing assistance for
lower income households has not been among the highest
priorities of Congress during the past dozen years. In funding,
programs for the elderly and handicapped have fared better than
most. One justification for cutbacks in HUD programs is the
frustration with excessive costs, poor management, and the
seemingly intractable problems that prevent many very low-
income households from moving into the economic mainstream.
A continuing flow of new immigrants, both legal and
illegal, also guarantees that there will be an increasing
number of households in need of housing assistance. Focus on
this increased need has led some legislators to reexamine the
new construction programs for assisted housing programs of the
1970's. While it has been the consensus of many Congressmen for
several years that low income households could find housing if
they were given financial assistance, many now agree that
financial assistance is not enough. They recognize a need for
the construction of multifamily housing developments as well,
and several bills have been introduced in the 107th Congress
which encourage the production of assisted rental housing.
Housing initiatives on a limited budget.--In recent years,
HUD has moved aggressively to combat discrimination against
minorities, women, and low-income households in housing and
mortgage credit. Although some housing analysts question the
appropriateness of homeownership for very low income
households, HUD has pushed hard to increase the opportunities
for minorities and lower income households to become
homeowners. The agency has also made increasing efforts to
address the problem of declining neighborhoods in inner cities
and older suburbs by encouraging community development
organizations to join with the for-profit private sector.
A. RENTAL ASSISTANCE PROGRAMS
1. Introduction
Beginning in the 1930's with the Low-Rent Public Housing
Program, the Federal role in housing for low- and moderate-
income households has expanded significantly. In 1949, Congress
adopted a national housing policy calling for a decent home and
suitable living environment for every American family.
Although the Government has made striking advances in
providing affordable and decent housing for all Americans, data
indicate that the 4.8 million assisted units available at the
end of fiscal year 2000 were only enough to house approximately
25 percent of those eligible for assistance. However, a large
percentage of newly constructed subsidized housing over the
past 10 years have been for the elderly. The relative lack of
management problems and local opposition to family units make
elderly projects more popular. Yet, even with this preference
for the construction of units for the elderly, in many
communities there is a long waiting list for admission to
projects serving the elderly. Such lists are expected to grow
as the demand for elderly rental housing continues to increase
in many parts of the Nation.
2. Housing and Supportive Services
Congress has a long history of passing laws to assist in
providing adequate housing for elderly, but only in recent
years has it moved to provide support for services. This is
done through programs which permit the providers of housing to
supply services needed to enable the elderly to live with
dignity and independence. The following programs provide
housing and supportive services for the elderly.
(a) Section 202 Supportive Housing for the Elderly
Since its revision in 1974 the Section 202 program provided
rental assistance in housing designed specifically for the
elderly. It is also the Federal Government's primary financing
vehicle for constructing subsidized rental housing for elderly
persons. In 1990, the program was once again completely revised
by the National Affordable Housing Act to provide not only
housing for its residents, but services as well.
The Section 202 program is one of capital advances and
rental assistance. The capital advance is a noninterest loan
which is to be repaid only if the housing is no longer
available for occupancy by very-low income elderly persons. The
capital advances could be used to aid nonprofit organizations
and cooperatives in financing the construction, reconstruction,
or rehabilitation of a structure, or the acquisition of a
building to be used for supportive housing.
Rental assistance is provided through 20-year contracts
between HUD and the project owners, and will pay operating
costs not covered by tenant's rents. Tenants' portion of the
rent payment is 30 percent of their income or the shelter rent
payment determined by welfare assistance.
Since 1992, organizations providing housing under the
Section 202 program must also provide supportive services
tailored to the needs of its project's residents. These
services should include meals, housekeeping, transportation,
personal care, health services, and other services as needed.
HUD is to ensure that the owners of projects can access,
coordinate and finance a supportive services program for the
long term with costs being borne by the projects and project
rental assistance.
In the first session of the 106th Congress, several bills
were introduced to provide affordable housing for senior
citizens which would permit them to age in place. One of these
bills, H.R. 202, was included in Title V of the VA-HUD
Appropriations Act for FY2000 (P.L. 106-74). Title V authorized
the use of Section 202 funds to repair and convert housing
projects for the elderly into assisted living facilities. HUD
was directed to award grants only to sponsors who had a firm
commitment for the funding of services from sources other than
the Federal Government. Also, in awarding grants, HUD is to
consider the extent to which a conversion is needed or expected
to be needed, based on the age and income of the tenants in the
project, community support, commitment by the sponsor to
promote independence of the tenants to be assisted, and the
ability to provide services, 24-hour staffing, and health care.
During the second session of the 106th Congress, interest
was once again shown in making housing affordable, including
homeownership for low-income families. Several bills were
introduced and one of them, ( H.R. 5640 became Public Law 106-
569, ``The Affordable Housing for Seniors and Families Act''.
This Act authorized HUD to approve the prepayment of Section
202 properties if the owner of the property agrees to operate
the project until the maturity date of the original loan, in a
manner at least as advantageous to existing and future tenants
as the terms of the original agreement. This prepayment could
include refinancing which would result in a reduction in debt
service. If this occurs, the result could be a savings in
rental assistance payments made by HUD. The law says that if an
owner refinances his loan and a savings to HUD does occur, HUD
is to make at least 50 percent of the savings available to the
property owner to use in some way which would be beneficial to
the tenants of the project where the savings are realized. This
can include rehabilitation or modernization activities, as well
as the construction of an addition to a project such as
assisted living facilities. In addition the law permits owners
to keep any residual receipts in excess of $500 per unit to
help cover the cost of supportive services for the residents.
P.L.106-569 also permits the location and operation of
commercial facilities in Section 202 projects, as long as the
business is not being subsidized by Section 202 funds.
Businesses located on Section 202 properties should be
beneficial to tenants of the project and the surrounding
communities. Examples of encouraged businesses include grocery
stores and pharmacies.
At the end of fiscal year 2000, there were approximately
267,000 Sec.202 units eligible for payment. The appropriations
for fiscal year 2001 provide $779 million which, according to
HUD, should finance 7,200 additional units of supportive
housing for the elderly.
(b) congregate housing services
Congregate housing provides not only shelter, but
supportive services for residents of housing projects
designated for occupancy by the elderly. While there is no way
of precisely estimating the number of elderly persons who need
or would prefer to live in congregate facilities, groups such
as the Gerontological Society of America and the AARP have
estimated that a large number of people over age 65 and now
living in institutions or nursing homes would choose to
relocate to congregate housing if possible.
The Congregate Housing Services Program was first
authorized as a demonstration program in 1978, and later made
permanent under the National Affordable Housing Act of 1990.
The program provides a residential environment which includes
certain services that aid impaired, but not ill, elderly and
disabled tenants in maintaining a semi-independent lifestyle.
This type of housing for the elderly and disabled includes a
provision for a central dining room where at least one meal a
day is served, and often provides other services such as
housekeeping, limited health care, personal hygiene, and
transportation assistance.
Under the Congregate Housing Services Program, HUD and the
Farmer's Home Administration (FmHA) enter into 5-year renewable
contracts with agencies to provide the services needed by
elderly residents of public housing, HUD-assisted housing and
FmHA rural rental housing. Costs for the provision of the
services are covered by a combination of contributions from the
contract recipients, the Federal Government, and the tenants of
the project. Contract recipients are required to cover 50
percent of the cost of the program, Federal funds cover 40
percent, and tenants are charged service fees to pay the
remaining 10 percent. If an elderly tenant's income is
insufficient to warrant payment for services, part or all of
this payment can be waived, and this portion of the payment
would be divided evenly between the contract recipient and the
Federal Government.
In an attempt to promote independence among the housing
residents, each housing project receiving assistance under the
congregate housing services program must, to the maximum extent
possible, employ older adults who are residents to provide the
services, and must pay them a suitable wage comparable to the
wage rates of other persons employed in similar public
occupations.
Congress last appropriated funding directly for the
Congregate Housing Program in fiscal year 1995. For FY1996
through FY1997, no appropriations were made, but the program
was supported by carryovers in funding from previous years. In
FY1998 and fiscal year 1999, the VA-HUD appropriations bills
provided funding for congregate services and service
coordinators for the elderly and disabled as a set-aside of the
Community Development Block Grants (CDBG). Title V of the VA-
HUD Appropriations Act for FY2000 (P.L.106-74) authorized the
renewal of all grants made in prior years for service
coordinators and congregate services in Public Housing for
FY2000. Both the FY2000 and the FY2001 HUD appropriations bills
earmarked $50 million of Section 202 appropriated funds for
service coordinators and the provision of congregate services
in assisted housing.
Title VIII of the Affordable Housing For Seniors and
Families Act (P.L.106-659) authorized appropriations for grants
for service coordinators who link residents of projects with
medical and supportive services in the community. Eligible
residents of this service would be elderly tenants of public
housing, Section 202, Section 8, Section 236, Section 514, and
Section 515 projects. The law also extends the services of the
coordinator into the surrounding vicinity of the eligible
federally assisted project. This provision is seen as an effort
to make the project a focal point of the community.
In the last few years, private developers have shown a
growing interest in the development of congregate housing.
Considering the growing number of elderly who may benefit from
congregate housing services, this is one avenue of housing
assistance that the States may want to explore more carefully.
Today there are approximately 240 projects that receive Federal
assistance under the Congregate Housing Services Program.
3. Public Housing
Conceived during the Great Depression as a means of aiding
the ailing construction industry and providing decent, low-rent
housing, the Public Housing Program has burgeoned into a system
that includes 1.3 million units, housing more than 3.7 million
people. Approximately 33 percent of public housing units are
occupied by elderly persons.
The Public Housing Program is the oldest Federal program
providing housing for the elderly. It is a federally financed
program operated by State-chartered local public housing
authorities (PHA's). Each PHA usually owns its own projects. By
law, a PHA can acquire or lease any property appropriate for
low-income housing. They are also authorized to issue notes and
bonds to finance the acquisition, construction, and improvement
of projects. When the program began, it was assumed that
tenant's rents would cover project operating costs for such
items as management, maintenance, and utilities. Rent payments
are now set at 30 percent of tenant's adjusted income. However,
since passage of the FY1999 VA-HUD Appropriations Act, PHAs
have the option of setting a minimum rent of $50 if they
believe it is necessary for the maintenance of their projects,
with exception made for families where this rent level would
present a hardship. Tenant rents have not kept pace with
increased operating expenses, so PHAs receive a Federal subsidy
to help defray operating and modernization costs.
A critical problem of public housing is the lack of
services for elderly tenants who have ``aged in place'' and
need supportive services to continue to live independently.
Congregate services have been used in some projects in recent
years, but only about 40 percent of the developments report
having any onsite services staff to oversee service delivery.
Thus, even if a high proportion of developments would have some
services available, there is evidence that these services may
often only reach a few residents, leaving a large unmet need.
Under the National Affordable Housing Act of 1990, Congress
established service coordinators as eligible costs for
operating subsidies. In addition, up to 15 percent of the cost
of providing services to the frail elderly in public housing is
an eligible operating subsidy expense. Services may include
meals, housekeeping, transportation, and health-related
services. Although services and service coordinators are an
eligible cost for using the operating subsidy, they are not
required and therefore, not available in all public housing
projects.
Another problem surfacing in public housing in recent years
is that of mixed populations living in the same buildings. By
``mixed populations'' we mean occupancy by both elderly and
disabled persons in buildings designated as housing for the
elderly. The Housing and Community Development Act of 1992
addressed the problem of mixed populations in public housing
projects. This seems to have become a concern in part because
of the broadened definition of ``disabled'' to include
alcoholics and recovering drug abusers, and the increasing
number of mentally disabled persons who are not
institutionalized. Also, by definition, elderly families and
disabled families were included in one term, ``elderly'' in the
housing legislation authorizing public housing.
The 1992 Act provided separate definitions of elderly and
disabled persons. It also permitted public housing authorities
to designate housing for separate or mixed populations within
certain limitations, to ensure that no resident of public
housing is discriminated against or taken advantage of in any
way.
This action was reinforced in 1996 with the signing into
law of (P.L. 104-120), the Housing Opportunity Program
Extension Act of 1996. This act contained two provisions of
particular interest to persons in public and assisted housing.
Section 10 of the law permitted PHAs to rent portions of the
projects designated for elderly tenants to near elderly persons
(age 55 and over) if there were not enough elderly persons to
fill the units. The law also goes into detail on the
responsibilities of PHAs in offering relocation assistance to
any disabled tenants who choose to move out of units not
designated for the elderly. Persons already occupying public
housing units cannot be evicted in order to achieve this
separation of populations. However, tenants can request a
change to buildings designated for occupancy for just elderly
or disabled persons. Managers of projects may also offer
incentives to tenants to move to designated buildings, but they
must ensure that tenants' decisions to move are strictly
voluntary. Section 9 of the Housing Opportunity Program
Extension Act of 1996 was concerned with the safety and
security of tenants in public and assisted housing. This
provision of the law makes it much easier for managers of such
apartments to do background checks on tenants to see if they
have a criminal background. It also makes it easier for
managers to evict tenants who engage in illegal drug use or
abuse alcohol.
In recent years, the condition of public housing projects
has declined noticeably in some areas of the country,
particularly in the inner cities. There are varied reasons for
the decline of public housing, including a concentration of the
poorest tenants in a few projects, an increase in crime and
drugs in developments, and a lack of funds to maintain the
projects at a suitable level. Some analysts believe that public
housing has outlived its usefulness and should be replaced by
providing tenants with rental assistance vouchers that they can
use to find their own housing in the private market. Other
analysts disagree with this point of view and say that some
tenants, the elderly in particular, would have a hard time
finding their own housing if they were handed a voucher and
told to find their own apartments. These analysts believe that
doing away with public housing is not the answer, but that more
of an income mix is needed among tenants and funds should be
directed to some type of ``reward'' system to offer incentives
to PHAs to improve public housing.
Title V of the FY1999 VA-HUD Authorization Act (P.L. 105-
276) made many changes to the public housing program. Some of
these changes are: non-working, non-elderly or disabled persons
residing in public housing will be required to perform 8 hours
of community service a month; tenants are given opportunities
for increased input in decisionmaking; PHA's have greater
access to nation-wide police reporting services to screen
applicants for criminal or drug activity before admitting them
to public housing, and troublesome tenants can be evicted
quickly.
4. Section 8 Housing Program
Traditional public housing assistance offers few choices as
to the location and type of housing units desired by low-income
families. Also, some housing advocates believe that many
problems plaguing public housing projects could be avoided if
the poor were not concentrated in these projects, but given
rental assistance to live in privately owned apartments. To
this end, the Section 8 rental assistance program was created
in 1974.
Section 8 is designed to provide subsidized housing to
families with incomes too low to obtain decent housing in the
private market. Under the original program, subsidies were paid
to landlords on behalf of eligible tenants to not only assist
tenants paying rents, but also for promoting new construction
and substantial rehabilitation. The program as it was then,
came to be seen as too costly, particularly the costs
associated with new construction and rehabilitation. As a
result, authority to enter into new contracts for new
construction was eliminated and rehabilitation was limited in
1983. While eliminating new construction, and limiting
substantial rehabilitation to only projects designated for
occupancy by the homeless, the Housing Act of 1983 continued
the use of rental assistance certificates, and introduced the
Section 8 tenant-based voucher program. The VA-HUD
Appropriations Act for FY1999 (105-276) combined Section 8
assistance under the voucher system as project-based vouchers
and tenant-based vouchers, eliminating the term
``certificate.''
5. Project-based and Tenant-based Vouchers
There is one major difference between Section 8 project-
based and tenant-based assistance. Under the Section 8 project-
based program, rents and rent-to-income ratio is capped and
subsidy depends on the rent. A family who rents a Section 8
unit pays 30 percent of its income as rent, and HUD pays the
rest based on a fair market rent formula. Units are rented from
private developers who have Section 8 assistance attached to
their projects. Under the Section 8 tenant-based program, there
are no caps and the subsidy is fixed. This means that the
family receives a voucher from HUD stating that the Department
will pay up to the fair market rent minus 30 percent of the
family's adjusted income as a rental subsidy payment. The
family is free to find an apartment and negotiate a rent with a
landlord. If they find a more expensive apartment that they
want to occupy, they will pay more than 30 percent of their
income as their share of the rent since HUD will only pay the
fixed amount. Likewise, if they find a less expensive
apartment, they would pay less than 30 percent of their income
as rent since once again HUD would pay a fixed amount.
Advocates of the tenant-based program argue that this
system avoids segregation and warehousing of the poor in
housing projects, and allows them to live where they choose.
Critics of the tenant-based program question whether it would
really help those most in need, and they believe that the
tenant-based program presents potential problems for some
elderly renters who need certain amenities such as grabrails
and accommodations for wheelchairs that are not found in all
apartments. They also doubt that many elderly would be in a
position to look for housing in safe, sanitary conditions and
negotiate rents with landlords, as is necessary in the tenant-
based program.
In fiscal year 2001, Congress appropriated $13.94 billion
for the Section 8 program, including $12.97 billion for the
renewal of contracts; $453 million for new families to receive
vouchers; $266 million for vouchers to prevent families from
being displaced by prepayments or other actions of Federal
housing programs; and $40 million for vouchers for non-elderly
disabled persons.
6. Rural Housing Services
The Housing Act of 1949 (P.L. 81-171) was signed into law
on October 25, 1949. Title V of the Act authorized the
Department of Agriculture (USDA) to make loans to farmers to
enable them to construct, improve, repair, or replace dwellings
and other farm buildings to provide decent, safe, and sanitary
living conditions for themselves, their tenants, lessees,
sharecroppers, and laborers. The Department was authorized to
make grants or combinations of loans and grants to farmers who
could not qualify to repay the full amount of a loan, but who
needed the funds to make the dwellings sanitary or to remove
health hazards to the occupants or the community.
Over time the Act has been amended to enable the Department
to make housing and grants to rural residents in general. The
housing programs are generally referred to by the section
number under which they are authorized in the Housing Act of
1949, as amended. The programs are administered by the Rural
Housing Service. As noted below, only one of the programs
(Section 504 grants) is targeted to the elderly.
Under the Section 502 program, USDA is authorized to make
direct loans to very low- to moderate-income rural residents
for the purchase or repair of new or existing single-family
homes. The loans have a 33-year term and interest rates may be
subsidized to as low as 1 percent. Borrowers must have the
means to repay the loans but be unable to secure reasonable
credit terms elsewhere.
In a given fiscal year, at least 40 percent of the units
financed under this section must be made available only to very
low-income families or individuals. The loan term may be
extended to 38 years for borrowers with incomes below 60
percent of the area median.
Borrowers with income of up to 115 percent of the area
median may obtain guaranteed loans from private lenders.
Guaranteed loans may have up to 30-year terms. Priority is
given to first-time homebuyers, and the Department of
Agriculture may require that borrowers complete a homeownership
counseling program.
In recent years, Congress and the Administration have been
increasing the funding for the guaranteed loans and decreasing
funding for the direct loans.
Under the Section 504 loan program, USDA is authorized to
make loans to rural homeowners with incomes of 50 percent or
less of the area median. The loans are to be used to repair or
improve the homes, to make them safe and sanitary, or to remove
health hazards. The loans may not exceed $20,000. Section 504
grants may be available to homeowners who are age 62 or more.
To qualify for the grants, the elderly homeowners must lack the
ability to repay the full cost of the repairs. Depending on the
cost of the repairs and the income of the elderly homeowner,
the owner may be eligible for a grant for the full cost of the
repairs or for some combination of a loan and a grant which
covers the repair costs. A grant may not exceed $5,000. The
combination loan and grant may total no more than $15,000.
Section 509 authorizes payments to Section 502 borrowers
who need structural repairs on newly constructed dwellings.
Under the Section 514 program, USDA is authorized to make
direct loans for the construction of housing and related
facilities for farm workers. The loans are repayable in 33
years and bear an interest rate of 1 percent. Applicants must
be unable to obtain financing from other sources that would
enable the housing to be affordable by the target population.
Individual farm owners, associations of farmers, local
broad-based nonprofit organizations, federally recognized
Indian Tribes, and agencies or political subdivisions of local
or State governments may be eligible for loans from the
Department of Agriculture to provide housing and related
facilities for domestic farm labor. Applicants, who own farms
or who represent farm owners, must show that the farming
operations have a demonstrated need for farm labor housing and
applicants must agree to own and operate the property on a
nonprofit basis. Except for State and local public agencies or
political subdivisions, the applicants must be unable to
provide the housing from their own resources and unable to
obtain the credit from other sources on terms and conditions
that they could reasonably be expected to fulfill. The
applicants must be unable to obtain credit on terms that would
enable them to provide housing to farm workers at rental rates
that would be affordable to the workers. The Department of
Agriculture State Director may make exceptions to the ``credit
elsewhere'' test when (1) there is a need in the area for
housing for migrant farm workers and the applicant will provide
such housing and (2) there is no State or local body or no
nonprofit organization that, within a reasonable period of
time, is willing and able to provide the housing.
Applicants must have sufficient initial operating capital
to pay the initial operating expenses. It must be demonstrated
that, after the loan is made, income will be sufficient to pay
operating expenses, make capital improvements, make payments on
the loan, and accumulate reserves.
Under the Section 515 program, USDA is authorized to make
direct loans for the construction of rural rental and
cooperative housing. When the program was created in 1962, only
the elderly were eligible for occupancy in Section 515 housing.
Amendments in 1966 removed the age restrictions and made low-
and moderate-income families eligible for tenancy in Section
515 rental housing. Amendments in 1977 authorized Section 515
loans to be used for congregate housing for the elderly and
handicapped.
Loans under section 515 are made to individuals,
corporations, associations, trusts, partnerships, or public
agencies. The loans are made at a 1 percent interest rate and
are repayable in 50 years. Except for public agencies, all
borrowers must demonstrate that financial assistance from other
sources will not enable the borrower to provide the housing at
terms that are affordable to the target population.
Under the Section 516 program, USDA is authorized to make
grants of up to 90 percent of the development cost to nonprofit
organizations and public bodies seeking to construct housing
and related facilities for farm laborers. The grants are used
in tandem with Section 514 loans.
Section 521 established the interest subsidy program under
which eligible low- and moderate-income purchasers of single-
family homes (under Section 515 or Section 514) may obtain
loans with interest rates subsidized to as low as 1 percent.
In 1974, Section 521 was amended to authorize USDA to make
rental assistance payments to owners of rental housing
(Sections 515 or 514) to enable eligible tenants to pay no more
than 25 percent of their income in rent. Under current law,
rent payments by eligible families may equal the greater of (1)
30 percent of monthly adjusted family income, (2) 10 percent of
monthly income, or (3) for welfare recipients, the portion of
the family's welfare payment that is designated for housing
costs. Monthly adjusted income is adjusted income divided by
12.
The rental assistance payments, which are made directly to
the borrowers, make up the difference between the tenants'
payments and the rent for the units approved by USDA. Borrowers
must agree to operate the property on a limited profit or
nonprofit basis. The term of the rental assistance agreement is
20 years for new construction projects and 5 years for existing
projects. Agreements may be renewed for up to 5 years. An
eligible borrower who does not participate in the program may
be petitioned to participate by 20 percent or more of the
tenants eligible for rental assistance.
Section 523 authorizes technical assistance (TA) grants to
States, political subdivisions, and nonprofit corporations. The
TA grants are used to pay for all or part of the cost of
developing, administering, and coordinating programs of
technical and supervisory assistance to families that are
building their homes by the mutual self-help method. Applicants
may also receive site loans to develop the land on which the
homes are to be built.
Sites financed through Section 523 may only be sold to
families who are building homes by the mutual self-help method.
The homes are usually financed through the Section 502 program.
Section 524 authorizes site loans for the purchase and
development of land to be subdivided into building sites and
sold on a nonprofit basis to low- and moderate-income families
or to organizations developing rental or cooperative housing.
Sites financed through Section 524 have no restrictions on
the methods by which the homes are financed or constructed. The
interest rate on Section 524 site loan is the Treasury cost of
funds.
Under the Section 533 program, USDA is authorized to make
grants to nonprofit groups and State or local agencies for the
rehabilitation of rural housing. Grant funds may be used for
several purposes: (1) rehabilitating single family housing in
rural areas which is owned by low- and very low-income
families, (2) rehabilitating rural rental properties, and (3)
rehabilitating rural cooperative housing which is structured to
enable the cooperatives to remain affordable to low- and very
low-income occupants. The grants were made for the first time
in fiscal year 1986.
Applicants must have a staff or governing body with either
(1) the proven ability to perform responsibly in the field of
low-income rural housing development, repair, and
rehabilitation; or (2) the management or administrative
experience which indicates the ability to operate a program
providing financial assistance for housing repair and
rehabilitation.
The homes must be located in rural areas and be in need of
housing preservation assistance. Assisted families must meet
the income restrictions (income of 80 percent or less of the
median income for the area) and must have occupied the property
for at least 1 year prior to receiving assistance. Occupants of
leased homes may be eligible for assistance if (1) the
unexpired portion of the lease extends for 5 years or more, and
(2) the lease permits the occupant to make modifications to the
structure and precludes the owner from increasing the rent
because of the modifications.
Repairs to manufactured homes or mobile homes are
authorized if (1) the recipient owns the home and site and has
occupied the home on that site for at least 1 year, and (2) the
home is on a permanent foundation or will be put on a permanent
foundation with the funds to be received through the program.
Up to 25 percent of the funding to any particular dwelling may
be used for improvements that do not contribute to the health,
safety, or well being of the occupants; or materially
contribute to the long term preservation of the unit. These
improvements may include painting, paneling, carpeting, air
conditioning, landscaping, and improving closets or kitchen
cabinets.
Section 5 of the Housing Opportunity Program Extension Act
of 1996 (P.L. 104-120) added Section 538 to the Housing Act of
1949. Under this newly created Section 538 program, borrowers
may obtain loans from private lenders to finance multifamily
housing and USDA guarantees to pay for losses in case of
borrower default. Under prior law, Section 515 was the only
USDA program under which borrowers could obtain loans for
multifamily housing. Under the Section 515 program, however,
eligible borrowers obtain direct loans from USDA.
Section 538 guaranteed loans may be used for the
development costs of housing and related facilities that (1)
consist of 5 or more adequate dwelling units, (2) are available
for occupancy only by renters whose income at time of occupancy
does not exceed 115 percent of the median income of the area,
(3) would remain available to such persons for the period of
the loan, and (4) are located in a rural area.
The loans may have terms of up to 40 years, and the
interest rate will be fixed. Lenders pay to USDA a fee of 1
percent of the loan amount. Nonprofit organizations and State
or local government agencies may be eligible for loans of 97
percent of the cost of the housing development. Other types of
borrowers may be eligible for 90 percent loans. On at least 20
percent of the loans, USDA must provide the borrowers with
interest credits to reduce the interest rate to the applicable
Federal rate. On all other Section 538 loans, the loans will be
made at the market rate, but the rate may not exceed the rate
on 30-year Treasury bonds plus 3 percentage points.
The Section 538 program is viewed as a means of funding
rental housing in rural areas and small towns at less cost than
under the Section 515 program. Since the Section 515 program is
a direct loan program, the government funds the whole loan. In
addition, the interest rates on Section 515 loans are
subsidized to as low as 1 percent, so there is a high subsidy
cost. Private lenders fund the Section 538 loans and pay
guarantee fees to USDA. The interest rate is subsidized on only
20 percent of the Section 538 loans, and only as low as the
applicable Federal rate, so the subsidy cost is not as deep as
under the Section 515 program. Occupants of Section 515 housing
may receive rent subsidies from USDA. Occupants of Section 538
housing may not receive USDA rent subsidies. All of these
differences make the Section 538 program less costly to the
government than the Section 515 program.
It has not been advocated that the Section 515 program be
replaced by the Section 538 program. Private lenders may find
it economically feasible to fund some rural rental projects,
which could be funded under the Section 538 program. Some areas
may need rental housing, but the private market may not be able
to fund it on terms that would make the projects affordable to
the target population. Such projects would be candidates for
the Section 515 program.
The Section 538 program was a demonstration program whose
authority expired on September 30, 1998. The program has been
made permanent by Section 599C of the Quality Housing and Work
Responsibility Act of 1998 (P.L. 105-276). The Act also amends
the program to provide that the USDA may not deny a developer's
use of the program on the basis of the developer using tax
exempt financing as part of its financing plan for a proposed
project.
7. Federal Housing Administration
The Federal Housing Administration (FHA) is an agency of
the Department of Housing and Urban Development(HUD) which
administers programs that insure mortgages on individual home
purchases and loans on multifamily rental buildings. The loans
are made by private lenders and FHA insures the lenders against
loss if the borrowers default. The FHA program is particularly
important to those who are building or rehabilitating apartment
buildings. The elderly are often the occupants of such
buildings.
Of particular importance to the elderly is the revision
that Congress made to Section 232 of the National Housing Act.
This section authorizes FHA to insure loans for Nursing Homes,
Intermediate Care Facilities, and Board and Care Homes. Section
511 of the Housing and Community Development Act of 1992 (P.L.
102-550) amended Section 232 to authorize FHA to insure loans
for assisted living facilities for the frail elderly.
The term ``assisted living facility'' means a public
facility, proprietary facility, or facility of a private
nonprofit corporation that:
(1) Is licensed and regulated by the State (or if there is
no State law providing for such licensing and regulation by the
State, by the municipality or other political subdivision in
which the facility is located);
(2) Makes available to residents supportive services to
assist the residents in carrying out activities of daily living
such as bathing, dressing, eating, getting in and out of bed or
chairs, walking, going outdoors, using the toilet, laundry,
home management, preparing meals, shopping for personal items,
obtaining and taking medications, managing money, using the
telephone, or performing light or heavy housework, and which
may make available to residents home health care services, such
as nursing and therapy; and
(3) Provides separate dwelling units for residents, each of
which may contain a full kitchen or bathroom, and includes
common rooms and other facilities appropriate for the provision
of supportive services to residents of the facility.
The term ``frail elderly'' is defined as an elderly person
who is unable to perform at least three activities of daily
living adopted by HUD.
An assisted living facility may be free-standing, or part
of a complex that includes a nursing home, an intermediate care
facility, a board and care facility or any combination of the
above. The law also authorizes FHA to refinance existing
assisted living facilities.
8. Low Income Housing Tax Credit
The Low Income Housing Tax Credit program (LIHTC), created
by the Tax Reform Act of 1986, provides tax credits to
investors who build or rehabilitate rental housing units that
must be kept available to lower income households for 30 years
or longer. Although initially approved on a temporary basis, it
was made permanent in 1993. This $3.8 billion a year program
(which is expected to increase to $4.6 billion by 2005) is
administered at the state level by housing finance agencies.
Estimates vary, but the program may have helped create as many
as 800,000 apartments since 1987, and in the last few years,
may have added about 75,000 units a year. Under Public Law 106-
554 signed by President Clinton on December 21, 2000, the
housing tax credit program was increased by 40 percent. This is
expected to subsidize the construction and rehabilitation of an
additional 30,000 affordable rental units a year. A 1997 survey
by the General Accounting Office found that about 26 percent of
tax credit projects placed in service between 1992 and 1994
were primarily intended to serve lower-income elderly. The tax
credits, that are based on the amount spent to develop the
subsidized units themselves, are claimed by both individual and
corporate investors over a 10-year period. In return for the
tax credits, investors must keep the units rented to households
whose incomes are no more than 60 percent of the median income
in the local area. In many cases, the tax credits do not
provide enough financial support by themselves to make the
project economically viable. This is particularly the case
where housing finance agencies negotiate agreements with
investors to provide special services to tenants, or where
apartments must be rented to those with incomes significantly
lower than the maximum 60 percent of local area median that is
generally required. In cases such as these, the tax credit is
often combined with funds from various HUD programs, primarily
Community Development Block Grant and HOME money, and
frequently, Section 8 rental assistance. The use of tax-exempt
bond financing is also common.
Despite substantial political support, some housing
analysts contend that this supply side construction program is
an expensive way to provide housing assistance compared to
alternatives such as housing vouchers. Little is known about
how much the tax credit units cost to produce when all public
subsidies are considered and how much the rents in these units
are being reduced compared to similar unassisted apartments.
The General Accounting Office is now completing a study on the
comparative costs of the various Federal housing rental
programs and the results should be available in late 2001. Even
if tax credit units are more expensive than housing vouchers,
as past evidence has indicated, vouchers may not always be a
viable option for some of the elderly, particularly the frail
elderly. Voucher holders must shop around for a landlord
willing to take them, which may be difficult for some elderly.
On the other hand, once a voucher holder finds an acceptable
unit, they may not have to move for many years.
There is some concern, based on the past experience of
other assisted rental projects, that service to renters in tax
credit units may deteriorate or that units will not be
adequately maintained over the long run, since investors
receive most of their financial incentives during the first 10
years of the project's life. But housing advocates argue that
for those with low-wage jobs, it is becoming increasingly
difficult to find affordable housing and that the tax credit
program is very important. They point to government figures
showing that more than nearly 5 million very-low income
households have serious housing problems, most paying more than
50 percent of their income for shelter.\1\
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*\1\ See Housing the Poor: Federal Housing Programs for Low-Income
Families-By Morton J. Schussheim. CRS Report 98-860 E. October 20,
1998.
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B. PRESERVATION OF AFFORDABLE RENTAL HOUSING
1. Introduction
In addition to the expiration of Section 8 rental
contracts, another current issue is the excessive costs and
poor conditions at a number of Section 8 ``project-based''
rental complexes. Over the past several decades, HUD's FHA has
insured the mortgages on Section 8 rental projects with about
860,000 low income units. For a variety of reasons, including
rigid ``annual adjustment factor'' rent increases, the rents at
many projects are now 20 percent or more above competitive
market levels. At the same time, many buildings have also
deteriorated from lack of maintenance and capital improvements.
Whether this is because of poor management, purposeful
disinvestment, or factors beyond the landlord's control remains
an important issue. But the result is that many projects are
insured for more than they are currently worth. This has
created a dilemma: because many of these apartments are costly
to operate and maintain, HUD must either pay larger sums to the
owners on behalf of the assisted tenants (pay more of the
above-market rents), or to the extent that HUD ceases to
support these high rents or tenants obtain flexibility to move
elsewhere (housing vouchers) the projects become financially
unworkable and HUD loses money as the insurer of the mortgage.
Congress has wrestled over what to do for several years now.
There is considerable pressure to reduce excessive subsidies
going to some landlords. The elderly in many of these projects
have become concerned that Congressional efforts at reforms
might mean they would have to pay more rent or have to move
elsewhere.
If excessively high rents and deteriorating conditions
sound contradictory, they may be. HUD has announced a $50
million effort to crack down on Section 8 landlords in 50 of
the biggest cities who take substantial Federal housing
subsidies but allow their apartments to fall into serious
disrepair. There will be more investigators sent into the
field, and more civil and criminal charges filed. But this does
not get to the root of the problems. Aside from the serious
design flaw of fully insuring these mortgages, the problems
highlight a fundamental difficulty with project-based
assistance. In the regular rental market, tenants will move if
conditions or services deteriorate beyond a certain point. This
possibility keeps most landlords on their toes. But in Section
8 projects, tenants cannot or will not move because they would
lose their rent subsidy.
2. Portfolio Re-Engineering Program
Title V of the VA-HUD Appropriations Act for fiscal year
1998 (P.L. 105-65) contains the latest restructuring plan for
Section 8 contracts. This title establishes a mark-to-market
program for restructuring FHA-insured mortgages for Section 8
project-based contracts, reduces the costs of oversubsidized
Section 8 properties, gives HUD the authority to appoint
participating administrative entities (PAEs) who would develop
and administer a restructuring plan for the projects, seeks to
minimize fraud and abuse in federally assisted housing, and
creates the Office of Multifamily Housing Assistance
Restructuring in HUD.
The Re-Engineering Program authorizes the Secretary of HUD
to enter into portfolio restructuring agreements with housing
finance agencies, capable public entities, and profit and non-
profit organizations, known as PAE's (participating
administrative entities) who will supervise the program. The
restructuring program is voluntary and owners have the option
of not renewing their HUD Section 8 contracts. Owners
interested in participating in the restructuring program are
screened to see if their properties are economically viable and
in good physical condition. Owners of properties that are
approved would then work with the PAE in developing a rental
assistance plan for the project. If properties are in an
advanced state of deterioration where rehabilitation would be
too costly, the properties would be demolished or disposed of.
Tenants in projects that do not have renewed contracts would be
eligible for voucher assistance and would receive reasonable
moving expenses.
Projects funded by Section 202 housing for the elderly,
Section 811 housing for the disabled, or the McKinney Homeless
Authorization Act, are exempt from the restructuring levels.
These projects even if restructured, would operate on current
rent levels with operating and adjustment factors being
considered. Therefore, the elderly, disabled or previously
homeless persons living in these projects would not be affected
by a mortgage restructuring.
C. HOMEOWNERSHIP
1. Homeownership Rates
There was strong political support in the 1990's for
efforts to increase the homeownership rate. Homeownership is
thought to give families a stake in their neighborhood and a
chance to accumulate wealth (an important part of retirement
security.) The 1990's were particularly favorable years to
become a homeowner. There was a strong job market and
relatively low mortgage interest rates during most of the
decade. The homeownership rate reached a record high of 67.7
percent by the third quarter of 2000, and by the end of the
second quarter of 2001, a record 72.3 million families owned
their home.
Table X.--Homeownership Rates by Age: 1990 and 2000
[In percentage]
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Age Groups 1990 2000
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Less than 25 years........................................ 15.7 21.7
25 to 29.................................................. 35.2 38.1
30 to 34.................................................. 51.8 54.6
35 to 44.................................................. 66.3 67.9
45 to 54.................................................. 75.2 76.5
55 to 64.................................................. 79.3 80.3
Over 65................................................... 76.3 80.4
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Source: U.S. Housing Market Conditions. Department of Housing and Urban
development (HUD). May 2001.
The latter half of the 1990's was particularly opportune
time for minorities, lower-income households, and those living
in neighborhoods often underserved by lenders, to apply for and
receive a home mortgage. The vigorous enforcement of fair
housing laws and the Community Reinvestment Act have made
mortgage credit more available to lower-income and minority
households. In addition, homeownership efforts by the
government-sponsored enterprises Fannie Mae and Freddie Mac,
and a variety of affordable home lending initiatives by HUD,
the real estate industry, and others have contributed to
increased opportunities for lower-income buyers.
While the homeownership rate for minorities increased
substantially in percentage terms during the 1990's, more than
10 percent, they still remain much below that for whites. For
the year 2000, the rate for blacks was 47.6 percent (and
reached a record high of 48.8 percent in the 2nd quarter of
2001). For Hispanics, the rate for 2000 was 46.3 percent. These
rates compare to 73.8 percent for rate for white non-Hispanics.
However, the overall homeownership rate in central cities
was a relatively low 51.4 percent, compared to 74.0 percent in
suburban areas. Some metropolitan areas have homeownership
rates much below the national average, for example, New York,
N.Y., 34.1 percent; Los Angeles-Long Beach, 49.0 percent; San
Francisco, 48.9 percent; Miami, 56.2 percent; Houston, 53.6
percent and Boston, 58.7 percent.
------------------------------------------------------------------------
Class 1990 2000
------------------------------------------------------------------------
Nationwide................................................ 64.1 67.4
White (Non-Hispanic)...................................... 69.4 73.8
Black (Non-Hispanic)...................................... 42.6 47.6
Hispanic.................................................. 41.2 46.3
Married Couples
with Children............................................. 73.5 78.3
w/o Children.............................................. 82.2 86.1
Other Families
with Children............................................. 36.0 43.2
w/o Children.............................................. 64.3 65.8
------------------------------------------------------------------------
Source: U.S. Housing Market Conditions. Department of Housing and Urban
Development. February, 2001.
Help for moderate-income homebuyers is available from a
number of Federal sources, including the Mortgage Revenue Bond
program, which lowers the mortgage rate for certain moderate-
income buyers, and the Federal Housing Administration (FHA) and
the Veterans Administration (VA) mortgage insurance programs
which encourage private lenders to make loans to those who have
little money for a downpayment or who have blemished credit
records. The FHA has its Officer Next Door and Teacher Next
Door programs that sell FHA-foreclosed single-family homes
located in certain designated revitalization areas to police
officers and teachers at a 50 percent discount.
As noted, the economic climate has been very favorable in
recent years, but during a period of rising unemployment, many
of the newest homebuyers could face difficulties. Many low-
income buyers have purchased homes with very low downpayments
and very little savings set aside to carry them through
economic setbacks. Some are concerned that there may not be
adequate safety nets in place when the economy turns downward.
As of the middle of 2001, the economy had softened somewhat,
but the 4.5 percent unemployment rate was still considered very
low. HUD's FHA insurance program does have a new ``Loss
Mitigation Program'' to help borrowers retain their homes and
cure a delinquency on their mortgage. Existing assistance for
borrowers in trouble include special forbearance, mortgage
modifications, pre-foreclosure sale and deed-in-lieu of
foreclosure. The program has a new ``partial claims'' option
that supports home buyers who can only partially recover from a
financial difficulty.
2. Homeownership Tax Provisions
The most important incentives for homeownership are the tax
deductions allowed for mortgage interest and property taxes
paid. Upper-middle and upper income homeowners benefit most
from these provisions. The Congressional Joint Committee on
Taxation has estimated the cost of these two tax benefits for
fiscal year 2001 to be $83.7 billion: $62.7 billion for the
mortgage interest deduction and $21.0 billion for the deduction
of property taxes.\1\ They are projected to increase to a total
of $97.7 billion by the year 2005. These provisions are of
little or no value to lower income households because most
lower-income taxpayers take the standard deduction or are in
low marginal tax brackets. These tax deductions are also of
little value to many elderly homeowners since most own their
home without a mortgage. Households with incomes below $50,000
receive 7 percent of these tax benefits, and those with incomes
of $50,000 or more receive 93 percent.
---------------------------------------------------------------------------
\1\ Estimates of Federal Tax Expenditures for Fiscal Years 2001-
2005. Joint Committee on Taxation. April 6, 2001.
---------------------------------------------------------------------------
While as noted, most elderly homeowners have no mortgage
debt, and thus do not benefit much from mortgage interest and
property tax deductions, there have been some important changes
in the tax laws that have been particularly beneficial for
owners approaching retirement age and beyond. Prior to 1997,
most homeowners could avoid paying a tax on the gain from the
sale of their residence by purchasing a more expensive home
under the ``rollover provision'' in the tax code. However, this
often meant that households had to buy a larger and more
expensive home than they preferred. In addition, a small number
of people who had to sell their home because of the loss of a
job, a major medical expense, or a divorce, and thus could not
buy a more expensive home, were often faced with a large tax on
the sale of their home. Before 1997, there was also a tax
provision that allowed many home sellers age 55 and above to
exclude from taxation up to $125,000 of gain from the sale of a
home.
The Taxpayer Relief Act of 1997 made major changes to the
treatment of gains from the sale of a home, replacing the
rollover and the $125,000 exclusion. Instead, under the 1997
Act, a taxpayer who is single can exclude up to $250,000 of
gain from the sale of a principal residence ($500,000 for joint
returns) that does not require a rollover and is not restricted
to those over age 55. The exclusion can be used for one sale
every 2 years and the amount of the exclusion is generally pro-
rated for periods of less than 2 years. It is available for
sales made after May 6, 1997. This change benefits homeowners
in divorce proceedings or facing a serious financial setback
that forces them to sell their home without purchasing another.
It also allows owners nearing retirement age to sell their
home, and either purchase a smaller home (downsize) or become
renters, without having to worry about the tax consequences of
the sale. In addition, most homeowners will no longer need to
save a lifetime of financial documents on home purchases,
sales, and spending on improvements.
There were also changes made in the 1997 Act that affect
Individual Retirement Accounts (IRAs) and homes. Under the Act,
the 10 percent penalty tax on IRA withdrawals before age 591/2
will not apply to funds used for a qualified home purchase.
(But IRA money for which a tax deduction has been taken, and
earnings on such money, will be subject to tax upon
withdrawal). Withdrawals must be used within 120 days for the
home purchase expenses of the taxpayer or the taxpayer's
spouse, child, grandchild, or ancestor, or the spouse's
ancestor. This penalty-free withdrawal is limited to $10,000
less any qualified home buyer withdrawals made in prior years.
The funds can be used to acquire, construct, or rebuild a
residence and to pay for settlement, financing, and closing
costs. The home must be a principal residence, and the
purchaser must have had no ownership interest in a principal
residence for 2 years before the purchase. This provision is
effective for tax years beginning after December 31, 1997.
There is some concern that parents and grandparents could feel
obligated to help children with a home purchase even though
this might not be in their best interest.
3. Legislative Proposals to Increase Homeownership
A number of bills introduced in the 107th Congress would
help homebuyers. Others would provide financial incentives to
developers who build or rehabilitate housing that would be
affordable to buyers with moderate incomes. President Bush has
proposed a number of homeownership initiatives in his FY2002
budget. One would set aside $200 million within HUD's existing
HOME program for the ``American Dream Downpayment Fund.'' The
fund would provide a $3-for-$1 match, up to a maximum of $1,500
when third parties contribute of to $500 to help low-income
families finance the purchase of a first home. Another
initiative would allow up to a year's worth of HUD Section 8
rental housing vouchers to be used either for a downpayment or
to make mortgage payments when a qualified assisted renter
purchases a home. Under a third initiative, HUD will seek
authority to allow the FHA to offer low-income families
``hybrid adjustable rate mortgages'' that have lower rates for
an initial number of years (3,5, 7, or 10 years), and then
adjust annually based on an index tied to U.S. Treasury
securities. These kind of mortgages already exist in the
conventional market and are reasonably popular among homebuyers
who do not expect to live in their home for long periods of
time.
A fourth Bush Administration homeownership initiative is a
proposed change in the tax code. It would offer $1.7 billion of
tax credits over 5 years to homebuilders to encourage the
rehabilitation of existing properties (such as abandoned
buildings in central cities) or new construction of 100,000
affordable single-family homes in urban or rural areas. The new
homes would be targeted to census tracts with incomes no
greater than 80 percent of the local area median and to
families making 80 percent or less of the local area median
income.
There are a number of other homeowner proposals before the
107th Congress. One would provide a tax credit equal to 10
percent of the purchase price of the home, up to a maximum of
$5,000. Another would reduce the downpayment amount that a
first-time homebuyer is required to pay if purchasing a home
insured by the FHA. Several bills would modify the existing
Mortgage Revenue Bond program to make more tax-exempt bond
revenue available for this first-time homebuyer program.
4. Home Equity Conversion
According to the 1999 American Housing Survey (AHS), 80.3
percent of the elderly own their own homes, and 76.2 percent of
them are owned free of any mortgage debt. The median value of
all homes owner by the elderly is $96,442 and the median value
for homes with no mortgage is $92,880. For many of the elderly
homeowners, the equity in their homes represents their largest
asset, and estimates of their collective equity range from $600
billion to more than $1 trillion.
Many elderly homeowners find that while inflation has
increased the value of their homes, it has also eroded the
purchasing power of those living on fixed incomes. They find it
increasingly difficult to maintain the homes while also paying
the needed food, medical, and other expenses. Their incomes
prevent them from obtaining loans. ``House rich and cash poor''
is the phrase that is often used to describe their dilemma. One
option is to sell the home and move to an apartment or small
condominium. For a variety of reasons, however, many of the
elderly prefer to remain in the homes for which and in which
they may have spent most of their working years.
Since the 1970's, parties have sought to create mortgage
instruments which would enable elderly homeowners to obtain
loans to convert their equity into income, while providing that
no repayments would be due for a specified period or (ideally)
for the lifetime of the borrower. These instruments have been
referred to as reverse mortgages, reverse annuity mortgages,
and home equity conversion loans. Active programs are described
below.
The Department of Housing and Urban Development (HUD)
Demonstration Program is the first nationwide home equity
conversion program which offers the possibility of lifetime
occupancy to elderly homeowners. The Housing and Community
Development Act of 1987 (P.L. 100-242) authorized HUD to carry
out a demonstration program to insure home equity conversion
mortgages for elderly homeowners. The borrowers (or their
spouses) must be elderly homeowners (at least 62 years of age)
who own and occupy one-family homes. The interest rate on the
loan may be fixed or adjustable. The homeowner and the lender
may agree to share in any future appreciation in the value of
the property.
The program has been made permanent and current law
provides that up to 150,000 mortgages may be made under the
program. The program was amended to permit the use of it for 1-
to 4- family residences if the owner occupies one of the units.
Previous law permitted only 1-family residences.
The mortgage may not exceed the maximum mortgage limit
established for the area under section 203(b) of the National
Housing Act. The borrowers may prepay the loans without
penalty. The mortgage must be a first mortgage, which, in
essence, implies that any previous mortgage must be fully
repaid. Borrowers must be provided with counseling by third
parties who will explain the financial implications of entering
into home equity conversion mortgages as well as explain the
options, other than home equity conversion mortgages, which may
be available to elderly homeowners. Safeguards are included to
prevent displacement of the elderly homeowners. The home equity
conversion mortgages must include terms that give the homeowner
the option of deferring repayment of the loan until the death
of the homeowner, the voluntary sale of the home, or the
occurrence of some other events as prescribed by HUD
regulations.
The Federal Housing Administration (FHA) insurance protects
lenders from suffering losses when proceeds from the sale of a
home are less than the disbursements that the lender provided
over the years. The insurance also protects the homeowner by
continuing monthly payments out of the insurance fund if the
lender defaults on the loan.
When the home is eventually sold, HUD will pay the lender
the difference between the loan balance and sales price if the
sales price is the lesser of the two. The claim paid to the
lender may not exceed the lesser of (1) the appraised value of
the property when the loan was originated or (2) the maximum
HUD-insured loan for the area.
The Federal National Mortgage Association (Fannie Mae) has
been purchasing the home equity conversion mortgages originated
under the program.
A company named Freedom Home Equity Partners has begun to
make home equity conversion loans in California. The borrower
must be at least age 60 and own a one-to-four family home that
is not a mobile home or cooperative. The borrower receives a
single lump sum which may be used to purchase an immediate
annuity to provide monthly cash advances for the remainder of
the borrower's life. An equity conservation feature guarantees
that at least 25 percent of the value of the home will be
available to the borrower or to heirs when the loan is
eventually repaid. The company reportedly intends to expand the
program to other States.
Transamerica HomeFirst was marketing home equity conversion
loans in California, New Jersey, and Pennsylvania. To qualify
for this so-called ``HouseMoney'' plan, the borrower could own
a one-to-four family home that is not a mobile home or
cooperative. A manufactured home could qualify if it were
attached to a permanent foundation.
There is no minimum age requirement, per se, but the
borrower's age and home value must be sufficient to generate
monthly cash advances of at least $150. For borrowers less than
age 93, the cash advance is paid in two ways. First, the
borrower receives monthly loan advances for a specified number
of years based on life expectancy. Second, the borrower begins
receiving monthly annuity advances after the last loan advance
is received. The annuity advance continues for the remainder of
the borrower's life. A borrower, aged 93 or more when obtaining
a HouseMoney loan, receives monthly loan advances for a fixed
number of years as selected by the borrower. No annuity
advances are available to such borrowers.
Currently, the company is administering old loans, but no
new loans are being written under the program.
Since November 1996 the Federal National Mortgage
Association (Fannie Mae) has also been using its own reverse
mortgage product the ``Home Keeper Mortgage.'' Fannie Mae
expects to the program to result in more than $37 million
mortgages over the next 5 years. This is the first conventional
reverse mortgage that will be available on nearly a nationwide
basis. Previously, reverse mortgages were not permitted in
Texas, but a Fannie Mae press release on March 1, 2001 noted
the origination of one of the first reverse mortgages in the
state.
An eligible borrower must (1) be at least age 62, (2) own
the home free and clear or be able to pay off the existing debt
from the proceeds of the reverse mortgage or other funds, and
(3) attend a counseling course approved by Fannie Mae. The loan
becomes due and payable when the borrower dies, moves, sells
the property, or otherwise transfers title. The interest rate
on the loan adjusts monthly according to changes in the 1 month
CD index published by the Federal Reserve. Over the life of the
loan the rate may not change by more than 12 percentage points.
In some States the borrower will have the option of agreeing to
share a portion of the future value of the property with the
lender and in return will receive higher loan proceeds during
the term of the loan.
A variant of the Home Keeper Mortgage may be used for home
purchases by borrowers age 62 or more. A combination of
personal funds (none of which may be borrowed) and proceeds
from a Home Keeper Mortgage may be used to purchase the
property. No payments are due on the loan until the borrower no
longer occupies the property as a principal residence.
(a) Lender Participation
The FHA and Fannie Mae plans have the potential for
participation by a large number of lenders. In theory, any FHA-
approved lender could offer home equity conversions loans. In
practice, it appears that the mortgages are only being offered
by a few lenders. Several factors could account for this. From
a lender's perspective, home equity conversion loans are
deferred-payment loans. The lender becomes committed to making
a stream of payments to the homeowner and expects a lump-sum
repayment at some future date. How are these payments going to
be funded over the loan term? What rate of return will be
earned on home equity conversion loans? What rate could be
earned if these funds were invested in something other than
home equity conversions? Will the home be maintained so that
its value does not decrease as the owner and the home ages? How
long will the borrower live in the home? Will the institution
lose ``goodwill'' when the heirs find that most or all of the
equity in the home of a deceased relative belongs to a bank?
These issues may give lenders reason to be reluctant about
entering into home equity conversion loans. For lenders
involved in the HUD program, the funding problem has been
solved since the Federal National Mortgage Association has
agreed to purchase FHA-insured home equity conversions from
lenders. The ``goodwill'' problem may be lessened by FHA's
requirement that borrowers receive third-party counseling prior
to obtaining home equity conversions. Still, many lenders do
not understand the program and are reluctant to participate.
(b) Borrower Participation
Likewise, many elderly homeowners do not understand the
program and are reluctant to participate. After spending many
years paying for their homes, elderly owners may not want to
mortgage the property again.
Participants may be provided with lifetime occupancy, but
will borrowers generate sufficient income to meet future health
care needs? Will they obtain equity conversion loans when they
are too ``young'' and, as a result, have limited resources from
which to draw when they are older and more frail and sick? Will
the ``young'' elderly spend the extra income on travel and
luxury consumer items? Should home equity conversion mechanisms
be limited as last resort options for elderly homeowners?
Will some of the home equity be conserved? How would an
equity conversion loan affect the homeowner's estate planning?
Does the homeowner have other assets? How large is the home
equity relative to the other assets? Will the homeowner have
any survivors? What is the financial position of the heirs
apparent? Are the children of the elderly homeowner relatively
well-off and with no need to inherit the ``family home'' or the
funds that would result from the sale of that home?
Alternatively, would the ultimate sale of the home result in
significant improvement in the financial position of the heirs?
How healthy is the homeowner? What has been the
individual's health history? Does the family have a history of
cancer or heart disease? Are large medical expenses pending? At
any given age, a healthy borrower will have a longer life
expectancy than a borrower in poor health.
What has been the history of property appreciation in the
area? Will the owner have to share the appreciation with the
lender?
The above questions are interrelated. Their answers should
help determine whether an individual should consider home
equity conversion, what type of loan to consider, and at what
age home equity conversion should be considered.
(c) Recent Problems with Home Equity Conversion Loans
Telemarketing operations may obtain data on homeownership,
mortgage debt, and age of the homeowner. In recent years, some
``estate planning services'' have been contacting elderly
homeowners and offering to provide ``free'' information on how
such homeowners may turn their home equity into monthly income
at no cost to themselves. The companies did little more than
refer loan applications to mortgage lenders participating in
the HUD reverse mortgage program or to insurance companies
offering annuities. Reportedly, the estate planning services
were pocketing 6 to 10 percent of any loan that the referred
homeowner received.
On March 17, 1997, HUD issued Mortgage Letter 97-07 which
informed FHA-approved lenders that, effective immediately, HUD
would no longer insure reverse mortgages obtained with the
assistance of estate planning services. Lenders were notified
that HUD would take action to withdraw FHA approval from
lenders who continue to use certain estate planning services.
HUD asked lenders to inform senior citizens that counseling
is provided at little or no cost through HUD-approved, non-
profit counseling services. Lenders were given a telephone
number that homeowners may call to receive the name and phone
number of a HUD-approved counseling agency near their home.
One of the estate planners obtained a restraining order to
block HUD from enforcing the changes suggested in the Mortgage
Letter. Basically, the court found that HUD had not followed
required rulemaking procedures. The Mortgage Letter did not,
for example, permit a period for public comment. In response,
the Senior Homeowner Reverse Mortgage Protection Act (H.R.
1297) and the Senior Citizen Home Equity Protection Act (S.
562) were introduced in the 105th Congress. The bills were
identical except for their titles. The provisions of these
bills were amended and included in the fiscal year 1999 HUD
Appropriations Act, P.L. 105-276.
Title V of P.L. 105-276 is cited as the Quality Housing and
Work Responsibility Act. Section 593 of the Act amends the
National Housing Act to prevent the funding of unnecessary or
excessive costs for obtaining FHA-insured home equity
conversion loans. The eligibility requirements for obtaining
FHA insurance have been amended to require that borrowers
receive full disclosure of costs charged to the borrower,
including the costs of estate planning, financial advice, and
other services that are related to the mortgage but that are
not required to obtain the mortgage. The disclosure must
clearly state which charges are required to obtain the mortgage
and which charges are not required to obtain the mortgage. The
loans must be made with such restrictions as HUD determines are
appropriate to ensure that the borrower does not fund any
unnecessary or excessive costs for obtaining the mortgage,
including the costs of estate planning, financial advice, or
other related services.
Section 593 requires that, in each of fiscal years 2000
through 2003, up to $1 million of any funds made available for
housing counseling under Section 106 of the HUD Act of 1968,
must be used for housing counseling and consumer education in
connection with HUD home equity conversion mortgages. HUD is
directed to consult with interested parties to identify
alternative approaches to providing the consumer information
that may be feasible and desirable for the FHA-insured reverse
mortgage and for other reverse mortgage programs. HUD is given
the discretion to adopt alternative approaches to consumer
education that are developed through this consultation. HUD may
only use alternative approaches if such approaches provide
consumers with all the information specified in the law.
D. INNOVATIVE HOUSING ARRANGEMENTS
1. Shared Housing
Shared housing can be best defined as a facility in which
common living space is shared, and at least two unrelated
persons (where at least one is over 60 years of age) reside. It
is a concept which targets single and multifamily homes and
adapts them for elderly housing. Also, Section 8 housing
vouchers can be used by persons in a shared housing
arrangement.
Shared housing can be agency-sponsored, where four to ten
persons are housed in a dwelling, or, it may be a private home/
shared housing situation in which there are usually three or
four residents. The economic and social benefits of shared
housing have been recognized by many housing analysts. Perhaps
the most easily recognized benefit is companionship for the
elderly. Also, shared housing is a means of keeping the elderly
in their own homes, while helping to provide them with
financial assistance to aid in the maintenance of that home.
There are a number of shared housing projects in existence
today. Anyone seeking information in establishing such a
project can contact two knowledgeable sources. One is called
``Operation Match'', which is a growing service now available
in many areas of the country. It is a free public service open
to anyone 18 years or older. It is operated by housing offices
in many cities and matches people looking for an affordable
place to live with those who have space in their homes and are
looking for someone to aid with their housing expenses. Some of
the people helped by Operation Match are single working
parents, persons in need of short-term housing assistance,
elderly people hurt by inflation or health problems, and the
disabled who require live-in help to remain in their homes.
The other knowledgeable source of information in shared
housing is the Shared Housing Resource Center in Philadelphia.
It was founded in 1981, and acts as a link between individuals,
groups, churches, and service agencies that are planning to
form shared households.
2. Accessory Apartments
Accessory apartments have been accepted in communities
across the Nation for many years, as long as they were occupied
by members of the homeowner's family. Now, with affordable
housing becoming even more difficult to find, various interest
groups, including the low-income elderly, are looking at
accessory apartments as a possible source of affordable
housing.
Accessory apartments differ from shared housing in that
they have their own kitchens, bath, and many times, own
entrance ways. It is a completely private living space
installed in the extra space of a single family home.
The economic feasibility of installing an accessory
apartment in one's home depends to a large extent on the design
of the house. The cost would be lower for a split-level or
house with a walk-out basement than it would be for a Cape Cod.
In some instances, adding an accessory apartment can be very
costly, and the benefit should be weighed against the cost.
Many older persons find that living in accessory apartments
of their adult children is a way for them to stay close to
family, maintain their independence, and have a sense of
security. They are less likely to worry about break-ins and
being alone in an emergency if they occupy an accessory
apartment.
Not everyone, however, welcomes accessory apartments into
their areas. Many people are skeptical, and see accessory
apartments as the beginning of a change from single-family
homes to multifamily housing in their neighborhoods. They are
afraid that investors will buy up homes for conversion to
rental duplexes. Many worry about absentee landlords, increased
traffic, and the violation of building codes. For these
reasons, in many parts of the country, accessory apartments are
met with strong opposition.
Some communities have found ways to deal with these
objections. One way is to permit accessory apartments only in
units that are owner-occupied. Another approach is to make
regulations prohibiting exterior changes to the property that
would alter the character of the neighborhood. Also, towns can
set age limits as a condition for approval of accessory
apartments. For example, a town may pass an ordinance stating
that an accessory apartment can only be occupied by a person
age 62 or older.
Because of the opposition and building and zoning codes,
the process of installing an accessory apartment may be
intimidating to many people. However, anyone seriously
considering providing an accessory apartment in his home should
seek advice from a lawyer, real estate agents and remodelers
before beginning so that the costs and benefits can be weighed
against one another.
E. FAIR HOUSING ACT AND ELDERLY EXEMPTION
The Fair Housing Amendments Act of 1988 amended the Civil
Rights Act of 1968, and made it unlawful to refuse to sell,
rent, or otherwise make real estate available to persons or
families, based on ``familial status'' or ``handicap.'' This
amendment was put into law to end discrimination in housing
against families with children, pregnant women, and disabled
persons.
In passing this law, however, Congress did grant exceptions
for housing for older persons. The Act does not apply to
housing: (1) provided under any State or Federal program (such
as Sec. 202) specifically designed and operated to assist
elderly persons; (2) intended for and solely occupied by
persons 62 years of age or older; or (3) intended and operated
for occupancy by at least one person 55 years of age or older
per unit, subject to certain conditions.
In 1994, the Department of Housing and Urban Development
(HUD) proposed a rule which would determine whether or not a
project occupied by senior citizens would be exempt from the
law. The proposal was met with negative responses from many
elderly advocacy groups promoting congressional response.
On December 28, 1995, P.L. 104-76, the Housing for Older
Persons Act of 1995, was signed into law. This law defined
senior housing as a ``facility or community intended and
operated for the occupancy of at least 80 percent of the
occupied units by at least one person 55 years of age or
older.'' The law also requires that projects or mobile home
parks publish and adhere to policies and procedures which would
show its intent to provide housing for older persons.
F. HOMELESS ASSISTANCE
The plight of the homeless continues to be one of the
Nation's pressing concerns. One of the most frustrating and
troubling aspects of the homeless issue is that no definitive
statistics exist to determine the number of homeless persons.
An Urban Institute (UI) study dated February 2000, reveals that
there are roughly 2.3 million to 3.5 million people who suffer
from a spell of homelessness at one point during a year. This
figure includes people who experience homelessness for a period
as short as one day to the entire year; almost half (49
percent) of homeless clients have been homeless only once, but
22 percent have been homeless four or more times.
In an effort to obtain a ``true number'' of people who
experience homelessness, Congress included a requirement in the
FY2001 HUD appropriations (P.L. 106-377, codified at 42 USC
Sec. 11383(a)(7)) that 1.5 percent of the Homeless Assistance
Grants be used to develop an automated, client-level Annual
Performance Report System. In the Senate report (107-43) on the
FY2002 appropriations, the Appropriations Committee reiterated
its support of HUD's efforts in working with communities to
continue with data collection and analysis efforts to prevent
duplicate counting of homeless persons, and to analyze their
patterns of use of assistance, including how they enter and
exit the homeless assistance system and the effectiveness of
the system. The Committee stated that HUD should consider this
activity to be a priority.
In 1996, the National Survey of Homeless Assistance
Providers and Clients (NSHAPC) was conducted. This study was
designed and funded by 12 Federal agencies with guidance
provided by the Interagency Council on the Homeless and with
data collected by the U.S. Bureau of Census and analyzed by the
Urban Institute. NSHAPC indicated that 34 percent of homeless
people found at homeless assistance programs were members of
homeless families (one client and one or more of the client's
minor children). Homeless clients were predominantly male (68
percent) and nonwhite (53 percent); 48 percent never married;
and 38 percent had less than a high school diploma. Forty-two
percent of homeless clients reported that finding a job was
their top need followed by a need for help in finding
affordable housing (38 percent). Thirty-eight percent of
homeless clients reported alcohol problems during the past
month; 26 percent had drug problems; and 39 percent had mental
health problems during that period. Over one-quarter (27
percent) of homeless clients had lived in foster care, a group
home or other institutional setting for part of their
childhood. Twenty-five percent reported childhood physical or
sexual abuse. Twenty-three percent of homeless clients were
veterans: 21 percent served before the Vietnam era (before
1964); 47 percent served during the Vietnam era (between
August, 1964 and April 1975); and 57 percent served since the
Vietnam era; 33 percent of the male veterans were stationed in
a war zone, and 28 percent were exposed to combat.
When homelessness gained prominence in the early 1980's,
some observers felt that the problem was a temporary
consequence of economic conditions fueled by the recession of
1981-1982. However, reports such as the NSHAPC indicate that,
although extreme poverty is the virtually universal condition
of clients who are homeless, accompanying factors such as low
levels of education, few job skills, exhaustion of social
supports or complete lack of family, problems with alcohol or
drug use, severe mental illness, childhood and adult
experiences of violence all increase a person's risk of
becoming homeless. A shortage of affordable housing and
increased skill levels needed for employment also increase the
risk of homelessness.
According to the National Coalition for the Homeless (NCH),
increased homelessness among elderly persons is largely the
result of the declining availability of affordable housing and
poverty among certain segments of the aging. Of the 12.5
million persons in households identified by HUD as having
``worst case housing needs,'' 1.5 million are elderly people.
Thirty-seven percent of very-low-income elderly people receive
housing assistance. The NCH reported that between 1993 and
1995, the total number of elderly with very low incomes dropped
by about 300,000. They added that this drop may reflect that a
growing portion of the elderly population are protected from
severe poverty by Social Security and private pensions. A
recent analysis of Census data found that without Social
Security, nearly half (47.6 percent) of Americans age 65 or
over would have been poor in 1997. In fact, Social Security
reduced the poverty rate among elderly people in 1997 by 11.9
percent and lifted 11.4 million elderly people out of poverty.
However, Social Security benefits are often inadequate to cover
the cost of housing. In addition, some homeless persons are
unaware of their own eligibility for public assistance programs
and face difficulties applying for and receiving benefits.
According to the Bureau of Census, 1998, elderly people have a
lower poverty rate than the general population (10.5 percent
compared to 13.3 percent for all people) but are more likely
than the nonelderly to have incomes just over the poverty
threshold. Seventeen percent of elderly people had family
incomes below 125 percent of poverty. Sixty-five percent of
older renters, 71 percent of older single female renters, 71
percent of older Hispanic renters, and 69 percent of older
African-American renters spend more than 30 percent of their
income on housing which, combined with other living expenses,
makes them particularly vulnerable to homelessness.
Furthermore, overall economic growth may not alleviate the
income and housing needs of elderly poor people, as they are
not as likely to continue or return to work or gain income
through marriage as are younger homeless persons.
NCH singled out various studies showing that once on the
street, elderly homeless persons often find getting around
difficult, and, distrusting the crowds at shelters and clinics,
they are more likely to sleep on the street. The homeless
elderly are prone to victimization and are more likely than
other homeless persons to suffer from a variety of health
problems, including chronic disease, functional disabilities
and high blood pressure. To prevent elderly Americans from
becoming homeless, NCH recommends an increase in low income
housing, income supports and health care services.
Presently, there are nearly two dozen Federal programs
targeted to assist the homeless which are administered by seven
different agencies within the Federal Government. In FY2001,
they were funded at roughly $1.7 billion. In addition to the
targeted homeless programs, assistance is potentially available
to homeless people through nontargeted programs designed to
provide services for low-income people generally, e.g., the
food stamp program, Community Development Block Grants and
Community Services Block Grants. Seven of the targeted
homelessness programs are authorized by the McKinney-Vento
Homeless Assistance Act. They are Education for Homeless
Children and Youth; Emergency Food & Shelter; Homeless Veterans
Reintegration Project; and four Homeless Assistance Grants
Programs administered by HUD--Supportive Housing, Emergency
Shelter Grants, Shelter Plus Care and Section 8 Moderate
Rehabilitation Assistance for Single-Room Occupancy Dwellings.
Most of the McKinney-Vento Act programs provide funds
through competitive and formula grants. An exception is the
Emergency Food and Shelter Program, administered by the Federal
Emergency Management Administration (FEMA), in which assistance
is available through the local boards that administer FEMA
funds. The assistance programs also focus on building
partnerships with States, localities, and not-for-profit
organizations in an effort to address the multiple needs of the
homeless population.
In 1995 and 1996, HUD overhauled the application process
used by the Department for the distribution of competitively
awarded McKinney Act funds. The intent was to shift the focus
from individual projects to community-wide strategies for
solving the problems of the homeless. The new options in the
application process incorporate HUD's continuum of care (CoC)
strategy. Four major components are considered on this
approach: prevention (including outreach and assessment),
emergency shelter, transitional housing with supportive
services, and permanent housing with or without supportive
services. The components are used as guidelines in developing a
plan for the community that reflects local conditions and
opportunities. This plan becomes the basis of a jurisdiction's
application for McKinney Act homeless funds. All members of a
community interested in addressing the problems of homelessness
(including homeless providers, advocates, representatives of
the business community, and homeless persons) can be involved
in this continuum of care approach to solving the problems of
homelessness.
The new application model established a combined
application process for all of HUD's McKinney Act programs with
the exception of Emergency Shelter Grants. In varying degrees
the HUD programs, i.e., the Supportive Housing Program, Shelter
Plus Care, and Section 8 Moderate Rehabilitation Single Room
Occupancy, contain a ``supportive services'' element such as
child care, employment assistance, outpatient health services,
food and case management. It has been estimated that over 50
percent of HUD homeless assistance grant funds are being spent
on ``services'' rather than on housing. In 2001, HUD Secretary
Martinez initiated a joint task force with the Secretary of
Health and Human Services (HHS) to identify and target each
agency's responsibilities concerning HUD's homeless programs,
so that HUD could concentrate on the housing component and HHS
could concentrate on the services component. In the House
report (107-159) on the FY2002 appropriations, the Committee
commended these efforts; the Committee required that a report
of findings and progress be filed no later than February, 2002.
Congress appropriated the following funds for HUD Homeless
Assistance Grants: FY1998--$823 million; FY1999--$975 million;
FY2000--$1.020 billion; FY2001 $1.023 billion. Since FY1999 at
least 30 percent of the appropriated funds are to be used for
permanent housing.
There are seven targeted Federal programs that focus on
homeless veterans to meet such needs as job training
(administered by the Department of Labor) and health care,
transitional housing and residential rehabilitation
administered by the Department of Veterans Affairs (VA). In
addition to the targeted programs, the VA engages in several
activities not reported as separate funded programs to assist
the homeless, such as Drop-in Centers, Comprehensive Homeless
Centers, VA Excess Property for Homeless Veterans Initiative
and a project with the Social Security Administration called
SSA-VA Outreach where staff coordinate outreach and benefits
certification to increase the number of veterans receiving SSA
benefits.
Targeted VA program obligations for FY2001 are as follows:
Health Care for Homeless Veterans--$59 million; Homeless
Providers Grants and Per Diem Program--$33 million; Domiciliary
Care for Homeless Veterans--$35 million; Compensated Work
Therapy/Therapeutic Residence Program--$8 million; Loan
Guaranty Transitional Housing for Homeless Veterans--$6
million; and HUD VA Supported Housing--$5 million.
G. HOUSING COST BURDENS OF THE ELDERLY
Housing costs are a serious burden for many low- and
moderate- income households, particularly for elderly
households living on fixed incomes. Figures from the Department
of Labor's Consumer Expenditure Survey from 1999 show that
households headed by those age 65 and over, who had an average
income of $26,581 in 1999, spent $8,944 or 34 percent of their
income on housing. The figure for consumer units of all ages
was 28 percent. This category includes not only the cost of
shelter itself, but utilities and household operations,
housekeeping supplies, and household furnishings. While the
percentage of income spent on mortgage interest drops sharply
for households age 65 and over, other housing costs remain
high. Even though household income falls significantly for the
elderly, ($26,581 compared to the average household income of
$43,951 in 1999), the amount of property taxes paid by the
elderly is higher than that paid by the average household
($1149 in 1999 versus $1123 for the average household.) The
elderly spend 4.3 percent of income for property taxes; the
average household, about 2.1 percent.
CHAPTER 13
ENERGY ASSISTANCE AND WEATHERIZATION
OVERVIEW
Energy costs have a substantial impact on the elderly poor.
Often they are unable to afford the high costs of heating and
cooling, and they are far more physically vulnerable than
younger adults in winter and summer.
The high cost of energy is a special concern for low-income
elderly individuals. The inability to pay these costs causes
the elderly to be more susceptible to hypothermia and heat
stress. Hypothermia, the potentially lethal lowering of body
temperature, is estimated to be the cause of death for up to
25,000 elderly people each year. The Center for Environmental
Physiology in Washington, DC. reports that most of these deaths
occur after exposure to cool indoor temperatures rather than
extreme cold. Hypothermia can set in at indoor temperatures
between 50 and 60 degrees Fahrenheit. Additionally, extremes in
heat contribute to heat stress, which in turn can trigger heat
exhaustion, heatstroke, heart failure, and stroke.
Two Federal programs exist to ease the energy cost burden
for low-income individuals: The Low-Income Home Energy
Assistance Program (LIHEAP) and the Department of Energy's
Weatherization Assistance Program (WAP). Both LIHEAP and WAP
give priority to elderly and handicapped citizens to assure
that these households are aware that help is available, and to
minimize the possibility of utility services being shut off. In
the past, States have come up with a variety of means for
implementing the targeting requirement. Several aging
organizations have suggested that Older Americans Act programs,
especially senior centers, be used to disseminate information
and perform outreach services for the energy assistance
programs. Increased effort has been made in recent years to
identify elderly persons eligible for energy assistance and to
provide the elderly population with information about the risks
of hypothermia.
Although these programs have played an important role in
helping millions of America's poor and elderly meet their basic
energy needs, and to weatherize their homes, there is a
dramatic gap between existing Federal resources and the needs
of the population these programs were intended to serve.
According to HHS data, in 1981, 36 percent of eligible
households received heating and/or winter assistance crisis
benefits. By 2000, only an estimated 17 percent of eligible
households received those benefits, however this was up from 13
percent in 1999.
According to HHS, in FY1998 (the most recent year for which
detailed data are available), the average household had energy
expenditures of $1,280, compared to $1,082 for low-income
households (those at or below 150 percent of Federal poverty
guidelines) and $1,063 for LIHEAP recipient households. The
energy burden for LIHEAP recipients in FY1998 was over 15
percent, 9 percentage points higher than for all households,
and 3 percentage points higher than low-income households.
Both the LIHEAP and weatherization programs are vital to
the households they serve, especially during the winter months.
According to a 1994 HHS study, since major cuts in LIHEAP began
in 1988, the number of low-income households with ``heat
interruptions'' due to inability to pay had doubled. Thus, many
low-income people go to extraordinary means to keep warm when
financial assistance is inadequate, such as going to malls,
staying in bed, using stoves, and cutting back on food and/or
medical needs. A survey of 19 states and the District of
Columbia, conducted by the National Energy Assistance
Directors' Association, reported that arrearages and threats of
shut-offs increased to 4.3 million households in 2001. An
estimated 5 million households received LIHEAP in 2000, an
increase of 1 million over fiscal year 1999.
A. BACKGROUND
1. The Low-Income Home Energy Assistance Program
In the 1970's, prior to LIHEAP, there were a series of
modest, short-term fuel crisis intervention programs. These
programs were administered by the Community Services
Administration (CSA) on an annual budget of approximately $200
million. However, between 1979 and 1980 the price of home
heating oil doubled. As a result, Congress sharply expanded aid
for energy by creating a three-part, $1.6 billion energy
assistance program. Of this amount, $400 million went to CSA
for the continuation of its crisis-intervention programs; $400
million to HHS for one-time payments to recipients of
Supplemental Security Income (SSI); and $800 million to HHS for
distribution as grants to States to provide supplemental energy
allowances.
In 1980, Congress passed the Home Energy Assistance Act as
part of the crude oil windfall profit tax legislation,
appropriating $1.85 billion for the program. At present, LIHEAP
is authorized by the Low-Income Home Energy Assistance Act
(Title XXVI of the Omnibus Budget Reconciliation Act of 1981)
as amended by the Human Services Reauthorization Acts of 1984,
1986, 1990, the National Institutes of Health Revitalization
Act of 1993, the Human Services Amendments of 1994, and the
Human Services Reauthorization Act of 1998.
LIHEAP is one of the seven block grants originally
authorized by OBRA and administered by HHS. The purpose of
LIHEAP is to assist eligible households in meeting the costs of
home energy. Grants are made to the States, the District of
Columbia, approximately 124 Indian tribes and tribal
organizations, and six U.S. territories. Each grantee's annual
grant is a percentage share of the annual Federal appropriation
(grants to Indian tribes are taken from their State's
allocation). The percentage share is set by a formula
established in 1980 for LIHEAP's predecessor. If the Federal
appropriation is above $1.975 billion, a new formula takes
effect, and grants are allocated by a formula based largely on
home energy expenditures by low-income households. Annual
Federal grants can be supplemented with the following funds:
oil price overcharge settlements (money paid by oil companies
to settle oil price control violation claims and distributed to
States by the Energy Department); State and local funds and
special agreements with energy providers; money carried over
from the previous fiscal year; authority to transfer funds from
other Federal block grants; and payments under a $24 million-a-
year special incentive program for grantees that successfully
``leverage'' non-Federal resources.
Financial assistance is provided to eligible households,
directly or through vendors, for home heating and cooling
costs, energy-related crisis intervention aid, and low-cost
weatherization. Some States also make payments in other ways,
such as through vouchers or direct payments to landlords.
Homeowners and renters are required to be treated equitably.
Flexibility is allowed in the use of the grants. No more than
15 percent may be used for weatherization assistance (up to 25
percent if a Federal waiver is given, and up to 10 percent may
be carried over to the next fiscal year. A maximum of 10
percent of the grant may be used for administrative costs. A
provision of the Human Services Reauthorization Act of 1998
added language stating that grantees should give priority for
weatherization services to those households with the lowest
incomes that pay a high proportion of their income for home
energy.
States establish their own benefit structures and
eligibility rules within broad Federal guidelines. Eligibility
may be granted to households receiving other forms of public
assistance, such as SSI, Temporary Assistance to Needy
Families, food stamps, certain needs-tested veterans' and
survivors' payments, or those households with income less than
150 percent of the Federal poverty income guidelines or 60
percent of the State's median income, whichever is greater.
Lower income eligibility requirements may be set by States and
other jurisdictions, but not below 110 percent of the Federal
poverty level.
LIHEAP places certain program requirements on grantees.
Grantees are required to provide a plan which describes
eligibility requirements, benefit levels, and the estimated
amount of funds to be used for each type of LIHEAP assistance.
Public input is required in developing the plan. The highest
level of assistance must go to households with the lowest
incomes and highest energy costs in relation to income. Energy
crisis intervention must be administered by public or nonprofit
entities that have a proven record of performance. Crisis
assistance must be provided within 48 hours after an eligible
household applies. In life-threatening situations, assistance
must be provided in 18 hours. A reasonable amount must be set
aside by grantees for energy crisis intervention until March 15
of each year. Applications for crisis assistance must be taken
at accessible sites and assistance in completing an application
must be provided for the physically disabled.
(a) Program Data
The most recent estimates from HHS concerning LIHEAP
recipiency by type of service are for fiscal year 1999. Those
estimates, based on data reported by the states, indicate that
in FY1999, 3.4 million households received regular heating cost
assistance and 748,000 received winter crisis aid. These data
do not reflect an unduplicated count of households, but rather
an estimated count of households that received each category of
assistance. In addition to heating assistance provided by
LIHEAP funds, cooling aid was provided to an estimated 480,000
households, summer crisis aid to 194,000 households, and
weatherization assistance to 87,000.
The most recently released data regarding average LIHEAP
benefit amounts indicate that the average heating/winter crisis
benefit amount in FY1998 was $213, approximately the same as
the average for FY1997 ($214). The average cooling/summer
crisis benefit for FY1998 was $248, an increase of 78 percent
from FY1997. The percentage of federally eligible households
assisted with LIHEAP benefits has risen from 13 percent in 1998
to 17 percent according to preliminary estimates for FY2000.
The fiscal year 1998 LIHEAP Home Energy Notebook, prepared
for the U.S. Department of Health and Human Services in
October, 2000 revealed:
On average, residential energy expenditures for all
households decreased by 2.3 percent, from $1,310 in
fiscal year 1997 to $1,280 in fiscal year 1998. LIHEAP
recipient households decreased their average
residential energy expenditures by almost 9 percent,
from $1,167 in fiscal year 1997 to $1,063 in fiscal
year 1998;
Low-income households overall (49.2 percent), and
LIHEAP recipient households specifically (51.3 percent)
use natural gas as their main heating fuel. Use of
electricity as a main heating fuel has increased for
LIHEAP recipient families, reaching almost 30 percent
in 1997. Over 8 percent of LIHEAP households use fuel
oil as their main heating source.
Average home heating expenditures for LIHEAP
recipient households were about $347;
Home heating expenditures represented a higher
percentage of annual household income for low-income
households (about 3.8 percent; 5.2 percent for LIHEAP
recipient households) than for all households (about
1.9 percent);
While electricity is used by most households to cool
their homes, low-income households are less likely than
all households to cool their homes;
Average annual home cooling expenditures in fiscal
year 1998 for all households that cooled was about
$143, and for LIHEAP recipients that cooled was about
$122;
Cooling expenditures represented a higher percentage
of average annual income for low-income households that
cooled (1.3 percent) than for all households that
cooled (0.6 percent).
(b) Funding
There has been a substantial reduction in the level of
regular LIHEAP funding in the past two decades, from a high of
$2.1 billion in fiscal year 1985 to the current level of $1.4
billion in fiscal year 2001. However, regular LIHEAP funds
have, in recent years, been supplemented with increasing
amounts of emergency LIHEAP funding. In FY2001, a total of $600
million in contingency LIHEAP funds was appropriated ($300
million as part of a FY2001 supplemental appropriation measure
(P.L. 107-20), raising the total amount of LIHEAP funding to $2
billion.
In fiscal year 1994, LIHEAP was funded at $1.473 billion;
the appropriation also included a contingency fund for weather
emergencies of $600 million. In fiscal year 1995, LIHEAP was
funded at $1.319 billion, the appropriation also included a
weather emergency fund of $600 million. In fiscal year 1996,
LIHEAP was funded at $900 million; the appropriation also
included an emergency fund of $300 million. In fiscal year
1997, LIHEAP was funded at $1 billion, with a contingency fund
of $420 million.
In fiscal year 1998, Public Law 105-78 funded LIHEAP at the
$1 billion level again, with a $300 million emergency fund. The
fiscal year 1999 omnibus appropriations bill (Public Law 105 -
277), provided $1.1 billion in LIHEAP funding for fiscal year
1999, plus $300 million in emergency funding. The bill also
included $1.1 billion in advanced funding for fiscal year 2000.
Ultimately, $2 billion was appropriated in FY2000, including
$900 million in emergency funding.
Contingency LIHEAP funds have been utilized in recent years
for both cold and hot weather emergencies. The most recent
releases of emergency funds have been allocated to all states,
to assist low-income households facing significant increases
for heating oil, natural gas, and propane prices during the
winter of 2000/2001. Overall, allotments have been weighted for
states with a greater percentage of households using fuel oil,
natural gas, and propane for heating. However, on August 23,
2000, President Clinton released $2.6 million in emergency
LIHEAP funds to Southern California, for low-income households
that had been facing substantially higher electricity rates.
Likewise, most of the summer releases of FY2000 emergency funds
targeted southern states, to help low-income families cool
their homes during the extreme summer heat.
2. The Department of Energy Weatherization Assistance Program
Federal efforts to weatherize the homes of low-income
persons began on an ad hoc, emergency basis after the 1973 oil
embargo. A formal program was established, under the Community
Services Administration (CSA), in 1975. The Federal Energy
Administration (FEA) became involved in 1976 with passage of
Public Law 94-385, as amended. In October 1977, the newly
formed Department of Energy (DOE) assumed the responsibilities
of the FEA. In 1977 and 1978, DOE administered a grant program
that paralleled and supplemented the CSA program; DOE provided
money for the purchase of material and CSA was responsible for
labor. In 1979, DOE became the sole Federal agency responsible
for operating a low-income weatherization assistance program.
The DOE's Weatherization Assistance Program is authorized
under Title IV of the Energy Conservation and Production Act
(P.L. 94-385, as amended). The goals of the Weatherization
Assistance Program (WAP) are to decrease national energy
consumption and to reduce the impact of high fuel costs on low-
income households, particularly those of the elderly and
persons with disabilities. Additionally, the program seeks to
increase employment opportunities through the installation and
manufacturing of low-cost weatherization materials. The 1990
legislation reauthorizing the program also permits and
encourages the use of innovative energy saving technologies to
achieve these goals.
The Weatherization Assistance Program is a formula grant
program which flows from the Federal to State governments to
local weatherization agencies. There are 51 State grantees
(each State and the District of Columbia), and approximately
970 local weatherization agencies, or subgrantees.
To be eligible for weatherization assistance, household
income must be at or below 125 percent of the Federal poverty
level. States, however, may raise their income eligibility
level to 150 percent of the poverty level to conform to the
LIHEAP income ceiling. States may not, however, set it below
125 percent of the poverty level. Households with persons
receiving Temporary Assistance to Needy Families (TANF),
Supplemental Security Insurance (SSI), or local cash assistance
payments are also eligible for assistance. Priority for
assistance is given to households with an elderly individual,
age 60 and older, or persons with disabilities. On December 8,
2000, the Department of Energy issued final rules amending the
regulations for the weatherization program. ``Households with a
high energy burden'' and ``high residential energy users'' were
added as new categories for those receiving priority service.
Although the law is not specific, Federal regulations
specify that each State's share of funds is to be based on its
climate, relative number of low-income households and share of
residential energy consumption. Funds made available to the
States are in turn allocated to nonprofit agencies for
purchasing and installing energy conserving materials, such as
insulation, and for making energy-related repairs. Federal law
allows a maximum average expenditure of $2,500 per household in
fiscal year 2001, unless a state-of-the-art energy audit shows
that additional work on heating systems or cooling equipment
would be cost-effective.
(a) Program Data
Since its inception through fiscal year 2000, the
weatherization program has served more than 5 million homes. In
approximately 33 percent of the homes weatherized, at least one
resident was 60 years of age or older. An estimated 67,340
homes were weatherized in fiscal year 1999 and 75,000 in fiscal
year 2000.
In 1993, the DOE issued a report entitled National Impacts
of the Weatherization Assistance Program in Single Family and
Small Multifamily Dwellings. The report represents 5 years of
research that shows DOE's Weatherization Assistance Program
saves money, reduces energy use, and makes weatherized homes a
safer place to live. Two researchers at DOE's Oak Ridge
National Laboratory concentrated on data from the 1989 program
year (April 1 through March 31) in which 198,000 single-family
and small multifamily buildings and 20,000 units in large
multifamily buildings were weatherized. 14,970 dwellings
weatherized in that year were studied. The report revealed:
The Weatherization Assistance Program saved $1.09 in
energy costs for every $1 spent;
The average energy savings per dwelling was $1,690,
while it cost $1,550 to weatherize the average home,
including overhead;
The program was most effective in cold weather States
in the Northeast and upper Midwest, which may be due to
DOE's early emphasis on heating rather than cooling;
States with cold climates produced the highest energy
savings. For natural gas consumption, first-year
savings represented a 25-percent reduction in gas used
for space heating and a 14-percent reduction in total
electricity use;
Weatherization reduced the average low-income
recipient's energy bill by $116, which represented
approximately 18 percent of the total home heating bill
of $640;
Energy savings through weatherization reduced U.S.
carbon emissions by nearly 1 million metric tons.
Savings were the most dramatic in single-family,
detached houses in cold climates; and
The average low-income household in the North was
particularly hard hit by home energy costs, spending 17
percent of income on residential energy. Elsewhere
across the country, low-income people typically spent
12 percent of their income on energy, compared to only
3 percent for other income levels.
In 1996, the Department of Energy reported that the
Weatherization Assistance Program's performance had improved
significantly because of the implementation of many of the
recommendations of the 1990 National Evaluation that was
conducted under the supervision of the Oak Ridge National
Laboratory. A 1996 ``metaevaluation'' of 17 state-level
evaluations of the Weatherization Program concluded that
improved practices had produced 80 percent higher average
energy savings per dwelling in 1996 as compared to measured
savings in 1989. These savings equal a 23.4 percent reduction
in consumption of natural gas for all end uses.
(b) Funding
The Weatherization Assistance Program has been operating
without an appropriations authorization since 1990. Through the
general appropriations process, Congress has continued to
provide annual grants to support weatherization activities:
$124.8 million in FY1998; $133 million in FY1999; $135 million
in FY2000; and $153 million in FY2001.
CHAPTER 14
OLDER AMERICANS ACT
OVERVIEW
The Older Americans Act (OAA), enacted in 1965, is the
major vehicle for the organization and delivery of supportive
and nutrition services to older persons. It was created during
a time of rising societal concern for the needs of the poor.
The OAA's enactment marked the beginning of a variety of
programs specifically designed to meet the social services
needs of the elderly.
The OAA was one in a series of Federal initiatives that
were part of President Johnson's Great Society programs. These
legislative initiatives grew out of a concern for the large
percentage of older Americans who were impoverished, and a
belief that greater Federal involvement was needed beyond the
existing health and income-transfer programs. Although older
persons could receive services under other Federal programs,
the OAA was the first major legislation to organize and deliver
community-based social services exclusively to older persons.
The OAA followed similar social service programs initiated
under the Economic Opportunity Act of 1964. The OAA's
conceptual framework was similar to that embodied in the
Economic Opportunity Act and was established on the premise
that decentralization of authority and local control over
policy and program decisions would create a more responsive
service system at the community level.
When enacted in 1965, the OAA established a series of broad
policy objectives designed to meet the needs of older persons.
Over the years, the essential mission of the OAA has remained
very much the same: to foster maximum independence by providing
a wide array of social and community services to those older
persons in the greatest economic and social need. The
philosophy of the program has been to help maintain and support
older persons in their homes and communities to avoid
unnecessary and costly institutionalization.
The Act authorizes a wide array of service programs through
a nationwide network of 57 State agencies on aging and about
660 area agencies on aging (AAAs). It supports the only
federally sponsored job creation program benefiting low-income
older persons and is a source of Federal funding for training,
research, and demonstration activities in the field of aging.
It authorizes funds for supportive and nutrition services for
older Native Americans and Native Hawaiians and a program to
protect the rights of older persons.
The Act establishes the Administration on Aging (AOA)
within the Department of Health and Human Services (HHS) which
administers all of the Act's programs except for the Senior
Community Service Employment Program administered by the
Department of Labor (DOL), and the commodity or cash-in-lieu of
commodities portion of the nutrition program, administered by
the U.S. Department of Agriculture (USDA).
The original legislation established AOA within HHS and
established a State grant program for community planning and
services programs, as well as authority for research,
demonstration, and training programs. During the 1970's,
Congress significantly improved the OAA by broadening its scope
of operations and establishing the foundation for a ``network''
on aging under a Title III program umbrella. In 1972, Congress
established the national nutrition program for the elderly. In
1973, the area agencies on aging (AAAs) were authorized. These
agencies, along with the State Units on Aging (SUAs), provide
the administrative structure for programs under the OAA. In
addition to funding specific services, these entities act as
advocates on behalf of older persons and help to develop a
service system that will best meet older Americans' needs. The
service system encompasses services funded under the OAA, as
well as services supported by other Federal, State, and local
programs.
Other amendments established the long-term care ombudsman
program and a separate grant program for older Native Americans
in 1978, and a number of additional service programs under the
State and area agency on aging program in 1987. Amendments in
1992 created a new Title VII to consolidate and expand certain
programs that focus on protection of the rights of older
persons (which under prior law were authorized under Title
III). The most recent amendments in 2000 created the National
Family Caregiver Support program under Title III.
Increased funding during the 1970's allowed for the further
development of AAAs and for the provision of other services,
including access (transportation, outreach, and information and
referral), in-home, and legal services. Expansion of OAA
programs continued until the early 1980's when, in response to
the Reagan Administration's policies to cut the size and scope
of many Federal programs, the growth in OAA spending was slowed
substantially, and for some programs was reversed.
Until the 104th Congress, there had been widespread
bipartisan congressional support of OAA programs, especially
the nutrition and senior community service employment program.
The 104th Congress marked the beginning of controversy over a
number of proposals that surfaced as part of the Act's
reauthorization. This controversy continued until the end of
the 106th Congress when Congress agreed on various amendments
that had been in controversy for almost three Congresses (see
discussion below).
A. THE OLDER AMERICANS ACT TITLES
The following is a brief description of each Title of the
Older Americans Act:
Title I. Objectives and Definitions
Title I outlines broad social policy objectives aimed at
improving the lives of all older Americans in a variety of
areas including income, health, housing, long-term care, and
transportation.
Title II. Administration on Aging (AoA)
Title II of the Older Americans Act establishes AoA, within
the Department of Health and Human Services (HHS), as the chief
Federal agency advocate for older persons.
Title III. Grants for States and Community Programs on Aging
Title III authorizes grants to State and area agencies on
aging to act as advocates on behalf of, and to coordinate
programs for, the elderly. The program supports 57 State
agencies on aging, about 660 area agencies on aging, and over
27,000 service providers and currently funds six separate
service programs. States receive separate allotments of funds
for supportive services and centers, congregate and home-
delivered nutrition services, U.S. Department of Agriculture
(USDA) commodities or cash-in-lieu of commodities, disease
prevention and health promotion services, and family caregiver
support services.
Title III services are available to all persons aged 60 and
over, but are targeted to those with the greatest economic and
social need, particularly low-income minority persons and older
persons residing in rural areas. Means testing is prohibited.
Participants are encouraged to make voluntary contributions for
services they receive.
Funding for supportive services, congregate and home-
delivered nutrition services, and disease prevention and health
promotion is allocated to States by AoA based on each State's
relative share of the total population of persons aged 60 years
and over. Funding for family caregiver support services is
allocated to States based on each State's relative share of the
total population aged 70 years and over. States are required to
award funds for the local administration of these programs to
area agencies on aging. USDA provides commodities or cash-in-
lieu of commodities to States, in conjunction with the AoA
nutrition programs.
The Title III nutrition program is the Act's largest
program representing 40 percent of the Act's total funding and
59 percent of Title III funds. Data for FY1998 (the most recent
data available on persons served) show that the program
provided almost 244 million meals to 2.8 million older persons.
Forty-seven percent of the meals were provided in congregate
settings, such as senior centers, and 53 percent were provided
to frail older persons in their own homes.
Data from a national evaluation of the nutrition program
show that, compared to the total elderly population, nutrition
program participants are older and more likely to be poor, to
live alone, and to be members of minority groups. They are also
more likely to have health and functional limitations that
place them at nutritional risk. The report found the program
plays an important role in participants' overall nutrition and
that meals consumed by participants are their primary source of
daily nutrients. The evaluation also indicated that for every
Federal dollar spent, the program leverages on average $1.70
for congregate meals, and $3.35 for home-delivered meals.
The supportive services and centers program provides funds
to States for a wide array of social services, as well as the
activities of approximately 6,400 multipurpose senior centers.
Supportive services allow older adults to reside in their homes
and communities and remain as independent as possible. The
program serves nearly 7 million older persons of whom 36
percent had incomes below the poverty level, and almost 20
percent were minority older persons. There are three general
categories of services provided: access services (such as
information and referral, case management, outreach, and
transportation), in-home services (such as homemaking and
personal care), and community services (such as adult day care
and health promotion). The most frequently provided services
are transportation, information and assistance, home care, and
recreation.
In FY1998, the program provided 46 million one-way trips,
over 18 million hours of homemaker and personal care services
to nearly 260,000 older persons, and over 6 million hours of
adult day care to over 25,000 older persons.
The National Family Caregiver Support Program was added to
Title III by P.L.106-501 in 2000. The legislation authorizes
the following services: information and assistance to
caregivers about available services; individual counseling,
organization of support groups, and caregiver training; respite
services to provide families temporary relief from caregiving
responsibilities; and supplemental services (such as adult day
care or home care services, for example), on a limited basis,
that would complement care provided by family and other
informal caregivers.
Title IV. Research, Training, and Demonstration Program
Title IV of the Act authorizes the Assistant Secretary for
Aging to award funds for training, research, and demonstration
projects in the field of aging. Funds are to be used to expand
knowledge about aging and the aging process and to test
innovative ideas about services and programs for older persons.
Title IV has supported a wide range of projects, including
community-based long-term care, support services for
Alzheimer's disease, and career preparation and continuing
education in the field of aging.
Title V. Senior Community Service Employment Program
Title V of the Act authorizes a program to provide
opportunities for part-time employment in community service
activities for unemployed, low-income older persons who have
poor employment prospects. The program has three goals: to
provide employment opportunities for older persons; to create a
pool of persons who provide community services; and to
supplement the income of low- income older persons (income
below 125 percent of the Federal poverty level). Enrollees work
in a variety of community service activities and are paid the
higher of the national or State minimum wage or the local
prevailing pay for similar employment. The program, which is
not considered a job training program, supported over 61,500
jobs in program year (PY) 2000 (July 1, 2000-June 30, 2001).
Title V is administered by the Department of Labor (DOL),
which awards funds to ten national organizations and to all
States. National organizations that receive funds are
Asociaci"n Pro Personas Mayores, the National Caucus and Center
on Black Aged, National Council on Aging, American Association
of Retired Persons, National Council of Senior Citizens,
National Urban League, Inc., Green Thumb, National Pacific/
Asian Resource Center on Aging, National Indian Council on
Aging, and the U.S. Forest Service.
Funding is distributed using a combination of factors,
including a ``hold harmless'' for employment positions held by
national organizations in 1978, and a formula based on States'
relative number of persons aged 55 and over and per capita
income.
Title VI. Grants for Services for Native Americans
Title VI authorizes funds for supportive and nutrition
services to older Native Americans. Funds are awarded directly
by AoA to Indian tribal organizations, Native Alaskan
organizations, and non-profit groups representing Native
Hawaiians.
Title VII. Vulnerable Elder Rights Protection Activities
Title VII authorizes four separate vulnerable elder rights
protection activities. States receive separate allotments of
funds for the long-term care ombudsman program and elder abuse
prevention activities. Two other authorized programs--legal
assistance and the Native Americans elder rights program are
not funded. Funding for vulnerable elder rights protection
activities is allotted to States based on the States' relative
share of the total population age 60 and older. State agencies
on aging may award funds for these activities to a variety of
organizations for administration, including other State
agencies, area agencies on aging, county governments, nonprofit
services providers, or volunteer organizations.
The largest elder rights protection program is the long-
term care ombudsman program, whose purpose is to investigate
and resolve complaints of residents of nursing facilities,
board and care facilities, and other adult care homes. It is
the only Older Americans Act program that focuses solely on the
needs of institutionalized persons and is authorized under both
Title III (supportive services and centers) and Title VII.
State and other non-Federal funds represent a significant
amount of total funds for the program. In FY2000, more than $57
million in Federal and non-Federal funding was devoted to
support this program. About 56 percent of the program effort
was supported by Older Americans Act sources ($22.2 million
from the Title III supportive services and centers program, and
$9.5 million from Title VII programs); non-Federal and other
funds represented about 41 percent of the total program
support. The remaining 3 percent came from other Federal
sources.
B. SUMMARY OF MAJOR ISSUES IN THE 2000 REAUTHORIZATION
introduction
After 6 years of congressional debate on reauthorization of
the Older Americans Act, on November 13, 2000, President
Clinton signed H.R. 782, the Older Americans Act Amendments of
2000, which became P.L. 106-501. The law extended the Act's
programs through FY2005.
In summary, P. L. 106-501 contains the following major
provisions:
authorized $125 million for a new National
Family Caregiver Support Program under Title III
(Congress appropriated $125 million for the program for
FY2001);
reduced the number of separate
authorizations of appropriations by eliminating
authority for programs that were not funded;
retained separate authorization of
appropriations for the congregate and home-delivered
nutrition programs, and expanded a State's authority to
transfer funds between these programs;
required the Secretary of the Department of
Labor (DoL) to establish performance measures for the
senior community service employment program, and
retained the prior law division of funds for national
organizations (78 percent) and States (22 percent) for
FY2001. If funds increase above the FY2001 level ($440
million), State agencies are to receive proportionately
more funding;
retained authority for voluntary
contributions by older persons toward the costs of
services, and allowed States to impose mandatory cost-
sharing for certain Title III services older persons
receive;
clarified that the Title III formula
allocation is to be based on the most recent population
data, while stipulating that no State will receive less
than it received in FY2000;
required the President to convene a White
House Conference on Aging by December 2005.
Brief Legislative Background
Prior to passage of P.L. 106-501, authorizations of
appropriations for programs under the Older Americans Act
expired at the end of FY1995. For the expired period, FY1996-
FY2000, programs continued to be funded through appropriations
legislation for the Departments of Labor, Health and Human
Services, and Agriculture, each of which administer portions of
the Act.
In the past, the Act had received wide bipartisan
congressional support. However, beginning with the 104th
Congress, and continuing through the 106th Congress, Members of
Congress differed about certain proposals that were under
discussion as part of the reauthorization. These included
proposals to change the formula for allocation of supportive
services and congregate and home-delivered nutrition services
to States; consolidate a number of separately authorized
programs; change the way community service employment funds are
allocated to national organizations and States; and change
minority targeting requirements, among other things. As a
result of controversy around these issues, the 104th and 105th
Congresses took no final action.
In the 104th Congress, legislation to reauthorize the Act
was reported by both the House Economic and Educational
Opportunities (EEO) \1\ Committee and the Senate Labor and
Human Resources Committee, but not with bipartisan
agreement.\2\ However, the bills were not acted upon by either
chamber.
---------------------------------------------------------------------------
\1\ This House committee changed its name in the 105th Congress to
the House Education and the Workforce Committee.
\2\ H.R. 2570 was reported by the House Economic and Educational
Opportunities (EEO) Committee on April 25, 1996; S. 1643 was reported
by the Senate Labor and Human Resources Committee on July 31, 1996. The
Senate Committee's name was changed to the Senate Committee on Health,
Education, Labor and Pensions in the 106th Congress.
---------------------------------------------------------------------------
In the 105th Congress, legislation to reauthorize the Act
was introduced by the Chairman of the Subcommittee on Early
Childhood, Youth and Families of the House Education and the
Workforce Committee (H.R. 4099), which had responsibility for
the Act. However, no further action was taken on the bill. The
Chairman of the Subcommittee on Aging of the Senate Labor and
Human Resources Committee, which had responsibility for the
Act, did not introduce legislation in the 105th Congress.
By early summer 1998, some Members of Congress were
concerned that there was no action on reauthorization. In
response to rising criticism from constituents and constituent
organizations about the lack of action, two bills that would
have reauthorized the Act through FY2001 were introduced. These
bills would have simply reauthorized appropriations for
programs in the Act, but would have made no substantive program
changes (S. 2295, Senator McCain and H.R. 4344, Representative
DeFazio). They received substantial congressional support S.
2295 had 67 co-sponsors, and H.R. 4344 had 188 co-sponsors.
However, no further action was taken on these bills.
1. 106th Congress Activities
Final congressional action was taken on the reauthorization
in late October 2000. On October 25, the House passed H.R. 782,
the Older Americans Act Amendments of 2000, by a vote of 405 to
2. The next day, the bill passed the Senate by a vote of 94-0.
The President signed it on November 13, 2000 as P.L. 106-501.
Activities relating to the reauthorization spanned both
sessions of the 106th Congress. On September 15, 1999, H.R.
782, the Older Americans Act of 1999, was approved by the House
Committee on Education and the Workforce. H.R. 782 was
scheduled to be considered by the House under ``suspension of
the rules'' (which requires a two-thirds majority vote for
passage) on October 4, 1999. However, the bill was not taken up
due to controversy about provisions in the bill, including the
proposal for changing the Title III funding formula to States
and restructuring the Title V senior community service
employment program (these issues are discussed below). In
addition, there was concern that the bill was to be brought up
under suspension of the House rules which would have meant that
no floor amendments would have been allowed.
S. 1536, the Older Americans Act Amendments of 1999, was
ordered reported by the Senate Committee on Health, Education,
Labor and Pensions (HELP), on July 21, 2000. Both bills
addressed the issues that had been in controversy during the
104th and 105th Congresses, in addition to some other topics
that surfaced in the 106th Congress.
2. Issues in Reauthorization
The following discusses proposals that were considered as
part of the reauthorization and their resolution as part of
P.L. 106-501.
National Family Caregiver Support Program
The Clinton Administration's Older Americans Act
reauthorization proposal and the FY2000 and FY2001 budget
proposals included a proposal for creation of the National
Family Caregiver Support program that was to be part of Title
III of the Act. The proposal was one part of a multipart
Clinton Administration initiative on long-term care services
for persons of all ages. Other parts of the Administration's
initiative included a tax credit for functionally and/or
cognitively impaired persons of all ages, and authority for the
Office of Personnel Management (OPM) to offer group long-term
care insurance for Federal employees, retirees, and their
families.\3\
---------------------------------------------------------------------------
\3\ For further information on the Clinton Administration's
proposal, see CRS Report RL 30254, Long-Term Care: The President's
FY2000 Initiative and Related Legislation, by Carol O' Shaughnessy, Bob
Lyke and Carolyn Merck.
---------------------------------------------------------------------------
About 4 million persons age 65 and over living in the
community are estimated to need long-term care assistance due
to a functional disability. The need for long-term care is
measured by need for assistance with activities of daily living
(ADL), and/or instrumental activities of daily living (IADLs).
Functional disability is defined as the inability to perform,
without human and/or mechanical assistance, the following
activities of daily living (ADLs): dressing, eating, bathing,
moving around indoors, transferring from a bed to a chair, and
toileting. It is also measured by the inability to perform
certain instrumental activities of daily living (IADLs),
including light housekeeping, meal preparation, shopping,
taking medications, and managing money, among others. Of the 4
million older persons with any functional disability, over half
need assistance with one or more ADLs, and almost 40 percent
need assistance with IADLs only.
Research on disability and long-term care has documented
the enormous responsibilities that families face in caring for
relatives who are living in the community and who have
significant impairments. Data from the 1994 National Long-Term
Care Survey sponsored by the Department of Health and Human
Services (DHHS) indicate that over 7 million persons provide
120 million hours of informal, that is, unpaid, care to about
4.2 million functionally disabled older persons each week.
These data conclude that if the work of these caregivers were
to be replaced by paid home care, costs would range from $45
billion to $94 billion annually. Moreover, research has shown
that the informal, or unpaid, care provided by family members
can prevent or delay entry into long-term care facilities.\4\
---------------------------------------------------------------------------
\4\ Doty, Pam. Informal Caregiving, Compassion in Action. U.S.
Department of Health and Human Services. Office of Assistant Secretary
for Planning and Evaluation, 1998. Data are from the 1994 National
Long-Term Care Survey, a nationally representative sample of
functionally impaired Medicare beneficiaries living in the community.
---------------------------------------------------------------------------
Data from the 1994 survey and previous surveys indicate
that most persons who need long-term care receive no formal, or
paid, assistance. Most assistance they receive is provided by
family members. Almost 60 percent of impaired elderly rely
exclusively on informal care provided by family members.
Typically, elderly persons rely on their spouses and adult
children for assistance.
The National Family Caregiver support program, authorized
by P.L. 106-501, is intended to meet some of the needs of
family caregivers. It authorizes $125 million in grants to
State agencies on aging to establish the family caregiver
support program. For FY2001, Congress appropriated $125 million
for the program.
The legislation authorizes the following services:
information to caregivers about available services; assistance
to caregivers in gaining access to services; individual
counseling, organization of support groups, and caregiver
training; respite services to provide families temporary relief
from caregiving responsibilities; and supplemental services
(adult day care or home care services, for example), on a
limited basis, that would complement care provided by family
and other informal caregivers.
All caregivers eligible to receive services could receive
information and assistance, and individual counseling, access
to support groups, and caregiver training. Services that tend
to be more individualized, such as in-home respite, home care,
and adult day care, would be directed to persons who have
specific care needs. These are defined in the law as persons
who are unable to perform at least two activities of daily
living (ADL) without substantial human assistance, including
verbal reminding, or supervision; or due to a cognitive or
other mental impairment, require substantial supervision
because of behavior that poses a serious health or safety
hazard to the individual or other individuals. ADLs include
bathing, dressing, toileting, transferring from a bed or a
chair, eating, and getting around inside the home.
Priority is to be given to older persons and their families
who have the greatest social and economic need, with particular
attention to low income minority individuals, and to older
persons who provide care and support to persons with mental
retardation and developmental disabilities. In addition, under
certain circumstances, grandparents and certain other
caregivers of children may receive services.
The law allows States to establish cost-sharing policies
for individuals who would receive respite and supplemental
services provided under the program, that is, persons could be
required to contribute toward the cost of services received.
Funds are to be allotted to States based on a State's share
of the total population aged 70 and over. However, persons
under age 70 would be eligible for caregiver services. The
Federal matching share for the specified caregiver services is
75 percent, with the remainder to be paid by States. This is a
lower Federal matching rate than is applied to other Title III
services (such as congregate and home-delivered nutrition
services, and other supportive services) where the Federal
matching rate is 85 percent.
In its proposal, the Clinton Administration projected that
the $125 million level would provide one or more of the
caregiver support services to about 250,000 families each year.
The number of persons served would be affected by several
factors, including the number of persons who meet the specified
eligibility requirements and actually apply for services,
capabilities and readiness of service providers, and relative
spending by States on specific services.
Consolidation of Older Americans Act Programs
The law that existed prior to P.L. 106-501 authorized 20
programs (although some had never been funded). A major issue
in the 106th Congress, but especially in the two prior
Congresses was a congressional initiative to streamline the
Act, in part, by consolidating separately authorized programs.
Some Members of Congress wanted to simplify certain
requirements of law, and consolidate smaller programs. The
House bill as originally approved by the House Committee on
Education and Labor in 1999 would have reduced the number of
authorized programs to 11; among other things, it would have
eliminated a separate title (but not authorization) for
training, research and demonstration activities in the field of
aging. S. 1536 as approved by the Senate Committee on Health,
Education, Labor and Pensions in 2000 would have reduced the
number of programs to 15.\5\ Both bills would have eliminated
authority for some programs that had not been funded.
---------------------------------------------------------------------------
\5\ For example, H.R. 782 would have eliminated a separate title
authorizing appropriations for research, training, and demonstration
activities that are the responsibility of the Assistant Secretary for
Aging. Instead, H.R. 782 would have authorized these activities under
Title I. S. 1536 would have retained the separate title. H.R. 782 would
have consolidated authorizations of appropriations for the long-term
care ombudsman and elder abuse prevention programs. On the other hand,
S. 1536 would have retained separate authorization of appropriations
for ombudsman, elder abuse prevention programs.
---------------------------------------------------------------------------
P.L. 106-501 did not consolidate major programs, but
eliminated authority for programs that had not received funding
in FY2000 and prior years as well as authority for a number of
demonstration projects. Table 1 presents authorization of
appropriations for each program as contained in the law.
C. OLDER AMERICANS ACT APPROPRIATIONS
Table 1. Authorizations of Appropriations for Older Americans Act
Programs in P.L. 106-501
------------------------------------------------------------------------
Authorization of
Older Americans Act Programs Appropriations
------------------------------------------------------------------------
Title I, Administration on Aging
Administration on Aging............... FY2001-FY2005, such sums as
may be necessary
Eldercare Locator..................... FY2001-FY2005, such sums as
may be necessary
Pension counseling and information FY2001-FY2005, such sums as
program. may be necessary
Title III, State and Community Programs on
Aging
Supportive services and centers....... FY2001-FY2005, such sums as
may be necessary
Congregate nutrition services......... FY2001-FY2005, such sums as
may be necessary
Home-delivered nutrition services..... FY2001-FY2005, such sums as
may be necessary
Disease prevention and health FY2001-FY2005, such sums as
promotion. may be necessary
Family caregiver support.............. FY2001, $125 million if the
aggregate amount for
supportive services and
centers, congregate and
home-delivered nutrition
services, and disease
prevention and health
promotion is not less than
the amount appropriated for
FY2000. For FY2002-05, such
sums as may be necessary.
Nutrition services incentive program FY2001-FY2005, such sums as
(formerly named the USDA commodity may be necessary
program).
Title IV, Training, Research, and FY2001-FY2005, such sums as
Discretionary Programs may be necessary
Title V, Community Service Employment FY2001, $475 million and for
Program FY2002-2005, such sums as
may be necessary, and such
additional sums for each
fiscal year to support
70,000 part-time employment
positions
Title VI, Grants for Native Americans
Indian and Native Hawaiian Programs... FY2001-FY2005, such sums as
may be necessary
Native American Caregiver Support FY2001, $5 million, and for
Program. FY2002-2005 such sums as
may be necessary
Title VII, Vulnerable Elder Rights
Protection Activities
Long-term care ombudsman program...... FY2001-FY2005, such sums as
may be necessary
Elder abuse, neglect, and exploitation FY2001-FY2005, such sums as
prevention program. may be necessary
Legal assistance development program.. FY2001-FY2005, such sums as
may be necessary
------------------------------------------------------------------------
Restructuring the Senior Community Service Employment Program
The Senior Community Service Employment program, authorized
under Title V of the Act, provides opportunities for part-time
employment in community service activities for unemployed, low-
income older persons who have poor employment prospects. The
program was funded at $440.2 million in FY2001, representing 26
percent Older Americans Act funds. It is administered by DoL,
which awards funds directly to national sponsoring
organizations and to States. The grantees and their FY2000
funding levels are shown in Table 2.
Table 2. FY2000 Funding to National Organizations and State Sponsors
------------------------------------------------------------------------
FY2000
Sponsor amount Percent of
[millions] total
------------------------------------------------------------------------
American Association of Retired Persons....... $50.6 11.6
Asociacion Nacional Por Personas Mayores...... 13.2 3.0
Green Thumb................................... 106.5 24.3
National Caucus and Center on the Black Aged.. 13.0 3.0
National Council on the Aging................. 38.0 8.7
National Council of Senior Citizens........... 64.3 14.7
National Urban League......................... 15.3 3.5
National Indian Council on Aging.............. 6.1 1.4
National Asian Pacific Center on Aging........ 6.0 1.4
U.S. Forest Service........................... 28.5 6.5
-------------------------
National organization sponsors, total... $341.5 78.0
State agencies, total................... \1\$96.3 22.0
Total................................... \2\$437.8 100.0
------------------------------------------------------------------------
\1\This amount includes funds allocated to the territories.
\2\This amount differs from the total appropriation of $440.2 million
due to a set-aside by DoL of $2.4 million for experimental projects
under Section 502(e) of the Act.
Beginning in the 104th Congress and continuing through the
106th Congress, some Members of Congress were concerned about
how the program was administered. Some Members wanted more
funds to be distributed to States, rather than having the
majority of funds distributed to the same national
organizations every year, as had been required by Appropriation
Committee directives for many years. Other issues included
concerns that funding to the 10 national organizations was
awarded by DoL on a noncompetitive basis and about how much
funding was used by the organizations for administration. A
General Accounting Office (GAO) report completed in 1995
focused attention on these issues. GAO reviewed DoL's method of
awarding funds, the allocation of funds to States, and grantee
use of funds. It concluded that the program could be improved
by assuring more equitable distribution of funds nationally, by
enforcing statutory limits on use of funds for administration,
and by applying procedures for competition for funds by
sponsors, among other things.\6\
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\6\ U.S. General Accounting Office. Senior Community Service
Employment Program Delivery Could Be Improved Through Legislative and
Administrative Actions. GAO/HEHS-96-4. November 1995.
---------------------------------------------------------------------------
Like the 104th and 105th Congress reauthorization
proposals, H.R. 782 and S. 1536 would have restructured the
program, in part, to respond to the GAO findings although they
differed in approach. Both proposals gave States more control
of the administration of the program and introduced competition
for funds among prospective grantee organizations. The bills
made changes in (1) the distribution of funds by the Federal
Government; (2) formula allocations to grantees; and (3)
requirements regarding use of funds by grantees for
administration and other enrollee costs. These and other
issues, and their resolution in P.L. 106-501, are discussed
below.
Distribution of Community Service Employment Funds by the
Federal Government.--For many years, Appropriations Committee
directives stipulated that national organizations were to
receive 78 percent of the total Title V funds, and States, 22
percent.\7\ The Committee directives differed from the
authorizing statute that was in force. The statute stipulated
that funds be awarded to national public and non-profit private
organizations at the level they received funds in 1978; 55
percent of any funds in excess of the 1978 funding level was to
be distributed to State agencies, and 45 percent to national
organizations. However, for most years since 1978, the
Appropriations Committee directives stipulated the 78 percent/
22 percent split of funds.
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\7\ This has been a long-standing issue. For example, in the 1978
reauthorization of the Older Americans Act, the Senate Labor and Human
Resources Committee expressed concern about the ``circumvention'' by
the Appropriations Committee of the authorizing committee formula.
---------------------------------------------------------------------------
In its 1995 report, GAO noted that there was inequitable
distribution of funding within some States, as well as
duplication of effort among national and State sponsors. Some
State agencies have had long-standing concerns about the
duplication of national organizations' activities that is
caused by the distribution of funds to multiple organizations
within a State. In addition, States maintained that because
they administer only 22 percent of total funds in a State,
their ability to coordinate operations of the program is very
limited. In many States, multiple national organizations
administer programs in addition to a designated State agency
(usually the State agency on aging). For example, in six
States, each with Title V FY2000 funding of $15 million or
more, eight or nine national sponsors administer the program in
addition to the State agency (California, Florida, New York,
Ohio, Pennsylvania, and Texas). In most States, at least three
or four national organizations administer the program in
addition to the State agency.
These concerns led to various proposals during the 104th,
105th, and 106th Congress to restructure the program, primarily
by giving States more authority over the program, and by
increasing their share of total funding and decreasing the
national organizations' share. Proponents of shifting funds to
States indicated that costs of program administration and
duplication of effort would decrease since there would be fewer
organizations to administer the program within a State.
Proponents also said that giving States more leverage in
funding decisions would increase coordination of effort among
all grantees in States.
The restructuring of the senior community service
employment program generated substantial controversy during the
104th and 105th Congresses, and the controversy continued
during the 106th Congress. Some national organization grantees
expressed concern that their continued existence would be
threatened if more program funding were to be shifted to
States. They were also concerned that restructuring could
result in disruption of jobs for some existing enrollees. A
number of organizations and some Members of Congress indicated
that the program operated well under the national
organizations' administration, and that because of their long-
standing association, they had the needed expertise to continue
administering the majority of funds.
Both H.R. 782 and S. 1536 would have changed the 78
percent/22 percent split of funds between national
organizations and States, and transferred more funds to States;
however, they took different approaches. H.R. 782 would have
gradually transferred funds to States so that by FY2004,
national organizations would have received 55 percent of total
funds and State agencies would have received 45 percent. S.
1536 would have applied a different division of funds to
national organizations and State agencies only when total
funding exceeded the FY2000 appropriations level.
P.L. 106-501 ultimately retains the 78 percent/22 percent
split by requiring that State agencies and national
organizations be ``held harmless'' at their FY2000 level of
activities that is, they are to receive no less than the amount
they received in FY2000 to maintain the FY2000 level of
activity.\8\ But when appropriations exceed the FY2000 level,
proportionately more funds are to be distributed to State
grantees. Specifically, any excess in appropriations over the
FY2000 level up to the first $35 million is to be allocated so
that 75 percent will be provided to States, and 25 percent to
national organizations. Funds appropriated above the first $35
million in excess of the FY2000 level are to be divided equally
between State agencies and national organizations.
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\8\ For purposes of allocation of funds and determining the FY2000
hold harmless amount, ``level of activities'' is defined as ``the
number of authorized positions multiplied by the cost per authorized
position.'' ``Cost per authorized position'' is defined as the sum of:
the hourly minimum wage specified in the Fair Labor Standards Act
of 1938, multiplied by 1,092 hours (21 hours times 52 weeks);
an amount equal to 11 percent of the above amount to cover Federal
payments for fringe benefits; and
an amount determined by the Secretary to cover Federal payments for
all other remaining program and administrative costs.
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When appropriations are in excess of the amount needed to
maintain the FY2000 hold harmless level, the excess is to be
allotted according to a State's relative population aged 55 and
over and its relative per capita income. (The relative
population and per capita income factors were contained in
prior law.) But, in order for all States to share in any
increased appropriations, the law requires that all States
receive a portion of the increase (30 percent of the percentage
increase) with the balance distributed according to the
population and per capita income factors.
Use of Funds for Enrollee Wages/Fringe Benefits,
Administration, and Other Enrollee Costs.--Title V funds are
used for (1) enrollee wages and fringe benefits; (2)
administration; and (3) other enrollee costs. For many years,
DoL regulations required that at least 75 percent of funds be
used for enrollee wages and fringe benefits, but this was never
specified by law. By law, grantees are allowed to use up to
13.5 percent of Federal funds for administration (and up to 15
percent of Federal funds under a waiver approved by Secretary
of DoL). Any remaining funds may be used for ``other enrollee
costs,'' including, for example, recruitment and orientation of
enrollees and supportive services for enrollees, among other
things.
In its review of the program, GAO found that most national
organizations and some State sponsors had budgeted
administrative costs in excess of the statutory limit by
inappropriately classifying them as ``other enrollee costs,''
thus increasing the total amount for administration above the
statutory limits. During consideration of the reauthorization,
some Members of Congress asserted that there should be
legislative language clarifying the classification of these
activities in order to avoid use of program funds for
administration in excess of the statutory limit, as GAO found
in the past.
In response to this concern and to clarify the various cost
categories, P.L. 106-501 defines administrative costs, and
programmatic costs as follows:
Definition of administrative costs.--Costs of
administration are personnel and non-personnel, and direct and
indirect costs, associated with the following:
accounting, budgeting, financial, and cash
management;
procurement and purchasing;
property management;
personnel management;
payroll;
coordinating the resolution of audits,
reviews, investigations, and incident reports;
audits;
general legal services;
development of systems and procedures,
including information systems, required for
administration; and
oversight and monitoring.
Administration also includes goods and services used for
administration; travel; and information systems related to
administration.
P.L. 106-501 retains the prior law limit on administrative
costs, that is, a grantee may use up to 13.5 percent of its
funds (with a waiver up to 15 percent) for administration. The
law also requires that, to the maximum extent practicable,
Title V grantees provide for payment of administrative expenses
from nonFederal sources.
``Programmatic activities.''--Funds not used for
administration are to be used for programmatic activities.
These include primarily enrollee wages and fringe benefits
(including physical exams) the law stipulates that no less than
75 percent of grant funds be used to pay wages and fringe
benefits. The remainder of funds may be used for:
enrollee training;
job placement assistance, including job
development and search assistance;
enrollee supportive services, including
transportation, health and medical services, special
job-related or personal counseling, incidentals (work
shoes, badges, uniforms, eyeglasses and tools); child
and adult care, temporary shelter, and follow-up
services; and
outreach, recruitment and selection, intake,
orientation, and assessments.
Performance Standards.--One of the areas that was under
discussion during the 104th and 105th Congresses was the need
to establish performance standards for Title V grantees. This
discussion continued during the 106th Congress, and ultimately
P.L. 106-501 added new provisions requiring the Secretary of
Labor to establish standards and performance indicators,
addressing the following areas:
number of persons served, with particular
consideration to individuals with greatest economic or
social need, poor employment history or prospects, and
those over the age of 60;
community services provided;
placement and retention into unsubsidized
public or private employment;
satisfaction of enrollees, employers, and
their host agencies with the experiences and services
provided; and
any additional indicators determined
appropriation by the Secretary.
The law set up procedures for corrective action if a
grantee or a subgrantee of the State does not achieve specified
levels of performance. These may include transferring funds
from the grantee/subgrantee, under certain circumstances, when
a grantee or subgrantee does not meet specified levels of
performance.
Negligent or Fraudulent Activities of Project Grantees.--In
the past, GAO performed audits of national organizations and
found that Title V funds allotted to certain national
organizations were used inappropriately. During the 106th
Congress, there was concern among some Members of Congress
about the findings of an audit of the National Council of
Senior Citizens (NCSC) Title V grant by the Inspector General
(IG) of DoL. The NCSC is the second largest of the national
organization recipients; in FY2000, it received $64.3 million,
representing 15 percent of the total Title V appropriation. In
February 1999, the IG issued a final audit of NCSC (and its
successor grantee, the National Senior Citizens Education and
Research Center NSCERC). The audit covered operations of the
grantee for 1992-1994. It questioned more than $6 million of a
total of more than $180 million audited.
Partially in response to these audit findings, P.L. 106-501
adds provisions designed to assure that Title V applicants are
capable of administering Federal funds. The law adds a set of
responsibility tests that applicants must meet in order to
receive funds. The following two tests would establish that the
applicant is not responsible to administer Federal funds:
unsuccessful efforts by the organization to recover debts
established by DoL and failure to comply with requirements for
debt repayment; and established fraud or criminal activity.
Other responsibility tests include the presence of serious
administrative deficiencies, willful obstruction of the audit
process, and failure to correct deficiencies, among other
things.
Coordination of State and National Organization Grantee
Operations.--A recurring issue during the review of the program
has been concern by some observers about the lack of
coordination among project grantees within States, including
the distribution of employment positions within States. As
mentioned earlier, in some States, seven or eight grantees
administer the program along with State agencies.
P.L. 106-501 contains provisions designed to address
coordination among the various grantees. It adds new
requirements for a State Senior Employment Services Plan. Each
Governor is required to submit to the Secretary of DoL an
annual plan that will identify the number of persons eligible
for the program, and their characteristics and distribution
within the State. The plan must also include a description of
the planning process used to ensure the participation of
relevant agencies and organizations with an interest in
employment of older persons, including State and area agencies
on aging, national organizations administering the Title V
program, and State and local workforce investment boards, among
others. The Secretary of DoL is required to monitor State
implementation of these requirements to assure that the
Statewide planning and coordination of Title V activities are
taking place.
Placement of Participants in the Private Sector and in
Other Unsubsidized Employment.--The stated purpose of Title V
is to place low-income older individuals with poor employment
prospects in subsidized employment so that they may increase
their income and provide a source of labor to expand community
services. While this goal substantially defines the program, in
the past legislative provisions have given some attention to
placement of participants in unsubsidized employment. For
example, amendments to the Act in 1981 required DoL to use some
Title V funds for experimental projects designed to place
participants in second career training and in private business
(Section 502(e) of the Act). In addition, DoL regulations have
required that grantees attempt to achieve placement of
enrollees in unsubsidized employment. The regulations require
that each grantee strive to place at least 20 percent of their
authorized positions in unsubsidized employment. Generally,
projects have been successful at meeting or exceeding this
goal.
P.L. 106-501 further emphasizes the role of the program
regarding unsubsidized private placement of enrollees in a
number of ways. First, it States that the purpose of Title V
includes not only placement of participants in community
service activities, but also placement of participants in the
private sector. Second, it increases the amount of funds to be
spent by the Secretary on projects to place participants in
unsubsidized employment to 1.5 percent of total funds (rather
than 1 percent to 3 percent of the amount above the 1978 hold
harmless amount required by prior law). Had this been in effect
in FY2000, it would have meant for example, that the Secretary
would have had to reserve $6.6 million of FY2000 funds ($440.2
million) for Section 502(e) projects, rather than the $2.4
million that was set aside in FY2000.
Third, the law codifies the regulation regarding placement
of enrollees into unsubsidized employment. The Secretary is
required to establish, as part of the performance measures, a
requirement that grantees place at least 20 percent of
enrollees into unsubsidized employment. The law defines
``placement into public or private unsubsidized employment'' as
full- or part-time employment in the public or private sector
by an enrollee for 30 days within a 90-day period without using
a Federal or State subsidy program.
Coordination with the Workforce Investment System.--The
Workforce Investment Act (WIA) was enacted in 1998 with the aim
of consolidating and coordinating employment and training
programs across the Nation. P.L. 106-501 establishes a number
of requirements aimed at coordinating the Title V program with
the workforce investment system established by WIA. Among other
things, it requires that Title V projects participate in one-
stop delivery systems in the local workforce investment area
established under WIA. It also allows assessments of older
individuals for participation in either Title V projects or
under WIA (Subtitle B of Title I) to be used for the other
program, and deems Title V participants to be eligible under
Title I of WIA.
Interstate Funding Formula for Supportive and Nutrition Services
The way in which the Administration on Aging (AoA)
distributes nutrition and supportive funds to States continued
to be of concern in the 106th Congress, as it was in the 104th
and 105th Congresses. In general, prior law required AoA to
distribute Title III funds for supportive and nutrition
services to States based on their relative share of the
population aged 60 and older. In addition to specifying certain
minimum funding amounts, the law contained a ``hold harmless''
provision requiring that no State receive less than it received
in FY1987. P.L.106-501 changed the requirements regarding the
formula distribution.
By way of background, prior to the recent law change, AoA
distributed funds for supportive and nutrition services in the
following way. First, States were allotted funds in an amount
equal to their FY1987 allocations, which were based on
estimates of each State's relative share of the total
population age 60 and older in 1985.\9\ Second, the balance of
the appropriation was allotted to States based on their
relative share of the population aged 60 and over as derived
from the most recently available estimates of State population.
And third, State allotments were adjusted to assure that the
minimum grant requirements are met. The effect of this
methodology was that the majority of funds was distributed
according to population estimates that do not reflect the most
recent population trends. For example, for FY1999, 85 percent
of total Title III funds was distributed according to the
FY1987 ``hold harmless.'' The remainder of funds appropriated
was distributed according to 1997 population data.
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\9\ There is usually a 2-year time lag in availability of estimates
of State population from the U.S. Census Bureau.
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The method that AoA used to meet the 1987 ``hold harmless''
provision has been criticized. In a 1994 report, GAO concluded
that Title III funds were not distributed according to the
requirements of the statute.\10\ GAO concluded that the method
employed by AoA did not distribute funds proportionately
according to States' relative share of the older population,
based on the most recent population data and, therefore,
negatively affected States whose older population is growing
faster than others. GAO recommended that AoA revise its method
to allot funds to States, first, on the basis of the most
current population estimates, and then, adjust the allotments
to meet the hold harmless and statutory minimum requirements.
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\10\ U.S. General Accounting Office. Older Americans Act: Title III
Funds Not Distributed According to Statute. GAO/HEHS-94-37. January
1994.
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P.L. 106-501 followed the GAO recommendation by requiring
that funds be distributed according to the most recent data on
States' relative share of persons 60 years and older. The law
then stipulates that no State would receive less than it
received in FY2000, thereby creating a 2000 ``hold harmless''
requirement. The intent of this approach is to have funding
distributed, first, according to the most recent population
data (as compared to the prior methodology which distributed
the majority of funds to States, first, based on State
population data 13 years old), but at the same time assuring
that individual State allotments would not go below their
FY2000 levels.
If appropriations for Title III services increase over the
FY2000 level, the effect of the law will be that States which
are gaining a larger share of the total U.S. population over 60
years compared to other States will receive a proportionately
larger share of the increased appropriation. However, the 1987
hold harmless would still affect the distribution of funds
since the FY2000 hold harmless amount is partially based on the
1987 amount.
Congress also wanted to assure that if there were an
increase in appropriations over the FY2000 level, all States
will receive a share of the increase. Therefore, the law
requires that all States receive a portion of the increase (20
percent of the percentage increase) with the balance
distributed according to the population factors.
Targeting of Services to Low-Income Minority Older Persons
Low Income Minority Older Persons.--Targeting of services
to low-income minority older persons continued to be a subject
of review during the 106th Congress, as it has during past
reauthorizations of the Act. Bills in the 104th and 105th
Congresses would have deleted either some or most of current
law provisions regarding targeting services to minority older
individuals. The deletion of these provisions became quite
controversial with some Members of Congress as well as with
national aging organizations. Some Members wanted deletion of
the targeting provisions to create a level playing field for
services among all elderly, but still wanted to keep references
to those in greatest social and economic need. Others held that
since minority elderly are most disadvantaged with respect to
certain need characteristics, such as income, the special
targeting provisions should have been maintained.
P.L. 106-501 retained all prior law provisions regarding
targeting to low income minority individuals. These include
requirements that State and area agencies on aging target
services to persons in greatest social and economic need, with
particular attention on low-income minority older persons. It
requires that States, in developing their intraState funding
formulas, take into account the distribution within the State
of persons with the greatest economic and social need, with
particular attention to low-income minority older persons.
It also requires that the agencies set specific objectives
for serving low-income minority older persons and that program
development, advocacy, and outreach efforts be focused on these
groups. Service providers are required to meet specific
objectives set by area agencies for providing services to low-
income minority older persons, and area agencies are required
to describe in their area plans how they have met these
objectives.
Older Persons Residing in Rural Areas.--Many advocates
maintain that service needs of older persons in rural area are
often overlooked. Delivery of social services in rural areas
may be particularly difficult due to the lack of service
personnel and high transportation costs, among other things.
During the 106th Congress some Members of Congress were
concerned that the Act did not place enough focus on the needs
of older persons living in rural and sparsely populated areas.
In order to respond to this concern, P.L. 106-501 contains
a number of new provisions that are designed to recognize the
special problems of older persons in rural areas. Among other
things, the law requires that in providing services and in
developing planning objectives, State and area agencies take
into consideration the needs of persons in rural areas. In
addition, State agencies are required to consider the needs of
rural older persons when developing their intraState funding
formulas.
Cost-Sharing for Services by Older Persons
One of the most frequent issues to arise in past
reauthorization legislation has been whether the Act should
allow mandatory cost sharing for certain social services. Under
long-standing Federal policy, mandatory fees for Older
Americans Act services have been prohibited, but nutrition and
supportive services providers have always been encouraged
solicit voluntary contributions from older persons toward the
costs of services. Congress has intended that older persons not
be denied a service because they will not or cannot make a
contribution. Funds collected through voluntary contributions
are to be used to expand services. Prior to the 104th and 105th
Congresses, Members resisted proposals to allow Older Americans
Act programs to conduct cost-sharing for services.
Since the late 1980's, State and area agencies on aging
have been in favor of a policy that would allow them to impose
cost-sharing for certain services, arguing, in part, that such
a policy would eliminate barriers to coordination with other
State-funded services programs that do require cost-sharing,
such as home care and adult day care services. They also have
argued that cost-sharing would improve targeting of services if
cost-sharing policies were to be applied to persons who have
higher incomes while exempting low income persons.
Some representatives of aging services programs, such as
those representing minority/ethnic elderly, have been opposed
to cost-sharing, arguing, in part, that a mandatory cost-
sharing policy would discourage participation by low-income and
minority older persons. They have also argued that cost-sharing
would create a welfare stigma for Older Americans Act programs
which has not existed because of the absence of ``means
testing'' or cost-sharing policies.
The Clinton Administration's proposed that State agencies
be allowed to conduct cost-sharing for certain services, with
limitations. It specified that certain services be exempted
from cost-sharing policies. The Senate and House proposals
differed on cost-sharing. H.R. 782 would have retained the
voluntary nature of contributions, but S. 1536 contained
elements of the Administration's proposal and added other
requirements.
P.L. 106-501 ultimately made a distinction between cost-
sharing for certain services and voluntary contributions by
older persons. The law contains the following provisions.
Cost-Sharing.--The law allows States to implement cost-
sharing by recipients for certain services. There are
exceptions, however. Cost-sharing is not permitted for the
following services: information and assistance, outreach,
benefits counseling, case management, ombudsman, elder abuse
prevention, legal assistance, consumer protection services,
congregate and home-delivered nutrition services, and services
delivered through tribal organizations.
States may not apply cost-sharing for services to persons
who have low income (defined as income at or below the Federal
poverty level) and may not consider assets, savings, or other
property owned by individuals when creating a sliding scale for
cost sharing, or when seeking contributions. In addition,
States may exclude from their cost-sharing policies other low
income persons who have income above the poverty level.
Cost-sharing must be applied on a sliding scale, based on
income, and the cost of services. Income is to be established
by individuals on a confidential self-declaration basis, with
no requirement for verification. Service providers and area
agencies on aging would be prohibited from denying services to
older individuals due to their income or failure to make cost-
sharing payments.
The law requires the Secretary to conduct an evaluation of
cost-sharing practices that are conducted by States in order to
determine the impact of these practices on participation under
the Act. The evaluation is to be conducted at least 1 year
after enactment, and annually thereafter.
Voluntary Contributions.--The law provides that each
recipient of services have an opportunity to voluntarily
contribute toward the cost of all services. It stipulates that
voluntary contributions must be allowed, and may be solicited,
for all services provided under the Act, as long as the method
of solicitation is non-coercive. Among other things, older
persons may not be denied services if they do not contribute
toward the costs of services.
The law requires that both the cost-sharing and the
voluntary contributions policies protect the privacy of each
recipient of services. State and area agencies must establish
appropriate procedures to safeguard and account for cost share
payments, and use funds collected through cost sharing to
expand services for which payment was made.
ROLE OF THE OLDER AMERICANS IN LONG-TERM CARE
Although funding under the Older Americans Act is small
compared to Federal funding available under the Medicare and
Medicaid programs, many State and area agencies have been
leaders in the development of a system of home and community-
based services in their respective States and communities.
The OAA does not focus exclusively on long-term care, but
development of programs for persons in need of both home and
community-based and institutional long-term care services has
been a focus in various amendments to the Act. The purpose of
Title III is to foster the development of a comprehensive and
coordinated services system that will provide a continuum of
care for vulnerable elderly persons and allow them to maintain
maximum independence and dignity in a home environment. Title
III specifically authorizes funding for many community-based
long-term care services, including homemaker/home health aide
services, adult day care, respite, and chore services. Title
III funds a variety of other supportive services and nutrition
services. Home care services have been considered a priority
service for Title III funding since 1975.
The amount of funding devoted to home care services under
Title III represents a small fraction of the amount spent for
such services under Medicaid and Medicare; however, the Title
III program has the flexibility to provide home care services
to impaired older persons without certain restrictions that
apply under these programs, for example, the skilled care
requirements under Medicare, and the income and asset tests
under Medicaid. In some cases, OAA funds may be used to assist
persons whose Medicare benefits have been exhausted or who are
ineligible for Medicaid.
The role of the OAA in providing congregate and home-
delivered meals to the elderly is an important contribution to
the long-term care system. Recent trends in the nutrition
program indicate that State and area agencies on aging have
given increased attention to funding meals for the homebound
through the Title III program. Currently, the number of meals
served to older persons in their homes is greater than the
number provided in community settings under the congregate
nutrition program. Congress recognized the growing need for
assistance to families caring for older persons in the 2000
amendments when it authorized the National Family Caregiver
Support Program.
Another important role the OAA plays in long-term care is
through the administration of the long-term care ombudsman
program. Each State is required to establish and operate a
long-term care ombudsman program. These programs, under the
direction of a full-time State ombudsman, have responsibilities
to (1) investigate and resolve complaints made by or on behalf
of residents of nursing homes and board and care facilities,
(2) monitor the development and implementation of Federal,
State, and local laws, regulations, and policies with respect
to long-term care facilities, (3) provide information as
appropriate to public agencies regarding the problems of
residents of long-term care facilities, and (4) provide for
training staff and volunteers and promote the development of
citizen organizations to participate in the ombudsman program.
The primary role of long-term care ombudsmen is that of
consumer advocate. However, they are not limited to responding
to complaints about the quality of care. Problems with public
entitlements, guardianships, or any number of issues that a
nursing home resident may encounter are within the jurisdiction
of the ombudsman. A major objective of the program is to
establish a regular presence in long-term care facilities, so
that ombudsman can become well-acquainted with the residents,
the employees, and the workings of the facility.
In FY2000, there were 591 local ombudsman programs with 970
paid staff (full-time equivalent). The program relies heavily
on volunteers to carry out ombudsman responsibilities about
14,000 volunteers assisted paid staff in FY2000.
The 1992 OAA amendments required the Assistant Secretary
for Aging to evaluate the program. The evaluation, conducted by
the Institute of Medicine (IOM), concluded that the program
serves a vital public interest, and that it is understaffed and
underfunded to carry out its broad and complex responsibilities
of investigating and resolving complaints of the over 2 million
elderly residents of nursing homes and board and care
facilities. The report recommended increased funding to allow
States to carry out the program as stipulated by law and to
provide for greater program accountability.
CHAPTER 15
. SOCIAL, COMMUNITY, AND LEGAL SERVICES
A. BLOCK GRANTS
1. Background
(a) social services block grant
Social services programs are designed to protect
individuals from abuse and neglect, help them become self-
sufficient, and reduce the need for institutional care. Social
services for welfare recipients were not included in the
original Social Security Act, although it was later argued that
cash benefits alone would not meet all the needs of the poor.
Instead, services were provided and funded largely by State and
local governments and private charitable agencies. The Federal
Government began funding such programs under the Social
Security Act in 1956 when Congress authorized a dollar-for-
dollar match of State social services funding; however, this
matching rate was not sufficient incentive for many States and
few chose to participate. Between 1962 and 1972, the Federal
matching amount was increased and several program changes were
made to encourage increased State spending. By 1972, a limit
was placed on Federal social services spending because of
rapidly rising costs. In 1975, a new Title XX was added to the
Social Security Act which consolidated various Federal social
services programs and effectively centralized Federal
administration. Title XX provided 75 percent Federal financing
for most social services, except family planning which was 90
percent federally funded.
In 1981, Congress created the Social Services Block Grant
(SSBG) as part of the Omnibus Budget Reconciliation Act (OBRA).
Non-Federal matching requirements were eliminated and Federal
standards for services, particularly for child day care, also
were dropped. The block grant allows States to design their own
mix of services and to establish their own eligibility
requirements. There is also no federally specified sub-State
allocation formula.
The SSBG program is permanently authorized by Title XX of
the Social Security Act as a ``capped'' entitlement to States.
Legislation amending Title XX is referred to the House Ways and
Means Committee and the Senate Finance Committee. The program
is administered by HHS.
SSBG provides supportive services for the elderly and
others. States have wide discretion in the use of SSBG funds as
long as they comply with the following broad guidelines set by
Federal law. First, the funds must be directed toward the
following federally established goals: (1) prevent, reduce, or
eliminate dependency; (2) prevent neglect, abuse or
exploitation of children and adults; (3) prevent or reduce
inappropriate institutional care; (4) secure admission or
referral for institutional care when other forms of care are
not appropriate; and (5) provide services to individuals in
institutions.
Second, the SSBG funds may also be used for administration,
planning, evaluation, and training of social services
personnel. Finally, SSBG funds may not be used for capital
purchases or improvements, cash payments to individuals,
payment of wages to individuals as a social service, medical
care, social services for residents of residential
institutions, public education, child day care that does not
meet State and local standards, or services provided by anyone
excluded from participation in Medicare and other SSA programs.
States may transfer up to 10 percent of their SSBG allotments
to certain Federal block grants for health activities and for
low-income home energy assistance.
Welfare reform legislation enacted in the 104th Congress
(P.L. 104-193) established a block grant, called Temporary
Assistance for Needy Families (TANF), to replace the former Aid
to Families with Dependent Children (AFDC) program. The welfare
reform law originally allowed States to transfer no more than
10 percent of their TANF allotments to the SSBG. Under
provisions of the Transportation Equity Act (P.L. 105-178) the
amount that States could transfer into the SSBG was to be
reduced to 4.25 percent of their annual TANF allotments,
beginning in FY2001. However, this provision was superceded in
FY2001 by the FY2001 Consolidated Appropriations Act, which
maintains the transfer authority at the 10 level. Under current
law, the transfer authority is scheduled to decrease to 4.25
percent in FY2002. Legislation proposing to maintain the 10
percent transfer level has been introduced in the 107th
Congress. Any of these transferred funds may be used only for
children and families whose income is less than 200 percent of
the Federal poverty guidelines. Moreover, notwithstanding the
SSBG prohibition against use of funds for cash payments to
individuals, these transferred funds may be used for vouchers
for families who are denied cash assistance because of time
limits under TANF, or for children who are denied cash
assistance because they were born into families already
receiving benefits for another child.
Some of the diverse activities that block grant funds are
used for are: child and adult day-care, home-based services for
the elderly, protective and emergency services for children and
adults, family planning, transportation, staff training,
employment services, meal preparation and delivery, and program
planning.
(b) community services block grant
The Community Services Block Grant (CSBG) is the current
version of the Community Action Program (CAP), which was the
centerpiece of the war on poverty of the 1960's. This program
originally was administered by the Office of Economic
Opportunity within the Executive Office of the President. In
1975, the Office of Economic Opportunity was renamed the
Community Services Administration (CSA) and reestablished as an
independent agency of the executive branch.
As the cornerstone of the agency's antipoverty activities,
the Community Action Program gave seed grants to local, private
nonprofit or public organizations designated as the official
antipoverty agency for a community. These community action
agencies were directed to provide services and activities
``having a measurable and potentially major'' impact on the
causes of poverty. During the agency's 17-year history,
numerous antipoverty programs were initiated and spun off to
other Federal agencies, including Head Start, legal services,
low-income energy assistance and weatherization.
Under a mandate to assure greater self-sufficiency for the
elderly poor, the CSA was instrumental in developing programs
that assured access for older persons to existing health,
welfare, employment, housing, legal, consumer, education, and
other services. Programs designed to meet the needs of the
elderly poor in local communities were carried out through a
well-defined advocacy strategy which attempted to better
integrate services at both the State level and the point of
delivery.
In 1981, the Reagan Administration proposed elimination of
the CSA and the consolidation of its activities with 11 other
social services programs into a social services block grant as
part of an overall effort to eliminate categorical programs and
reduce Federal overhead. The administration proposed to fund
this new block grant in fiscal year 1982 at about 75 percent of
the 12 programs' combined spending levels in fiscal year 1981.
Although the General Accounting Office and a congressional
oversight committee had criticized the agency as being
inefficient and poorly administered, many in Congress opposed
the complete dismantling of this antipoverty program.
Consequently, the Congress in the Omnibus Budget Reconciliation
Act of 1981 (P.L. 97-35) abolished the CSA as a separate
agency, but replaced it with the CSBG to be administered by the
newly created Office of Community Services within the
Administration for Children and Families, under the Department
of Health and Human Services (HHS). Most recently the Coats
Human Services Reauthorization Act of 1998 (P.L. 105-285)
reauthorized CSBG through FY2003.
The CSBG Act requires States to submit an application to
HHS, promising the State's compliance with certain
requirements, and a plan showing how this promise will be
carried out. States must guarantee that legislatures will hold
hearings each year on the use of funds. States also must agree
to use block grants to promote self-sufficiency for low-income
persons (including the elderly), to address the needs of youth
in low-income neighborhood programs that will support the
primary role of the family through after-school child care
programs and establishing violence free zones for youth
development, to provide emergency food and nutrition services,
to coordinate public and private social services programs, and
to encourage the use of private sector entities in antipoverty
activities. States also must provide an assurance that the
State and all eligible entities in the State will participate
in the Results Oriented Management and Accountability System
(ROMA) or another performance measure system. However, neither
the plan nor the State application is subject to the approval
of the Secretary. No more than 5 percent of the funds, or
$55,000, whichever is greater, may be used for administration.
Since States had not played a major role in antipoverty
activities when the CSA existed, the Reconciliation Act of 1981
offered States the option of not administering the new CSBG
during fiscal year 1982. Instead, HHS would continue to fund
existing grant recipients until the States were ready to take
over the program. States which opted not to administer the
block grants in 1982 were required to use at least 90 percent
of their allotment to fund existing community action agencies
and other prior grant recipients. In the Act, this 90-percent
pass-through requirement applied only during fiscal year 1982.
However, in appropriations legislation for fiscal years 1983
and 1984, Congress extended this provision to ensure program
continuity and viability.
In 1984, Congress made the 90-percent pass-through
requirement permanent and applicable to all States under Public
Law 98-558. In the 1998 fifty State survey released by the
National Association for State Community Services Programs
(NASCSP) and funded by HHS, it was reported that the States
distributed the CSBG funds to their low-income communities
through more than 1,100 local ``eligible entities.'' Although
several types of local entities are eligible to deliver CSBG-
funded services, e.g., limited purpose agencies, migrant or
seasonal farm worker organizations, local governments or
councils of government, and Indian tribes or councils, 85
percent of all local CSBG agencies were Community Action
Agencies (CAAs). By statute, CAAs are governed by a tri-partite
board consisting of one-third elected public officials and at
least one -third representatives of the low- income community,
with the balance drawn from private sector leaders, including
business, faith- based groups, charities, and civic
organizations.
The 1998 fifty State survey also found that in FY1998, the
total resources spent by the CSBG network in 49 States were
about $6 billion. Of that total, approximately 66 percent came
from Federal programs other than CSBG; approximately 13 percent
came from the State; 6 percent came from local sources; 8
percent came from private sources; and 7 percent came from
CSBG.
Local agencies from 50 States provided detailed information
about their uses of CSBG funds. Those agencies used CSBG money
in the following manner: emergency services (18 percent),
linkages between and among programs (21 percent), nutrition
programs (10 percent), education (10 percent), employment
programs (9 percent), income management programs (5 percent),
housing initiatives (8 percent), self-sufficiency (12 percent),
health (3 percent), and other (4 percent).
2. Issues
(a) need for a performance measurement system
In the 1998 reauthorization of the CSBG, Congress required
that the Department of Health and Human Services work with the
States and local entities to facilitate (not establish) a
performance measurement system to be used by States and local
eligible entities to measure their performance in programs
funded through CSBG. This requirement was built on a voluntary
performance measurement system called the Results-Oriented
Management and Accountability System (ROMA), which was
initiated by States and local entities with HHS assistance
several years before. ROMA is intended to allow States and
local communities to determine their own priorities and
establish performance objectives accordingly. Full
participation in such a performance measurement system (either
ROMA or an alternative acceptable system) is required not later
than FY2001.
To encourage full participation in ROMA the HHS Office of
Community Services (OCS) reiterated six national goals for
community action that were identified by a CSBG Monitoring and
Assessment Task Force (MATF), composed of Federal, State and
local network representatives. These goals are intended to
respect the diversity of the Community Services Network and
provide clear expectations of results: (1) low-income people
become more self-sufficient; (2) the conditions in which low-
income people live are improved; (3) low-income people own a
stake in their community; (4) partnerships among supporters and
providers of service to low-income people are achieved; (5)
agencies increase their capacity to achieve results; and (6)
low-income people, especially vulnerable populations, achieve
their potential by strengthening family and other supportive
systems. The OCS said that ROMA implementation has been steady,
although uneven across the network ( In the 1998 National
Association for State Community Services Programs survey, it
was reported that over 60 percent of the States and more than
half of CAAs were actively engaged in ROMA implementation).
ROMA data for fiscal year 1997 were reported for the first time
last year (2000) as States moved from a service categorization
to an outcome orientation. OCS believes that the six national
ROMA goals reflect a number of important concepts that
transcend CSBG as a stand-alone program. According to HHS, the
goals convey the following unique strengths that the broader
concept of community action brings to the Nation's anti-poverty
efforts: (1) Focusing our efforts on client/community /
organizational change, not particular programs or services. As
such, the goals provide a basis for results-oriented, not
process-based or program-specific plans, activities and
reports; (2) Understanding the interdependence of programs,
clients and community. The goals recognize that client
improvements aggregate to and reinforce, community
improvements, and that strong and well-administered programs
underpin both; and (3) Recognizing that CSBG does not succeed
as an individual program. The goals presume that community
action is most successful when activities supported by a number
of funding sources are organized around client and community
outcomes, both within an agency and with other service
providers.
(b) elderly share of services
(1) SSBG
The role that the Social Services Block Grant plays in
providing services to the elderly had been a major concern to
policymakers. Supporters of the SSBG concept have noted that
social services can be delivered more efficiently and
effectively due to administrative savings and the
simplification of Federal requirements. Critics, on the other
hand, have opposed the block grant approach because of the
broad discretion allowed to States and the loosening of Federal
restrictions and targeting provisions that assure a certain
level of services for groups such as the elderly. In addition,
critics have noted that reductions in SSBG funding could
trigger uncertainty and increase competition between the
elderly and other needy groups for scarce social service
resources.
Under Title XX, the extent of program participation on the
part of the elderly was difficult to determine because programs
were not age specific. In the past, States have had a great
deal of flexibility in reporting under the program and, as a
result, it has been hard to identify the number of elderly
persons served, as well as the type of services they received.
The elimination of many of the reporting requirements under
SSBG made efforts to track services to the elderly very
difficult. In the past, States had to submit pre-expenditure
and post-expenditure reports to HHS on their intended and
actual use of SSBG funds. These reports were not generally
comparable across States, and their use for national data was
limited. In 1988, Section 2006 of the SSA was amended to
require that these reports be submitted annually rather than
biennially. In addition, a new subsection 2006(c) was added to
require that certain specified information be included in each
State's annual report and that HHS establish uniform
definitions of services for use by States in preparing these
reports. HHS published final regulations to implement these
requirements on November 15, 1993.
These regulations require that the following specific
information be submitted as a part of each State's annual
report: (1) The number of individuals who received services
paid for in whole or in part with funds made available under
Title XX, showing separately the number of children and adults
who received such services, and broken down in each case to
reflect the types of services and circumstances involved; (2)
the amount spent in providing each type of service, showing
separately the amount spent per child and adult; (3) the
criteria applied in determining eligibility for services (such
as income eligibility guidelines, sliding fee scales, the
effect of public assistance benefits and any requirements for
enrollment in school or training programs); and (4) the methods
by which services were provided, showing separately the
services provided by public agencies and those provided by
private agencies, and broken down in each case to reflect the
types of services and circumstances involved. The new reporting
requirements also direct the Secretary to establish uniform
definitions of services for the States to use in their reports.
In July of 2001, HHS released the annual report on SSBG
expenditures and recipients for 1999. This report is based on
information submitted by the States to HHS. According to that
report, 36 States used SSBG funds to support home-based
services (delivered to, but not restricted to, elderly adult
recipients), and their combined expenditures for these services
reflected approximately 7 percent of all SSBG expenditures made
by all 50 States and the District of Columbia. Likewise, 28
States made SSBG expenditures for providing special services
for the disabled (which again include, but are not limited to,
elderly disabled adults), amounting to 8 percent of all SSBG
expenditures made by all States on all services. The HHS
analysis highlights four particular services as being a cluster
of ``Services to Elderly in the Community'': adult day care,
adult protective services, congregate meals, and home-delivered
meals. According to the report, in 1999, approximately 752,00
individuals were recipients of at least four of those services.
It seems clear that there is a strong potential for fierce
competition among competing recipient groups for SSBG dollars.
The service categories receiving the greatest amount of SSBG
funds in 1999 were child day care and child foster care.
Increasing social services needs along with declining support
dollars portends a trend of continuing political struggle
between the interests of elderly indigent and those of indigent
mothers and children. Although some argue that the decrease in
SSBG federally appropriated funds has been accompanied by TANF
fund transfers into SSBG, advocates of maintaining, if not
increasing, SSBG funds emphasize that in the case of an
economic downturn, the transfers from TANF may decline, leaving
SSBG with the inability to support and provide services at the
level States have come to depend. Others contend that
regardless of transfers, States can use unspent TANF funds to
replace funding used for social services. Title XX advocates
counter that many of the services that the SSBG funds or
supports are not eligible activities under TANF, particularly
adult protection and in-home services for the elderly.
Legislation to restore the SSBG authorized ceiling to its 1996
level of $2.38 billion has been introduced in the 107th
Congress, but has not been approved. Likewise, bills proposing
to maintain the transfer authority from TANF to SSBG at 10
percent have been introduced, but not as yet acted upon, for
FY2002.
(2) CSBG Funds
The proportion of CSBG funds that support services for the
elderly and the extent to which these services have fluctuated
as a result of the block grant also remains unclear. Although
31 States provided information concerning outcome measures and/
or ROMA implementation, detailed information concerning support
services for the elderly is not readily available at this stage
of reporting and assessing results.
The report by NASCSP on State use of fiscal year 1998 CSBG
funds, discussed above, provides some interesting clues.
Although the survey was voluntary, all but two jurisdictions
eligible for CSBG allotments answered all or part of the
survey. Thus, NASCSP received data on CSBG expenditures broken
down by program category and number of persons served which
provides an indication of the impact of CSBG services on the
elderly. For example, data from 50 States show expenditures for
employment services, which includes job training and referral
services for the elderly, accounted for 9 percent of total CSBG
expenditures in those States. A catchall linkage program
category supporting a variety of services reaching older
persons, including transportation services, medical and dental
care, senior center programs, legal services, homemaker and
chore services, and information and referrals accounted for 21
percent of CSBG expenditures. Emergency services such as
donations of clothing, food, and shelter, low-income energy
assistance programs and weatherization are provided to the
needy elderly through CSBG funds, accounting for 18 percent of
CSBG expenditures in fiscal year 1998; 8 percent of CSBG
clients in FY1998 were older than 70. The same 50 State survey
reported that the number of families who were still active in
the labor force at the time they came to CAA for support, was
nearly the same as those who were retired.
3. Federal Response
(a) social services block grant appropriations
The SSBG program is permanently authorized and States are
entitled to receive a share of the total according to their
population size. By fiscal year 1986, an authorization cap of
$2.7 billion was reached.
Congress appropriated the full authorized amount of $2.7
billion for fiscal year 1989 (P.L. 100-436). Effective in
fiscal year 1990, Congress increased the authorization level
for the SSBG to $2.8 billion (P.L. 101-239). This full amount
was appropriated for each fiscal year from 1990 through fiscal
year 1995.
In fiscal year 1994, an additional $1 billion for temporary
SSBG in empowerment zones and enterprise communities was
appropriated and remains available for expenditure for 10
years. Each State is entitled to one SSBG grant for each
qualified enterprise community and two SSBG grants for each
qualified empowerment zone within the State. Grants to
enterprise communities generally equal about $3 million while
grants to empowerment zones generally equal $50 million for
urban zones and $20 million for rural zones. States must use
these funds for the first three of the five goals listed above.
Program options include: skills training, job counseling,
transportation, housing counseling, financial management and
business counseling, emergency and transitional shelter and
programs to promote self-sufficiency for low-income families
and individuals. The limitations on the use of regular SSBG
funds do not apply to these program options.
For fiscal year 1996, Congress appropriated $2.38 billion
for the SSBG, which was lower than the entitlement ceiling.
Under welfare reform legislation enacted in August 1996 (P.L.
104-193), Congress reduced the entitlement ceiling to $2.38
billion for fiscal years 1997 through 2002. After fiscal year
2002, the ceiling was scheduled to return to the previous level
of $2.8 billion. However, for fiscal year 1997, Congress
actually appropriated $2.5 billion for the SSBG, which was
higher than the entitlement ceiling established by the welfare
reform legislation. Congress appropriated $2.3 billion for the
program in fiscal year 1998 and $1.9 billion in fiscal year
1999, although the entitlement ceilings for those years was
$2.38 billion. In FY2000, the appropriation dropped further, to
$1.775 billion, and in FY2001, the year in which transportation
legislation enacted in 1998 (P.L. 105-178) scheduled a
reduction in the entitlement ceiling to $1.7 billion, Congress
actually exceeded the ceiling by funding the SSBG at $1.725
billion.
(b) community services block grant reauthorization and appropriations
The CSBG Act was established as part of OBRA 81 (P.L. 97-
35), and has subsequently been reauthorized five times: in 1984
(P.L. 98-558), in 1986 (P.L. 99-425), in 1990 (P.L. 101-501),
in 1994 (P.L. 103-252), and in 1998 (P.L. 105-277). In addition
to the CSBG itself, the Act authorizes various discretionary
activities, including community economic development
activities, rural community facilities, community food and
nutrition programs and the national youth sports program. Two
additional programs, although not authorized by the CSBG Act,
are administered by OCS together with these CSBG related
discretionary programs. They are job opportunities for low-
income individuals (JOLI) and the assets for independence
program which will enable low-income individuals to accumulate
assets in individual development accounts.
In fiscal year 2001, appropriations are as follows: $600
million for the CSBG; $24.5 million for community economic
development; $5.5 million for job opportunities for low-income
individuals (JOLI); $5.3 million for rural community
facilities; $16 million for national youth sports; $6.3 million
for community food and nutrition and $25 million for individual
development accounts.
B. ADULT EDUCATION AND LITERACY
1. Background
State and local governments have long had primary
responsibility for the development, implementation, and
administration of primary, secondary, and higher education, as
well as continuing education programs that benefit students of
all ages. The role of the Federal Government in education has
been to ensure equal opportunity, to enhance the quality of
programs, and to address selected national education
priorities.
While several arguments exist for the importance of formal
and informal educational opportunities for older persons, such
opportunities have traditionally been a low priority in
education policymaking. Public and private resources for the
support of education have been directed primarily at the
establishment and maintenance of programs for children and
college age students. This is due largely to the perception
that education is a foundation constructed in the early stages
of human development.
Although learning continues throughout one's life in
experiences with work, family, and friends, formal education
has traditionally been viewed as a finite activity extending
only through early adulthood. Thus, it is a relatively new
notion that the elderly have a need for formal education
extending beyond the informal, experiential environment. This
need for structured learning may appeal to ``returning
students'' who have not completed their formal education,
workers of any age who require retraining to keep up with rapid
technological change, or retirees who desire to expand their
knowledge and personal development.
Literacy means more than the ability to read and write. The
term ``functional illiteracy'' began to be used during the
1940's and 1950's to describe persons who were incapable of
understanding written instructions necessary to accomplish
specific tasks or functions. Definitions of functional literacy
depend on the specific tasks, skills, or objectives at hand. As
various experts have defined clusters of needed skills,
definitions of literacy have proliferated. These definitions
have become more complex as the technological information needs
of the economy and society have increased. For example, the
National Literacy Act of 1991 defined literacy as ``an
individual's ability to read, write, and speak in English, and
compute and solve the problems at levels of proficiency
necessary to function on the job and in society, to achieve
one's goals, and develop one's knowledge and potential.''
The National Adult Literacy Survey (NALS), conducted in
1992, defined literacy as ``using printed and written
information to function in society, to achieve one's goals, and
to develop one's knowledge and potential.'' The survey tested
adults in three different literacy skill areas prose, document,
and quantitative. It found that adults performing at the lowest
literacy levels in these areas were more likely to have fewer
years of education; to have a physical, mental, or other health
problem; and to be older, in prison, or born outside the United
States. The survey underscored the strong connection between
low literacy skills and low economic status. The U.S.
Department of Education will undertake another national
literacy survey in 2002 to determine what changes have occurred
in the Nation's literacy ability level during the past 10
years.
Statistics on educational attainment reveal cause for
concern. According to the Statistical Abstract of the U.S.,
2000, 174 million American adults were 25 years old and over in
1999; of these, 16.6 percent (29 million) never graduated from
high school (Statistical Abstract of the U.S., 2000, Table
251). As might be expected, there is a concentration of older
persons among this group of adults. According to the
Statistical Abstract, in contrast to the 16.6 percent rate of
non-completion of high school for all adults 25 years old and
over, almost twice that proportion, 32.0 percent, of those 65
years old and over did not graduate from high school, and among
those 75 years old and over, 37.3 percent did not graduate. The
use of these data to estimate functional literacy rates has the
drawback, however, that the number of grades completed does not
necessarily correspond to the actual level of skills of adult
individuals.
2. Program Description
The Adult Education and Family Literacy Act (AEFLA) is the
primary Federal adult education program. The AEFLA was
authorized as Title II of the Workforce Investment Act of 1998
(WIA), P.L. 105-220. Under the AEFLA, the U.S. Department of
Education makes grants to assist states and localities provide
adult education and family literacy programs. Approximately 5
million adults currently participate in these programs on an
annual basis. The FY2001 appropriation for AEFLA programs is
$561 million, representing a substantial increase above the
FY2000 amount of $470 million.
Compared to previous Federal adult education programs, the
AEFLA significantly augmented requirements for the
implementation of a performance accountability system. This
system is being implemented to measure program effectiveness
and progress at the state and local levels and to award state
incentive grants; performance results are to be considered in
making local awards.
Under the AEFLA State Grants program, allocations are made
to states by formula. States in turn make discretionary grants
to eligible providers for the provision of adult education
instruction and services. Adults are defined as those at least
16 years of age or otherwise beyond the age of compulsory
school attendance. Adult education includes services or
instruction below the college level for adults who: are not
enrolled in secondary school and not required to be enrolled;
lack mastery of basic educational skills to function
effectively in society; have not completed high school or the
equivalent; and are unable to speak, read, or write the English
language. Adult education services include: adult literacy and
basic education skills, adult secondary education and high
school equivalency; English-as-a-second-language; educational
skills needed to obtain or retain employment; and assistance
for parents to improve the educational development of their
children.
With certain exceptions, the AEFLA requires state and local
funds to support at a minimum 25 percent of total expenditures
for adult education activities under the AEFLA State Grants
program. Most states spend more than the minimum, and many
spend significantly more. For FY1998, the total of Federal,
state, and local expenditures related to adult education was an
estimated $1.3 billion. Of this amount, states and localities
contributed an estimated $958 million, or 74 percent of adult
education expenditures from all sources.
In the latest year for which detailed state enrollment data
are available from all states (1996), 4.0 million adults
participated in federally supported adult education and
literacy programs. Of this total, 1.56 million participated in
adult basic education programs, 1.56 million in English-as-a-
second-language programs, and 0.93 million in adult secondary
education activities. The Division of Adult Education and
Literacy at the U.S. Department of Education has estimated the
target population for AEFLA programs to be more than 44 million
adults, or nearly 27 percent of the adult population. These
adults are persons 16 years and older, who have not graduated
from high school or the equivalent, and who are not currently
enrolled in school.
3. Legislation in the 106th Congress
The Workforce Investment Act of 1998 (P.L. 105-220),
including the AEFLA under Title II, was enacted by the 105th
Congress. In comparison, the 106th Congress enacted relatively
little with regard to adult education and literacy. The AEFLA
is authorized through FY2003, so congressional attention may
not give a comprehensive look in that direction for another
year or more.
As already noted, the 106th Congress funded adult education
and literacy programs at a level of $561 million for FY2001
under the provisions of P.L. 106-554, the Consolidated
Appropriations Act, 2001, which is an increase over the FY2000
appropriation of $470 million. The FY2001 appropriation
continues a practice begun in FY2000 by reserving adult
education funds for English literacy and civics education
services for new immigrants and other limited English speaking
populations. The FY2001 reserve of $70 million will assist
communities with concentrations of recent immigrants by helping
such persons learn English literacy skills, obtain knowledge
about the rights and responsibilities of citizenship, and
acquire key skills necessary to deal with the government,
public schools, health services, the workplace, and other
institutions of American life.
C. DOMESTIC VOLUNTEER SERVICE ACT
1. Background
The purpose of the Domestic Volunteer Service Act of 1973
(DVSA), ``is to foster and expand voluntary citizen service in
communities throughout the Nation in activities designed to
help the poor, the disadvantaged, the vulnerable, and the
elderly.'' (42 U.S.C. 4950) The Act authorizes four major
volunteer programs: the Retired and Senior Volunteer Program
(RSVP), the Foster Grandparent Program, the Senior Companion
Program, and the Volunteers in Service to America (VISTA)
program. These programs are administered by the Corporation for
National and Community Service. The Corporation was created in
1993 by The National and Community Service Trust Act of 1993
(P.L. 103-82), which combined two independent Federal agencies
the Commission on National and Community Service, which
administered National Community Service Act (NCSA) programs,
and ACTION, which administered DVSA programs. The Corporation
is administered by a chief executive officer and a bipartisan
15-member board of directors appointed by the President and
confirmed by the Senate.
Funding for DVSA programs is contained in the Labor-HHS-ED
appropriations act. Authorization of appropriations for the
DVSA programs expired at the end of FY1996, but the programs
continue to be funded through appropriations legislation for
Labor-HHS-ED.
(a) national senior volunteer corps
Formerly known as the ``Older American Volunteer
Programs,'' the Corps consists primarily of the Foster
Grandparent Program (FGP), the Senior Companion Program (SCP),
and the Retired and Senior Volunteer Program (RSVP). The
premise of the Senior Volunteer Corps is that seniors through
their skills and talents can help meet priority community needs
and have an impact on national problems of local concern. In
all three programs, project grants for the Corps' programs are
awarded to public agencies, such as State, county, and local
governments, and to private nonprofit organizations. These
entities apply to the Corporations' State offices for funds to
recruit, place, and support the senior volunteers.
(1) Retired Senior Volunteer Program
The Retired Senior Volunteer Program (RSVP) was authorized
in 1969 under the Older Americans Act. In 1971, the program was
transferred from the Administration on Aging to ACTION and in
1973 the program was incorporated under Title II of the
Domestic Volunteer Service Act. RSVP is designed to provide a
variety of volunteer opportunities for persons 55 years and
older. Volunteers serve in such areas as youth counseling,
literacy enhancement, long-term care, refugee assistance, drug
abuse prevention, consumer education, crime prevention, and
housing rehabilitation. Although volunteers do not receive
hourly stipends ,as they do under the Foster Grandparent and
Senior Companion Programs, they receive reimbursement for out-
of-pocket expenses, such as transportation costs.
In FY1999, 485,000 volunteers served in 764 projects.
Roughly 89 percent were white, 8 percent were African American,
and 3 percent were Asian/Pacific Islanders or American Indian/
Alaskan Natives. Persons of Hispanic ethnicity of any racial
group accounted for 4 percent of the volunteers. Persons under
the age of 65 accounted for 15 percent of the volunteers, those
between 65 and 84 accounted for 74 percent, and those 85 and
older accounted for 10 percent. Women made up 75 percent of the
volunteers. For FY2001 $48.9 million was appropriated.
(2) Foster Grandparent Program (FGP)
The Foster Grandparent Program (FGP) originated in 1965 as
a cooperative effort between the Office of Economic Opportunity
and the Administration on Aging. It was authorized under the
Older Americans Act in 1969 and 2 years later transferred from
the Administration on Aging to ACTION. In 1973, the FGP was
incorporated under Title II of the Domestic Volunteer Service
Act.
The FGP provides part-time volunteer opportunities for
primarily low-income volunteers aged 60 and older. These
volunteers provide supportive services to children with
physical, mental, emotional, or social disabilities. Foster
grandparents are placed with nonprofit sponsoring agencies such
as schools, hospitals, day-care centers, and institutions for
the mentally or physically disabled. Volunteers serve 20 hours
a week and provide care on a one-to-one basis to three or four
children. A foster grandparent may continue to provide services
to a mentally retarded person over 21 years of age as long as
that person was receiving services under the program prior to
becoming age 21.
In general, to serve as a foster grandparent, an individual
must have an income that does not exceed 125 percent of the
poverty line, or in the case of volunteers living in areas
determined by the Corporation to be of a higher cost of living,
not more than 135 percent of the poverty line. Volunteers
receive stipends of $2.55 an hour. The Domestic Volunteer
Service Act exempts stipends from taxation and from being
treated as wages or compensation. In an effort to expand
volunteer opportunities to all older Americans, the 1986
amendments to DVSA (P.L. 99-551) permitted non-low-income
persons to become foster grandparents. The non-low-income
volunteers are reimbursed for out-of-pocket expenses only.
The number of foster grandparents who served in the 12
months ending June 30, 1999 was 28,700, of which roughly 56
percent were white, 38 percent were African American, and 6
percent were Asian/Pacific Islanders or American Indian/Alaskan
Natives. Persons of Hispanic ethnicity of any racial group
accounted for 9 percent of the volunteers. Persons under the
age of 65 accounted for 15 percent of the volunteers, those
between 65 and 84 accounted for 79 percent, and those 85 and
older accounted for 5 percent. Women made up 90 percent of the
volunteers. For FY2001, $98.9 million was appropriated.
Of the over 230,000 children served by the foster
grandparents for FY1999, 40 percent were 5 years of age or
under, 45 percent were between 6 and 12 years of age, and 14
percent were 13 and older. Of the children served, 63 percent
had one of five special needs. The special needs areas were
learning disabilities (25 percent), abused/neglected (12
percent), developmentally delayed/disabled (10 percent),
emotionally impaired/autistic (8 percent), and significantly
medically impaired (8 percent).
(3) Senior Companion Program (SCP)
The Senior Companion Program (SCP) was authorized in 1973
by P.L. 93-113 and incorporated under Title II, Section 211(b)
of the Domestic Volunteer Service Act of 1973. The Omnibus
Budget Reconciliation Act of 1981 (P.L. 97-35) amended Section
211 of the Act to create a separate Part C containing the
authorization for the Senior Companion Program.
This program is designed to provide part-time volunteer
opportunities for primarily low-income volunteers aged 60 years
and older. These volunteers provide supportive services to
vulnerable, frail older persons in homes or institutions. Like
the FGP, the 1986 Amendments (P.L. 99-551) amended SCP to
permit non-low-income volunteers to participate without a
stipend, but reimbursed for out-of-pocket expenses. The
volunteers help homebound, chronically disabled older persons
to maintain independent living arrangements in their own
residences. Volunteers also provide services to
institutionalized older persons and seniors enrolled in
community health care programs. Senior companions serve 20
hours a week and receive the same stipend and benefits as
foster grandparents. To participate in the program, low-income
volunteers must meet the same income test as for the Foster
Grandparent Program.
In FY1999, the number of individuals who served as senior
companions was 14,700. Roughly 60 percent were white, 33
percent were African American, 5 percent were Asian/Hawaiian/
Pacific Islander, and 2 percent were American Indian/Alaskan
Natives. Hispanic of any race made up 11 percent of the senior
companions. Persons between the age of 60 and 74 accounted for
67 percent of the volunteers, those between 75 and 84 accounted
for 28 percent, and those 85 and older accounted for 5 percent.
Women made up 85 percent of the volunteers. For FY2001 $40.4
million was appropriated.
Of the nearly 62,000 adults served by the senior companions
in FY1999, 13 percent were between 22 and 64 years of age, 22
percent were between 65 and 74, 36 percent were between 75 and
84, and 30 percent were 85 and older. Nearly half of the
clients were frail elderly and nearly 10 percent had
Alzheimer's disease.
(b) volunteers in service to america
Volunteers in Service to America (VISTA) was originally
authorized in 1964, conceived as a domestic peace corps for
volunteers to serve full-time in projects to reduce poverty.
Today, VISTA still holds this mandate. Volunteers 18 years and
older serve in community activities to reduce or eliminate
poverty and poverty-related problems. Activities include
assisting persons with disabilities, the homeless, the jobless,
the hungry, and the illiterate or functionally illiterate.
Other activities include addressing problems related to alcohol
abuse and drug abuse, and assisting in economic development,
remedial education, legal and employment counseling, and other
activities that help communities and individuals become self-
sufficient. Volunteers also serve on Indian reservations, in
federally assisted migrant worker programs, and in federally
assisted institutions for the mentally ill and mentally
retarded.
Volunteers are expected to work full-time for a minimum of
1 year. To the maximum extent possible, they live among and at
the economic level of the people they serve. Volunteers receive
a living allowance of approximately $8,730, and either a lump
sum stipend that accrues at the rate of $100 for each month of
service, or the educational award under the National Service
Trust. In FY1999, 55 percent of participants completing their
VISTA service chose the educational award. Participants also
receive health insurance, child care allowances, liability
insurance, and eligibility for student loan forbearance (i.e.,
postponement). Travel and relocation expenses can also be paid
to participants serving somewhere other than in their own
community.
The educational award for a full time term of service
(i.e., 1700 hours in a period of generally 10 to 12 months) is
$4,725 and half of that amount (approximately $2,362) per part
time term of service of at least 900 hours. An individual can
earn a maximum of two full or partial educational awards.
Awards are made at the end of the service term in the form of a
voucher that must be used within 7 years after successful
completion of service. Awards are paid directly to qualified
postsecondary institutions or lenders in cases where
participants have outstanding loan obligations. Awards can be
used to repay existing or future qualified education loans or
to pay for the cost of attending a qualified college or
graduate school or an approved school/work program. Educational
awards are taxed as income in the year they are used.
In program year 1998-1999, 4,563 participants completed
VISTA service. Based on a random sample of program year 1998-
1999 participants, 60 percent were white, 26 percent were
African-American, 11 percent were Hispanic, 2 percent were
Asian, and 1 percent were American Indian. Women made up 80
percent of the volunteers. By statute, the Corporation is
required to encourage participation of those 18 through 27
years of age and those 55 and older. In program year 1998-1999,
approximately 39 percent were 18 through 25 years of age; 22
percent of the participants were 55 and older. For FY2001,
$83.1 million was appropriated.
D. TRANSPORTATION
1. Background
Transportation serves both human and economic needs. It can
enrich an older person's life by expanding opportunities for
social interaction and community involvement, and it can
support an individual's capacity for independent living, thus
reducing or eliminating the need for institutional care. It is
a vital connecting link between home and community. For the
elderly and non-elderly alike, adequate transportation is
essential for the fulfillment of most basic needs: maintaining
relations with friends and family, commuting to work, grocery
shopping, and engaging in social and recreational activities.
Housing, medical, financial, and social services are useful
only to the extent that they are accessible to those who need
them.
2. Federal Response
Three strategies have shaped the Federal Government's role
in providing transportation services to the elderly: direct
provision (funding capital and operating costs for transit
systems or other transportation services); reimbursement for
transportation costs; and fare reduction. The major federally
sponsored transportation programs that provide assistance to
the elderly and persons with disabilities are administered by
the Department of Transportation (DOT) and by the Department of
Health and Human Services (HHS).
(a) department of transportation programs
The passage of the 1970 amendments to the Urban Mass
Transportation Act (UMTA 1964) of 1964 (P.L. 98-453), now
called the Federal Transit Act, which added Section 16 (now
known as Section 5310), marked the beginning of special efforts
to plan, design, and set aside funds for the purpose of
modifying transportation facilities to improve access for the
elderly and people with disabilities. Section 5310 declared a
national policy that the elderly and people with disabilities
have the same rights as other persons to utilize mass
transportation facilities and services. Section 5310 also
stated that special efforts shall be made in the planning and
design of mass transportation facilities and services to assure
the availability of mass transportation to the elderly and
people with disabilities, and that all Federal programs
offering assistance in the field of mass transportation should
contain provisions implementing this policy. The goal of
Section 5310 programs is to provide assistance in meeting the
transportation needs of the elderly and people with
disabilities where public transportation services are
unavailable, insufficient, or inappropriate. Funding levels
have primarily supported the purchase of capital equipment for
nonprofit and public entities.
Another significant initiative was the enactment of the
National Mass Transportation Assistance Act of 1974 (P.L. 93-
503) which amended UMTA 1964 to provide block grants for mass
transit funding in urban and nonurban areas nationwide. Under
this program, block grant money could be used for capital or
operating expenses at the localities' discretion. The Act also
required transit authorities to reduce fares by 50 percent for
the elderly and persons with disabilities during offpeak hours.
In addition, passage of the Surface Transportation
Assistance Act (STAA) of 1978 (P.L. 95-549) amended UMTA 1964
to provide Federal funding under Section 18 (now known as
Section 5311) which supports public transportation program
costs, both operating and capital, for nonurban areas. Elderly
people and people with disabilities in rural areas benefit
significantly from Section 5311 projects due to their social
and geographical isolation and thus greater need for
transportation assistance. Section 5311 appropriations have
increased significantly over time, from approximately $65 to
$75 million in the period 1979-1991, to an average of around
$120 million for 1992-1998, to an average of almost $200
million for 1999-2001.
The STAA of 1982 (P.L. 97-424) established Section 5307 in
its amendments to the UMTA Act. Section 5307 provides general
assistance to urbanized areas, but two of its provisions are
especially important to the elderly and persons with
disabilities. Section 5307 continues the requirement that
recipients of Federal mass transit assistance offer half-fares
to the elderly and people with disabilities during nonpeak
hours. In addition, States can choose to transfer funds from
Section 5307 to the Section 5311 program. Each year, between
$10 million and $20 million of Section 5307 funds nationwide
have been transferred to the Section 5311 program. State and
local governments also have the choice of using some of the
Federal highway funds for transit. In fiscal year 2000, $22.4
million of flexible highway funds was transferred to Section
5311.
The Rural Transit Assistance Program (RTAP), created in
1987 by Congress (P.L. 100-17), provides training, technical
assistance, research, and related support service for providers
of rural public transportation. The Federal Transit
Administration allocates 85 percent of the funds to the States
to be used to develop State rural training and technical
assistance programs. By the end of fiscal year 1989, all States
had approved programs underway. The remaining 15 percent of the
annual appropriation supports a national program, which is
administered by a consortium led by the American Public Works
Association and directed by an advisory board made up of local
providers and State program administrators. Funding for RTAP
has totaled more than $4 million annually since fiscal year
1987.
The DOT programs have been the major force behind mass
transit construction nationwide and are an important ingredient
in providing transportation services for older Americans.
Recognizing the overlapping of funding and services provided by
the two departments and the need for increased coordination,
HHS and DOT established an interdepartmental Coordinating
Council on Human Services Transportation in 1986. The Council
is charged with coordinating related programs at the Federal
level and promoting coordination at the State and local levels.
As part of this effort, a regional demonstration project has
been funded, and transportation and social services programs in
all States are being encouraged to develop better mechanisms
for working together to meet their transportation needs.
Despite these program initiatives, Federal strategy in
transportation has been essentially limited to providing seed
money for local communities to design, implement, and
administer transportation systems to meet their individual
needs. In the future, the increasing need for specialized
services for the growing population of elderly persons will
challenge State and local communities to finance both large-
scale mass transit systems and smaller neighborhood shuttle
services.
The reauthorization of the STAA (the Intermodal Surface
Transportation Efficiency Act of 1991 [ISTEA]; P.L. 102-240) in
1991 provided a number of important changes for the elderly and
disabled. Key provisions of ISTEA (which renamed UMTA to the
Federal Transit Administration [FTA]) included: (1) Allowing
paratransit agencies to apply for Section 3 (the Capital
Funding Program, now known as Section 5309) capital funding for
transportation projects that specifically address the needs of
elderly and disabled persons; (2) establishing a rural transit
set-aside of 5.5 percent of Section 5309 funds allocated for
replacement, rehabilitation and purchase of buses and related
equipment, and construction of bus-related facilities; and (3)
allowing transit service providers receiving assistance under
Section 5310 (Elderly and Persons with Disabilities Program) or
Section 5311 (Non-Urbanized Area Program) to use vehicles for
meal delivery service for homebound persons if meal delivery
services did not conflict with the provision of transit
services or result in the reduction of services to transit
passengers.
ISTEA also created the Transit Cooperative Research Program
(TCRP), the first federally funded cooperative research program
exclusively for transit. The program is governed by a 25-member
TCRP Oversight and Project Selection (TOPS) committee jointly
selected by the Federal Transit Administration, the
Transportation Research Board (TRB), and the American Public
Transit Association (APTA). To date, TCRP has resulted in the
publication of over 150 reports on a variety of topics,
including Americans with Disabilities Act transit service,
delivery systems for rural transit, and demand forecasting for
rural transit.
ISTEA also provided a substantial increase in funding for
programs benefiting elderly and disabled persons. Section 5310
funding rose from $35 million in FY1991 to $56 million in
FY1997; Section 5311 funding rose from $70 million in FY1991 to
$120 million in FY1997.
The Omnibus Transportation Employee Testing Act of 1991
gave the Federal Transit Administration (FTA) the statutory
authority to impose testing as a condition of financial
assistance. FTA can also require programs providing
transportation to the elderly to be covered by Federal testing
requirements even if they do not receive transit funding. The
Act requires drug testing of covered employees such as drivers,
dispatchers, maintenance workers, and supervisors. Alcohol
tests are to be administered prior to, during, or just after
the employee performs out-of-service safety-sensitive
functions. Post accident testing is also required. The Act
requires employers to report their data annually to develop a
national data base of experience with drug and alcohol testing.
The 105th Congress enacted the Transportation Equity Act
for the 21st Century (TEA-21, P.L. 103-178). The legislation
substantially increased total mass transit funding, including
Section 5310 and 5311, for the fiscal years 1998 through 2003.
Annual appropriations for Section 5310 have risen from $56
million in FY1997 to $77 million in FY2001; for Section 5311,
appropriations have risen from $120 million in FY1997 to $210
million in FY2001. TEA-21 also allows for the use of up to 10
percent of the urbanized formula funds (Section 5307) for ADA
demand response transit service.
(b) department of health and human services programs
The passage of the OAA of 1965 had a major impact on the
development of transportation for older persons. Under Title
III of the Act, transportation is considered a priority service
and is among the most frequently provided services fubded
through the supportive services and centers program. In Fy1998,
the program provided 46 million one-way trips.
In addition to the Older Americans Act, other programs
administered by HHS support transportation services for the
older persons. These include the Social Services Block Grant
(SSBG) and the Community Services Block Grant (CSBG) programs.
The Medicaid program supports medically related transportation.
3. Issues in Transportation Services for Older Persons
Transportation in Rural Areas.--Lack of transportation for
the rural elderly stems from several factors. First, the
dispersion of rural populations over relatively large areas
complicates the design of a cost-effective, efficient public
transit system. Second, the incomes of the rural elderly
generally are insufficient to afford the high fares necessary
to support a rural transit system. Third, the rising cost of
operating vehicles and inadequate reimbursement have
contributed to the decline in the numbers of operators willing
to transport the rural elderly. Fourth, the physical design and
service features of public transportation, such as high steps,
narrow seating, and unreliable scheduling, discourage elders'
participation. Fifth, the rural transit emphasis on general
public access and employment transportation may adversely
affect the elderly. If rural transit concentrates on
transporting workers to jobs, less emphasis may be placed on
transporting seniors to other services.
Lack of access to transportation in rural areas leads to an
underutilization of programs specifically designed to serve
older persons, such as adult education, congregate meal
programs and health promotion activities. Thus, the problems of
service delivery to rural elderly are essentially problems of
accessibility rather than program design.
Transportation in Suburban Areas.--The graying of the
suburbs is a phenomenon that has only recently received
attention from policymakers in the aging field. Since their
growth following World War II, it has been assumed that the
suburbs consisted mainly of young, upwardly mobile families.
The decades that have since elapsed have changed the profile of
the average American suburb, resulting in profound implications
for social service design and delivery.
The aging of suburbia can be attributed to two major
factors. First, migration has contributed to the growth of an
older suburban population. It is estimated that for every
person age 65 and older who moves back to the central city,
three move from the central city to the suburbs. Second, many
older persons desire to remain in the homes and neighborhoods
in which they have grown old, i.e., ``aging in place.'' The
growth of the suburban elderly population is expected to
increase at an even more rapid rate in the future due to the
large number of so-called pre-elderly (ages 50-64) living in
the suburbs.
The availability of transportation services for the elderly
suburban dweller is limited. Unlike large cities where dense
populations make transit systems practical, the sprawling low-
density geography of suburbs makes developing and operating
mass transportation systems prohibitively expensive. Private
taxi companies, if they operate in the outlying suburban areas
at all, are often very expensive. Further, the trend toward
retrenchment and fiscal restraint by the Federal Government has
significantly affected the development of transportation
services. Consequently, Federal support for private transit
systems designed especially for the elderly suburban dweller is
almost nonexistent. State and local governments have been
unable to harness sufficient resources to fund costly
transportation systems independent of Federal support.
Alternative revenue sources, such as user fees, are
insufficient to support suburb-wide services, and are generally
viewed as penalizing the low-income elderly most in need of
transportation services in the community.
The aging of the suburbs, therefore, has several
implications for transportation policy and the elderly. The
dispersion of older persons over a suburban landscape poses a
challenge for community planners who have specialized in
providing services to younger, more mobile dwellers.
Transportation to and from services and/or service providers is
a critical need. Community programs that serve the needs of
elderly persons, such as hospitals, senior centers, and
convenience stores, should be designed with supportive
transportation services in mind. In addition, service providers
should assist in coordinating transportation services for their
elderly clients. Primary transportation systems, or mass
transit, should ensure accessibility from all perimeters of the
suburban community to adequately serve the dispersed elderly
population. All too often, public transit primarily serves the
needs of working-age commuters. If accessibility for the entire
community is not possible, then service route models should be
considered. Service routes use smaller buses and follow fixed-
routes that connect concentrations of elderly residents to the
services that they need to access to maintain their
independence.
Challenges Associated With Some Older Drivers.--Americans
like to drive, and our automobiles have become much more than a
means of transportation they have become a reflection of our
personalities and a status symbol. Moreover, either the
shortage of, distance to, or costs of other transportation
services frequently means that not being able to drive greatly
limits one's access to the community. Particularly for older
persons, the automobile is often a symbol of independence and
dignity. Thus, many older Americans will continue depending on
the automobile for their basic means of transportation because
of their need for mobility, the availability and ease of using
the modern highway system, or the lack of other acceptable
choices.
In the United States, there were 18.5 million older drivers
(70 years and above) in 1999. These drivers constitute about 10
percent of all drivers. In 1999 there were 56,352 drivers
involved in fatal crashes of which 8.8 percent were age 70 or
older, and there were 25,210 drivers killed in crashes, of
which 13.1 percent were in the same age category. Because older
persons constitute an ever growing segment of the driving
public, risks to highway safety could likewise increase as U.S.
population demographics change. DOT reports that currently
there are 35 million Americans 65 years old or older, by 2020
there could be 53 million such older persons, and by 2030, one
in five Americans could be 65 years old or older. The largest
increase in this population group could come around the year
2010, when large numbers of baby boomers reach retirement age.
Based on these statistics and projected population breakdowns,
the number of older persons killed in auto crashes could
increase threefold by 2030.
There is substantial controversy regarding the safety of
older drivers. Some claim that older drivers are unsafe and for
that reason, more of them die in auto accidents. They cite
newspaper stories about older drivers getting lost on the
highways, driving on sidewalks, striking pedestrians at
intersections, and driving in oncoming traffic lanes. In fact,
some statistics suggest that older drivers have higher rates of
fatal crashes than any other age group other than young
drivers. Data indicate that:
Drivers aged 70 and older have more motor
vehicle deaths per 100,000 people than other groups
except people younger than 25;
Drivers 75 years and older have higher rates
of fatal motor vehicle crashes per mile driven than
drivers in other age groups except teenagers; and
Per licensed driver, fatal crash rates rise
sharply at age 70 and older.
It does not follow, however, that because a higher
percentage of elderly die in traffic crashes, that the elderly
actually cause a greater number of such crashes. Some
statistics suggest that the elderly, as a group, are safe
drivers. They have fewer crashes per 100,000 licensed drivers,
have the lowest rate of alcohol involvement, and have the
highest level of restraint use among various age groups.
According to DOT's Traffic Safety Facts: 1999, ``Older drivers
involved in fatal crashes had the lowest proportion of
intoxication with blood alcohol concentrations (BAC) of 0.10
grams per deciliter (g/dl) or greater of all adult drivers.
Fatally injured older pedestrians also had the lowest
intoxication rate of all adult pedestrian fatalities.'' Older
drivers may also travel at times other than peak traffic hours
and opt for less hazardous routes in running their errands.
Because older people, be they drivers, occupants, or
pedestrians, are more physically fragile than younger people,
they often die in traffic accidents that younger people
survive, in spite of their positive driving habits. For
example, when they are involved in crashes, occupants over 80
years old are more than four times more likely to die than
persons under 60 years old. Over the past 10 years, traffic
fatalities among the elderly have grown. In 1999 (according to
the Department of Transportation's Traffic Safety Facts: 1999),
the fatality rate for drivers 85 and over rose to over 9 times
the rate for drivers 25 through 69.
Many of the crashes involving the elderly may be due to
their inability to make quick decisions, or to react to rapidly
changing traffic conditions. The driving instincts and
experience of some older drivers may be compromised by
declining motor skills or cognitive ability. Crash causation
factors involve reduced eye, hand, and foot coordination, the
reflexes most likely to be impaired with aging. Furthermore,
mixing older, drivers with younger, more impetuous drivers,
could trigger incidents of road rage, a further risk to the
elderly. While medical problems may affect drivers in any age
category, there appear to be certain maladies associated with
aging that could, in turn, potentially compromise the ability
of the elderly to drive safely. Included among these are a
decline in peripheral vision and nighttime acuity, difficulties
with glare, and problems when focusing on close objects. Also,
advanced age brings increased incidence of cataracts, dementia,
cardiovascular disease, diabetes, stroke, episodes of loss of
consciousness, Parkinson's disease, glaucoma, arthritis, and
bursitis. Any, or a combination of these, could reduce or
impair driving ability. Although the literature suggests that
these factors show little relationship to crash involvement,
these impairments are predictive of the discontinuing of
driving and decreased mobility. Ironically, some of the
medicines prescribed to alleviate these maladies could also
negatively impact the ability of the elderly to drive or react
to traffic situations.
On the other hand, there are medical, technological, and
social factors that are increasing the ability of some older
Americans to continue to drive, and societal factors that
decrease the need for the elderly to drive. These include:
longer life spans with associated better
health, improved medical technologies reducing the
incidence of age-related disabilities;
telecommunication advances such as e-mail
and video conferencing that provide social
opportunities without requiring the use of automobiles;
construction of elder communities that
provide recreation, transportation, and other onsite
services; and
a willingness of many elder drivers to
recognize their risks and medical limitations, and
voluntarily ``turn in'' their keys, or to engage in
safer driving habits, such as driving at other than
peak traffic hours or only in the daytime.
Numerous programs to identify and address the problems of
elderly drivers have been initiated by both the Federal and
state governments. For example, during the last 5 years or so,
the National Highway Traffic Safety Administration (NHTSA) of
the U.S. Department of Transportation (DOT) has invested
roughly $500,000 to $600,000 per year into a research program
pertaining to the older driver. The agency has studied some of
the medical problems associated with older drivers and expects
to use its National Driving Simulator to replicate the most
hazardous situations for elders. NHTSA has sponsored studies
that characterize or assess the older driver problem, supported
pilot tests involving state licensing agents and other
professionals seeking innovative ways to deal with the older
driver challenge, and worked with the medical and licensing
community to improve licensing standards. The Federal Highway
Administration of DOT has also sponsored research to improve
highway signage, specifically with the older driver in mind.
There is also a diversity of state activities pertaining to the
older driver. Some states require more frequent testing of the
skills and abilities of elders behind the wheel; some provide
refresher courses for any drivers receiving citations; while
some require re-examination every 2 years and others allow
license renewal through the mail, without any examination.
In the private sector, organizations like the Insurance
Institute for Highway Safety (IIHS), the American Psychological
Association (APA), and TransSafety, Inc., have analyzed crash
data, looking for common denominators that may cause older
drivers to be at higher risk. Both APA and TransSafety have
targeted vision loss (especially the ``useful field of view'')
as an important risk factor. The American Association for
Retired Persons (AARP) has addressed problems experienced by
some older drivers. Since 1979, AARP has sponsored a course
entitled ``55 Alive: A Mature Driving Program.'' The course
provides 8-hour, safe-driver training which, when
satisfactorily completed, entitles the participant to receive a
certificate, redeemable with some insurance companies for a
discount. Since its inception, over six million people, of all
ages, have completed the course.
Additional information on these research and educational
activities can be obtained at following Internet Web sites,
maintained by:
National Highway Traffic Safety Administration
American Association of Retired Persons
Insurance Institute for Highway Safety
Concerns associated with some elder drivers are actually
components of a larger issue: promoting mobility for an aging
population. Addressing this challenge may require the
development of both short-term and long-term strategies. A
short-term approach could identify those changes that can be
made quickly and without extensive disruption to existing
transportation infrastructure. These strategies might include:
assessing key medical problems and
conducting rehabilitation of older drivers;
providing relevant medical information to
licensing bureaus;
requiring that driver licensing include
tests for hand, foot, and visual capabilities
(including useful field of view);
developing graduated licensing programs that
often reduce risks by limiting driving (similar to
those now applied to new drivers);
offering insurance incentives (similar to
those provided in the AARP program) to encourage elders
to self assess their driving habits, capabilities, and
difficulties, and to refresh their knowledge of traffic
laws and improve their driving skills;
changing the characteristics of traffic
lights and road signs (longer caution lights at
intersections and larger letters on traffic signs); and
promoting the deployment of tested
automotive technologies such as ``night vision'' to
increase the time available to react to rapidly
changing traffic situations in poor light.
Over the long-term, Federal and state transportation
authorities as well as the automobile industry may need to
refocus their activities to better meet the needs of older
drivers. Approaches could include:
tightening medical standards for driver
licensing;
developing and testing of model license
renewal processes that would assist many state agencies
facing difficult decisions regarding the renewal,
suspension, or revocation of licenses of older drivers.
Such processes could include the development of
improved screening, diagnostic or assessment
capabilities as well as driver rehabilitation programs;
developing and deploying vehicles equipped
with intelligent transportation systems (ITS) designed
to reduce the specific medical challenges facing many
older drivers;
accelerating construction of more mass
transit systems throughout the United States;
advancing research to find better ways to
protect vehicle occupants and to compensate for the
fragility of older populations;
redesigning or improving the design of
intersections, where older drivers have a higher
percentage of their crashes, to reduce crash frequency;
and
providing financial incentives (such as tax
credits or lower fares) for using mass transit and
improving the accessibility and reliability of transit
systems to reduce the need for many older Americans to
drive.
E. LEGAL SERVICES
1. Background
(a) the legal services corporation
Legislation establishing the Legal Services Corporation
(LSC) was enacted in 1974. Previously, legal services had been
a program of the Office of Economic Opportunity, added to the
Economic Opportunity Act in 1966. Because litigation initiated
by legal services attorneys often involves local and State
governments or controversial social issues, legal services
programs can be subject to unusually strong political
pressures. In 1971, in an effort to insulate the program from
those political pressures, the Nixon Administration developed
legislation creating a separate, independently housed
corporation.
The LSC was then established as a private, nonprofit
corporation headed by an 11 member board of directors,
nominated by the President and confirmed by the Senate. No more
than 6 of the 11 board members, as directed in the
Corporation's incorporating legislation, may be members of the
same political party as the President. The Corporation does not
provide legal services directly. Rather, it funds local legal
aid programs which are referred to by LSC as ``grantees.'' Each
local legal service program is headed by a board of directors,
of whom about 60 percent are lawyers admitted to a State bar.
In 2000, LSC funded 207 local programs. Together they served
every county in the nation, as well as the U.S. territories.
Legal services provided through Corporation funds are
available only in civil matters and to individuals with incomes
less than 125 percent of the Federal poverty guidelines. The
Corporation places primary emphasis on the provision of routine
legal services and the majority of LSC-funded activities
involve routine legal problems of low-income people. Legal
services cases deal with a variety of issues including: family
related issues (divorce, separation, child custody, support,
and adoption); housing issues (primarily landlord-tenant
disputes in nongovernment subsidized housing); welfare or other
income maintenance program issues; consumer and finance issues;
and individual rights (employment, health, juvenile, and
education). Most cases are resolved outside the courtroom. The
majority of issues involving the elderly concern government
benefit programs such as Social Security and Medicare.
Several restrictions on the types of cases legal services
attorneys may handle were included in the original law and
several other restrictions have since been added in
appropriations measures. These include, among others,
limitations on lobbying, class actions, political activities,
and prohibitions on the use of Corporation funds to provide
legal assistance in proceedings that seek nontherapeutic
abortions or that relate to school desegregation. In addition,
if a recipient of Corporation funds also receives funds from
private sources, the latter funds may not be expended for any
purpose prohibited by the Act. Funds received from public
sources, however, may be spent ``in accordance with the
purposes for which they are provided.''
Under the appropriations statute for fiscal year 2001 (P.L.
106-553), LSC grantees may not: ``engage in partisan litigation
related to redistricting; attempt to influence regulatory,
legislative or adjudicative action at the Federal, state or
local level; attempt to influence oversight proceedings of the
LSC; initiate or participate in any class action suit;
represent certain categories of aliens, except that non federal
funds may be used to represent aliens who have been victims of
domestic violence or child abuse; conduct advocacy training on
a public policy issue or encourage political activities,
strikes, or demonstrations; claim or collect attorneys' fees;
engage in litigation related to abortion; represent Federal,
state or local prisoners; participate in efforts to reform a
Federal or state welfare system; represent clients in eviction
proceedings if they have been evicted from public housing
because of drug-related activities; or solicit clients.
In addition, LSC grantees may not file complaints or engage
in litigation against a defendant unless each plaintiff is
specifically identified, and a statement of facts is prepared,
signed by the plaintiffs, kept on file by the grantee, and made
available to any Federal auditor or monitor. LSC grantees must
establish priorities, and staff must agree in writing not to
engage in activities outside these priorities.
With respect to restrictions related to welfare reform, the
reader should note that on February 28, 2001, the Supreme Court
held in the case of Legal Services Corporation v. Velazquez,
121 S. Ct. 1043 (2001), that an LSC funding restriction related
to welfare reform violates the First Amendment (i.e., freedom
of speech) rights of LSC grantees and their clients and is
thereby unconstitutional. The Supreme Court agreed with the
Second Circuit Court's ruling that, by prohibiting LSC-funded
attorneys from litigating cases that challenge existing welfare
statutes or regulations, Congress had improperly prohibited
lawyers from presenting certain arguments to the courts, which
had the effect of distorting the legal system and altering the
traditional role of lawyers as advocates for their clients.
Grantees also are required to maintain timekeeping records
and account for any non federal funds received. The
appropriations law contains extensive audit provisions. The
Corporation is prohibited from receiving non federal funds, and
grantees are prohibited from receiving non-LSC funds, unless
the source of funds is told in writing that these funds may not
be used for any activities prohibited by the Legal Services
Corporation Act or the appropriations law. However, grantees
may use non-LSC funds to comment on proposed regulations or
respond to written requests for information or testimony from
Federal, state, or local agencies or legislative bodies, as
long as the information is provided only to the requesting
agency and the request is not solicited by the LSC grantee.
(b) older americans act
Support for legal services under the Older Americans Act
(OAA) was a subject of interest to both the Congress and the
Administration on Aging (AOA) for several years preceding the
1973 amendments to the OAA. There was no specific reference to
legal services in the initial version of the OAA in 1965, but
recommendations concerning legal services were made at the 1971
White House Conference on Aging. Regulations promulgated by the
AOA in 1973 made legal services eligible for funding under
Title III of the OAA. Subsequent reauthorizations of the OAA
contained provisions relating to legal services. In 1975,
amendments granted legal services priority status. The 1978
Amendments to the OAA established a funding mechanism and a
program structure for legal services. The 1981 amendment
required that area agencies on aging spend ``an adequate
proportion'' of social service funding for three categories,
including legal services, as well as access and in-home
services, and that ``some funds'' be expended for each service.
The 1984 amendments to the Act retained the priority, but
changed the term to ``legal assistance'', and required that an
``adequate proportion'' be spent on ``each'' priority service.
In addition, area agencies were to annually document funds
expended for this assistance. The 1987 amendments specified
that each State unit on aging must designate a ``minimum
percentage'' of Title III social services funds that area
agencies on aging must devote to legal assistance and the other
two priority services. If an area agency expends at least the
minimum percentage set by the State, it will fulfill the
adequate proportion requirement. Congress intended the minimum
percentage to be a floor, not a ceiling, and has encouraged
area agencies to devote additional funds to each of these
service areas to meet local needs.
The 1992 amendments modified the structure of the Title III
program through a series of changes designed to promote
services that protect the rights, autonomy, and independence of
older persons. One of these changes was the shifting of some of
the separate Title III service components to a newly authorized
Title VII, Vulnerable Elder Rights Protection Activities. State
legal assistance development services was one of the programs
shifted from Title III to Title VII.
In order to be eligible for Title VII elder rights and
legal assistance development funds, State agencies must
establish a program that provides leadership for improving the
quality and quantity of legal and advocacy assistance as part
of a comprehensive elder rights system. State agencies are
required to provide assistance to area agencies on aging and
other entities in the State that assist older persons in
understanding their rights and benefiting from services
available to them. Among other things, State agencies are
required to establish a focal point for elder rights policy
review, analysis, and advocacy; develop statewide standards for
legal service delivery, provide technical assistance to AAAs
and other legal service providers, provide education and
training of guardians and representative payees; and promote
pro bono programs. State agencies are also required to
establish a position for a State legal assistance developer who
will provide leadership and coordinate legal assistance
activities within the State.
The OAA also requires area agencies to contract with legal
services providers experienced in delivering legal assistance
and to involve the private bar in their efforts. If the legal
assistance grant recipient is not a LSC grantee, coordination
with LSC-funded programs is required.
Another mandate under the OAA requires State agencies on
aging to establish and operate a long-term care ombudsman
program to investigate and resolve complaints made by, or on
behalf of, residents of long-term care facilities. The 1981
amendments to the OAA expanded the scope of the ombudsman
program to include board and care facilities. The OAA requires
State agencies to assure that ombudsmen will have adequate
legal counsel in the implementation of the program and that
legal representation will be provided. In many States and
localities, there is a close and mutually supportive
relationship between State and local ombudsman programs and
legal services programs.
The AOA has stressed the importance of such a relationship
and has provided grants to States designed to further
ombudsman, legal, and protective services activities for older
people and to assure coordination of these activities. State
ombudsman reports and a survey by the AARP conducted in 1987
indicate that through both formal and informal agreements,
legal services attorneys and paralegals help ombudsmen secure
access to the records of residents and facilities, provide
consultation to ombudsmen on law and regulations affecting
institutionalized persons, represent clients referred by
ombudsman programs, and work with ombudsmen and others to
change policies, laws, and regulations that benefit older
persons in institutions.
In other initiatives under the OAA, the AOA began in 1976
to fund State legal services developer positions--attorneys,
paralegals, or lay advocates--through each State unit on aging.
These specialists work in each State to identify interested
participants, locate funding, initiate training programs, and
assist in designing projects. They work with legal services
offices, bar associations, private attorneys, paralegals,
elderly organizations, law firms, attorneys general, and law
schools.
The 1987 amendments to OAA required that beginning in
fiscal year 1989, the Assistant Secretary collect data on the
funds expended on each type of service, the number of persons
who receive such services, and the number of units of services
provided. Today, OAA funds support over 600 legal programs for
the elderly in greatest social and economic need.
In 1990, the Special Committee on Aging surveyed all State
offices on aging regarding Title III funded legal assistance.
Key findings of the survey include: (1) 18 percent of States
contract with law school programs to provide legal assistance
under Title III-B of the Act and 35 percent contract with
nonattorney advocacy programs to provide counseling services;
(2) a majority of States polled (34) designated less than 3
percent of their Title III-B funds to legal assistance; (3)
minimum percentage of Title III-B funds allocated by area
agencies on aging to legal assistance ranged from 11 percent
down to 1 percent; and (4) only 65 percent of legal services
developers are employed on a full-time basis and only 38
percent hold a law degree.
(c) social services block grant
Under the block grant program, Federal funds are allocated
to States which, in turn, either provide services directly or
contract with public and nonprofit social service agencies to
provide social services to individuals and families. In
general, States determine the type of social services to
provide and for whom they shall be provided. Services may
include legal aid.
Because the Omnibus Budget Reconciliation Act of 1981
eliminated much of the reporting requirements included in the
Title XX program, little information has been available on how
States have responded to both funding reductions and changes in
the legislation. As a result, little data have been available
on the number and age groups of persons being served. In 1993,
however, Title XX was amended to require that certain specified
information be included in each State's annual report and that
HHS establish uniform definitions of services for use by States
in preparing these reports. According to state data for FY1999,
a very small amount (0.4 percent) of SSBG funds were used for
legal services.
2. Issues
(a) need and availability of legal services
The need for civil legal services for the elderly,
especially the poor elderly, is undeniable. This is partially
due to the complex nature of the programs under which the
elderly are dependent. After retirement, most older Americans
rely on government-administered benefits and services for their
entire income and livelihood. For example, many elderly persons
rely on the Social Security program for income security and on
the Medicare and Medicaid programs to meet their health care
needs. These benefit programs are extremely complicated and
often difficult to understand.
In addition to problems with government benefits, older
persons' legal problems typically include consumer fraud,
property tax exemptions, special property tax assessments,
evictions, foreclosures, custody of grandchildren,
guardianships, involuntary commitment to institutions, nursing
home and probate matters. Legal representation is often
necessary to help the elderly obtain basic necessities and to
assure that they receive benefits and services to which they
are entitled.
Due to the increasing victimization of seniors by consumer
fraud artists, on September 24, 1992, the Special Committee on
Aging convened a hearing entitled ``Consumer Fraud and the
Elderly: Easy Prey?'' The Committee sought to determine whether
senior citizens are easy prey for persons that seek to take
their money. The evidence suggests that seniors are often the
target of unscrupulous people that will sell just about
anything to make a dollar. It matters little that the services
or products that these individuals sell are of little value,
unnecessary, or at times nonexistent.
The purpose of the hearing was to provide a forum for
discussion of what various States are doing to combat consumer
fraud that targets the elderly, and to examine what the Federal
Government might do to support these efforts. The hearing
focused not only on the broad issue of consumer fraud that
targets older Americans, but more specifically, the areas of
living trusts, home repair fraud, mail order fraud, and
guaranteed giveaway scams. The States have generally taken the
lead in addressing this kind of fraud through law enforcement
and prosecution. The hearing illustrated, however, that the
Federal Government needs to do more. The Legal Services
Corporation is one of the weapons in the Federal arsenal that
could be used to combat this type of fraud.
In 2000, legal services attorneys closed about one million
cases. Legal Services Corporation programs do not necessarily
specialize in serving older clients but attempt to meet the
legal needs of the poor, many of whom are elderly. It is
estimated that approximately 9 million persons over 60 are LSC-
eligible. It is estimated that older clients represent about 10
percent of the clients served by the legal services program.
There is no precise way to determine eligibility for legal
services under the Older Americans Act because, although
services are to be targeted on those in economic and social
need, means testing for eligibility is prohibited.
Nevertheless, a paper developed by several legal support
centers in 1987 concluded that, in spite of advances in the
previous 10 years, the need for legal assistance among older
persons is much greater than available OAA resources can meet.
The availability of legal representation for low-income
older persons is determined, in part, by the availability of
funding for legal services programs. In recent years, there has
been a trend to cut Federal dollars to local programs that
provide legal services to the elderly.
There is no doubt that older persons are finding it more
difficult to obtain legal assistance. When the Legal Services
Corporation was established in 1974, its foremost goal was to
provide all low-income people with at least ``minimum access''
to legal services. This was defined as the equivalent of two
legal services attorneys for every 10,000 poor people. The goal
of minimum access was achieved in fiscal year 1980 with an
appropriation of $300 million, and in fiscal year 1981, with
$321 million. This level of funding met only an estimated 20
percent of the poor's legal needs. Currently, the LSC is not
even funded to provide minimum access. In most States, there is
only one attorney for every 10,000 poor persons. In contrast,
there are approximately 28 lawyers for every 10,000 persons
above the Federal poverty line.
The Private Attorney Involvement (PAI) project under LSC
requires each LSC grantee to spend at least 12.5 percent of its
basic field grant to promote the direct delivery of legal
services by private attorneys, as opposed to LSC staff
attorneys. The funds have been primarily used to develop pro
bono panels, with joint sponsorship between a local bar
association and a LSC grantee. Over 350 programs currently
exist throughout the country. Data indicates that the PAI
requirement is an effective means of leveraging funds. A higher
percentage of cases were closed per $10,000 of PAI dollars than
with dollars spent supporting staff attorneys.
It should be noted, however, that these programs have been
criticized by Legal Services staff attorneys. They claim that
these programs have been unjustifiably cited to support less
LSC funding and to the diversion of cases from LSC field
offices. Cuts in funding have decreased the LSC's ability to
meet clients' legal needs. Legal services field offices report
that they have had to scale down their operations and narrow
their priorities to focus attention on emergency cases, such as
evictions or loss of means of support. Legal services offices
must now make hard choices about whom they serve.
The private bar is an essential component of the legal
services delivery system for the elderly. The expertise of the
private bar is considered especially important in areas such as
will and estates as well as real estate and tax planning. Many
elderly persons, however, cannot obtain legal services because
they cannot afford to pay customary legal fees. In addition, a
substantial portion of the legal problems of the elderly stem
from their dependence on public benefit programs. The private
bar generally is unable to undertake representation in these
matters because it requires familiarity with a complex body of
law and regulations, and there is a little chance of collecting
a fee for services provided. Although many have cited the
capacity of the private bar to meet some of the legal needs of
the elderly on a full-fee, low-fee, or no-fee basis, the
potential of the private bar has yet to be fully realized.
(b) legal services corporation
(1) Board Appointments
The Legal Services Corporation Act provides that ``[t]he
Corporation shall have a Board of Directors consisting of 11
voting members appointed by the President, by and with the
advice and consent of the Senate, no more than 6 of whom shall
be of the same political party.'' President Clinton nominated
11 new Board members, all of whom were confirmed on October 21,
1993. President Bush's nominations for the 11 members to
succeed the longest-serving Board of Directors in LCS history
are not expected for several months.
(2) Status of Legal Services Corporation
Few people disagree that provision of legal services to the
elderly is important and necessary. However, people continue to
debate how to best provide these services. President Reagan
repeatedly proposed termination of the federally funded Legal
Services Corporation and the inclusion of legal services
activities in a social services block grant. Funds then
provided to the Corporation, however, were not included in this
proposal. This block grant approach was consistent with the
Reagan Administration's goal of consolidating categorical grant
programs and transferring decisionmaking authority to the
States. Inclusion of legal services as an eligible activity in
block grants, it was argued, would give States greater
flexibility to target funds where the need is greatest and
allowing States to make funding decisions regarding legal
services would make the program accountable to elected
officials.
The Reagan Administration also revived earlier charges that
legal services attorneys are more devoted to social activism
and to seeking collective solutions and reform than to routine
legal assistance for low-income individuals. These charges
resparked a controversy surrounding the program at the time of
its inception as to whether Federal legal aid is being misused
to promote liberal political causes. The poor often share
common interests as a class, and many of their problems are
institutional in nature, requiring institutional change.
Because legal resources for the poor are a scarce commodity,
legal services programs have often taken group-oriented case
selection and litigation strategies as the most efficient way
to vindicate rights. The use of class action suits against the
government and businesses to enforce poor peoples' rights has
angered some officials. Others protest the use of class action
suits on the basis that the poor can be protected only by
procedures that treat each poor person as a unique individual,
not by procedures which weigh group impact. As a result of
these charges, the ability of legal services attorneys to bring
class action suits has been severely restricted.
The Reagan Administration justified proposals to terminate
the Legal Services Corporation by stating that added pro bono
efforts by private attorneys could substantially augment legal
services funding provided by the block grant. It was believed
that this approach would allow States to choose among a variety
of service delivery mechanisms, including reimbursement to
private attorneys, rather than almost exclusive use of full-
time staff attorneys supported by the Corporation.
Supporters of federally funded legal services programs
argue that neither State nor local governments nor the private
bar would be able to fill the gap in services that would be
created by the abolition of the LSC. They cite the inherent
conflict of interest and the State's traditional nonrole in
civil legal services which, they say, makes it unlikely that
States will provide effective legal services to the poor. Many
feel that the voluntary efforts of private attorneys cannot be
relied on, especially when more lucrative work beckons. They
believe that private lawyers have limited desire and ability to
do volunteer work. Some feel that, in contrast to the LSC
lawyers who have expertise in poverty law, private lawyers are
less likely to have this experience or the interest in dealing
with the types of problems that poor people encounter.
Defenders of LSC believe that the need among low-income
people for civil legal assistance exceeds the level of services
currently provided by both the Corporation and the private bar.
Elimination of the Corporation and its funding could further
impair the need and the right of poor people to have access to
their government and the justice system. They also contend that
it is inconsistent to assure low-income people representation
in criminal matters, but not in civil cases.
3. Federal and Private Sector Response
(a) legislation--the legal services corporation
The 1974 LSC Act was reauthorized for the first and only
time in 1977 for an additional 3 years. Although the
legislation authorizing the LSC expired at the end of fiscal
year 1980, the agency has operated under a series of continuing
resolutions and appropriations bills, which have served both as
authorizing and funding legislation. The Corporation is allowed
to submit its own funding requests to Congress. In fiscal year
1985, Congress began to earmark the funding levels for certain
activities to ensure that congressional recommendations were
carried out. In addition to original restrictions, the
legislation for fiscal year 1987 included language that
provided that the legislative and administrative advocacy
provisions in previous appropriations bills and the Legal
Services Corporation Act of 1974, as amended, shall be the only
valid law governing lobbying and shall be enforced without
regulations. This language was included because the Corporation
published proposed regulations that were believed to go far
beyond the restrictions on lobbying which are contained in the
LSC statute.
For fiscal year 1988, Congress appropriated $305.5 million
for the LSC. Congress also directed the Corporation to submit
plans and proposals for the use of funding at the same time it
submits its budget request to Congress. This was deemed
necessary because the appropriations committees had encountered
great difficulty in tracing the funding activities of the
Corporation and received very little detail from the
Corporation about its proposed use of the funding request,
despite repeated requests for this information. The Corporation
is prohibited from imposing requirements on the governing
bodies of recipients of LSC grants that are additional to, or
more restrictive than, provisions already in the LSC statute.
This provision applies to the procedures of appointment,
including the political affiliation and length of terms of
office, and the size, quorum requirements, and committee
operations of the governing bodies.
In FY1996, Congress funded the LSC at $278 million, a
reduction of almost 31 percent from the previous year. In its
FY1996 budget resolution, the House assumed a 3-year phase-out
of the LSC, recommending appropriations of $278 million in
FY1996, $141 million in FY1997, and elimination by FY1998. The
House Budget Committee stated in its report (H.Rept. 104-120),
``Too often, . . . lawyers funded through Federal LSC grants
have focused on political causes and class action lawsuits
rather than helping poor Americans solve their legal problems.
. . . A phaseout of Federal funding for the LSC will not
eliminate free legal aid to the poor. State and local
governments, bar associations, and other organizations already
provide substantial legal aid to the poor.'' The $278 million
appropriation for the LSC in FY1996 provided funding for basic
field programs and audits, the LSC inspector general, and
administration and management. However, funding was eliminated
entirely for supplemental legal assistance programs, including
Native American and migrant farmworker support, national and
state support centers, regional training centers, and other
national activities. The 1996 appropriation also added more
restrictions on the activities of LSC attorneys.
For FY2001, the Clinton Administration requested $340
million for the LSC. The Clinton Administration had requested
$340 million every year since FY1997, in an effort to partially
restore cutbacks in funding. The proposal would have continued
all existing restrictions on LSC-funded activities. The
conference report on H.R. 4942 (H.Rept. 106-1005), the FY2001
District of Columbia appropriations, which includes the FY2001
Departments of Commerce, Justice, and State, the Judiciary, and
Related Agencies appropriations, provided $330 million for LSC
for FY2001. This is $25 million higher than the FY2000 LSC
appropriation and $10 million lower than the Clinton
Administration's request. The $330 million appropriation for
LSC includes $310 million for basic field programs and
independent audits, $10.8 million for management and
administration, $2.2 million for the inspector general, and $7
million for client self-help and information technology. H.R.
4942 was signed by President Clinton on December 21, 2000 as
P.L. 106-553. The reader should note that P.L. 106-554 mandated
a 0.22 percent governmentwide rescission of discretionary
budget authority for FY2001 for almost all government agencies.
Thus, the $330 million appropriation for LSC for FY2001 has
been reduced to $329.3 million. Current funding still remains
below the Corporation's highest level of $400 million in FY1994
and FY1995.
The language accompanying the President Bush's FY2002
budget affirms the President Bush's support for the LSC. It
states: ``The Federal Government, through LSC, ensures equal
access to our Nation's legal system by providing funding for
civil legal assistance to low-income persons. For millions of
Americans, LSC-funded legal services is the only resource
available to access the justice system. LSC provides direct
grants to independent local legal services programs chosen
through a system of competition. LSC programs serve clients in
every State and county in the Nation. Last year, LSC-funded
programs provided legal assistance and information to almost
one million clients.'' For FY2002, the Bush Administration has
requested the current level funding of $329.3 million for the
LSC.
(b) activities of the private bar
To counter the effects of cuts in Federal legal services
and to ease the pressure on overburdened legal services
agencies, some law firms and corporate legal departments began
to devote more of their time to the poor on a pro bono basis.
Such programs are in conformity with the lawyer's code of
professional responsibility which requires every lawyer to
support the provisions of legal services to the disadvantaged.
Although pro bono programs are gaining momentum, there is no
precise way to determine the number of lawyers actually
involved in the volunteer work, the number of hours donated,
and the number of clients served. Most lawyers for the poor say
that these efforts are not yet enough to fill the gap and that
a more intensive organized effort is needed to motivate and
find volunteer attorneys.
A relatively recent development in the delivery of legal
services by the private bar has been the introduction of the
Interest on Lawyers' Trust Accounts (IOLTA) program. This
program allows attorneys to pool client trust deposits in
interest bearing accounts. The interest generated from these
accounts is then channeled to federally funded, bar affiliated,
and private and nonprofit legal services providers. IOLTA
programs have grown rapidly. There was one operational program
in 1983. Today all 50 States and the District of Columbia have
adopted IOLTA programs. An American Bar Association study group
estimated that if the plan was adopted on a nationwide basis,
it could produce up to $100 million a year. The California
IOLTA program specifically allocates funds to those programs
serving the elderly. Although many of the IOLTA programs are
voluntary, the ABA passed a resolution at its February 1988
meeting suggesting that IOLTA programs be mandatory to raise
funds for charitable purposes.
Supporters of the IOLTA concept believe that there is no
cost to anyone with the exception of banks, which participate
voluntarily. Critics of the plan contend that it is an
unconstitutional misuse of the money of a paying client who is
not ordinarily apprised of how the money is spent. Supporters
point out that attorneys and law firms have traditionally
pooled their client trust funds, and it is difficult to
attribute interest to any given client. Prior to IOLTA, the
banks have been the primary beneficiaries of the income. While
there is no unanimity at this time among lawyers regarding
IOLTA, the program appears to have value as a funding
alternative.
On June 15, 1998, the Supreme Court issued a decision that
may affect the extent to which IOLTA funds will be available
for legal services in the future. These funds represent
interest earned on sums that are deposited by legal clients
with attorneys for short periods of time. A substantial amount
of these funds $69 million in 1999, according to the LSC are
used to help fund legal services programs. In Phillips v.
Washington Legal Foundation, the Court ruled that these funds
are the private property of clients, and returned the case to
the lower court to determine whether the state (Texas, in this
case) was required to compensate the clients for ``taking''
these funds.
In 1977, the president of the American Bar Association was
determined to add the concerns of senior citizens to the ABA's
roster of public service priorities. He designated a task force
to examine the status of legal problems and the needs
confronting the elderly and to determine what role the ABA
could play. Based on a recommendation of the task force, an
interdisciplinary Commission on Legal Problems of the Elderly
was established by the ABA in 1979. The Commission is charged
with examining six priority areas: the delivery of legal
services to the elderly; age discrimination; simplification of
administrative procedures affecting the elderly; long-term
care; Social Security; and housing. In addition, since 1976,
the ABA Young Lawyers Division has had a Committee on the
Delivery of Legal Services to the Elderly.
The Commission on Legal Problems of the Elderly has
undertaken many activities to promote the development of legal
resources for older persons and to involve the private bar in
responding to the needs of the aged. One such activity was a
national bar activation project, which provided technical
assistance to State and local bar associations, law firms,
corporate counsel, legal service projects, the aging network,
and others in developing projects for older persons.
The private bar has also responded to the needs of elderly
persons in new ways on the State and local levels. A number of
State and local bar association committees on the elderly have
been formed. Their activities range from legislative advocacy
on behalf of seniors and sponsoring pro bono legal services for
elderly people to providing community legal education for
seniors. Other State and local projects utilize private
attorneys to represent elderly clients on a reduced fee or pro
bono basis. In more than 38 States, handbooks that detail
seniors' legal rights have been produced either by State and
area agencies on aging, legal services offices, or bar
committees. In addition, some bar associations sponsor
telephone legal advice lines. Since 1982, attorneys in more
than half the States have had an opportunity to attend
continuing legal education seminars regarding issues affecting
elderly people. The emergence of training options for attorneys
that focus on financial planning for disability and long-term
care are particularly noteworthy.
In 1987, the Academy of Elder Law Attorneys was formed. The
purpose of this organization is to assist attorneys advising
elderly clients, to promote high technical and ethical
standards, and to develop awareness of issues affecting the
elderly.
A few corporate law departments also have begun to provide
legal assistance to the elderly. For example, Aetna Life and
Casualty developed a pro bono legal assistance to the elderly
program in 1981 through which its attorneys are granted up to 4
hours a week of time to provide legal help for eligible older
persons. The Ford Motor Company Office of the General Counsel
also began a project in 1986 to provide pro bono representation
to clients referred by the Detroit Senior Citizens Legal Aid
Project.
As recognized by the American Bar Association, private bar
efforts alone fall far short in providing for the legal needs
of older Americans. The ABA has consistently maintained that
the most effective approach for providing adequate legal
representation and advice to needy older persons is through the
combined efforts of a continuing Legal Services Corporation, an
effective Older Americans Act program, and the private bar.
With increased emphasis on private bar involvement, and with
the necessity of leveraging resources, the opportunity to
design more comprehensive legal services programs for the
elderly exists.
CHAPTER 16
CRIME AND THE ELDERLY
1. Background
Although violence experienced by all Americans, including
the elderly, has declined in the United States since 1991, the
crime rate remains higher than that reported in the early
1980's. According to the 1999 Uniform Crime Reports (UCR), in
the United States there is one violent crime every 22 seconds,
one murder every 34 minutes, one forcible rape every 6 minutes,
one robbery every minute, and one aggravated assault every 34
seconds.
According to research done by the American Association for
Retired Persons (AARP), ``one-third of persons age 50 and older
avoid going out at night because they are concerned about
crime.'' \1\ A recent poll released on June 7, 2001, shows that
older Americans continue to fear criminal victimization.
According to an ABC News/Washington Post poll, the elderly (and
women) continue to perceive crime as an important problem.\2\
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\1\ For further information see: AARP, The Policy Book: AARP Public
Policies 2001. [http://www.aarp.org/legipoly.html], Chapter 13, p. 19.
\2\ See: [http://www.abcnews.go.com/sections/politics/DailyNews/
poll00607.html].
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The Federal Bureau of Investigations preliminary 2000 UCR
figures, released on May 30, 2000, suggest that the fears of
many of these Americans may be exaggerated. According to the
FBI's press release, ``Crime Index Trends, 2000 Preliminary
Figures,'' the crime index\3\ did not yield a significant
change from the 1999 figures. The 1999 Crime Index total saw
its greatest decline since 1978, 6.8 percent.\4\ The 2000
findings of the Bureau of Justice Statistics' National Crime
Victimization Survey (NCVS) showed a decline in the violent
crime rate by 15 percent and the property crime rate by 10
percent. In August 2000, the Bureau of Justice Statistics
released a report, Criminal Victimization 1999, Changes 1998-99
with Trends 1993-99. According to the report, ``in 1999, the
rate of violent crime victimization of persons ages 65 or older
was 4 per 1,000'' and in 2000 the rate was 3.7 per 1,000. In
addition to the continued decline in the crime rate, statistics
show that the elderly, in comparison to younger Americans, are
less likely to experience a violent crime.\5\
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\3\ The FBI's Uniform Crime Report's crime index is composed of
violent crimes (murder, non-negligent manslaughter, forcible rape,
robbery, and aggravated assault) as well as property crimes (burglary,
larceny-theft, motor vehicle theft, and arson).
\4\ According to the FBI's Crime in the United States, 1999 Uniform
Crime Reports, ``This total (6.8 percent) represented the eighth
consecutive annual decline in the Crime Index.'' See: [http://
www.fbi.gov/pressrel/pressrel01/ucrprelim2000.htm], p. 6.
\5\ According to the Bureau of Justice Statistics, Victim
Characteristics:
In 2000 persons age 12 to 24 sustained violent victimization at
rates higher than individuals of all other ages.
Elderly persons (age 65 or older) were victims of an annual average
46,000 purse snatchings or pocket pickings, 166,000 nonlethal violent
crimes (rape, sexual assault, robbery, aggravated and simple assault),
and 1,000 murders between 1992-97.
Robbery accounted for a quarter of the violent crimes against
persons age 65 or older, but less than an eighth of the violent crimes
experienced by those age 12-64 between 1992-97.
For further information, see: [http://www.ojp.usdoj.gov/bjs/cvict--
v.htm].
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While these data appear to provide encouraging news,
special problems may arise when an older person falls victim to
crime. The impact of crime on the lives of older adults may be
greater than on the other population groups, given their
vulnerabilities. They are more likely to be injured, take
longer to recover, and incur greater proportional losses to
income. About 60 percent of the elderly live in urban areas,
where crime is more prevalent. Often, the elderly live in
social isolation, and in many instances they are unable to
defend themselves against their attackers. Because many seniors
live on social security and other fixed income and, as
retirees, may not have health insurance coverage through their
former place of employment, crime can devastate them
financially. Crime victimization of the elderly also can wreak
emotional havoc on them.
2. Legislative Response
Congress has expressed concern regarding the criminal
victimization of elderly citizens. On October 28, 2000, for
example, the Victims of Trafficking and Violence Protection Act
of 2000 (P.L. 106-386) was signed into law. Section 1209 of the
Act amends the Violence Against Women Act by adding a new
Subtitle H (Elder Abuse, Neglect, and Exploitation, Including
Domestic Violence and Sexual Assault Against Older or Disabled
Individuals). The Act directs the Attorney General to award
grants for training programs that would assist the law
enforcement community in recognizing and addressing instances
of elder abuse, neglect, exploitation, and violence against
individuals with disabilities as well as instances of domestic
violence and sexual assault against the elderly and individuals
with disabilities. Although the Act authorized appropriations
for the grants, Congress did not appropriate funding for
FY2001. President Bush, however, requested $5 million for
FY2002.
A. ELDER ABUSE
1. Background
Elder abuse affects hundreds of thousands of older persons
annually, yet remains largely a hidden problem. The National
Center on Elder Abuse (NCEA)(within the American Public Human
Services Association) has identified a number of types of
abuse: physical, sexual, emotional or psychological abuse,
financial or material exploitation, abandonment, self-neglect,
or neglect by another person. According to the Administration
on Aging (AoA), the most common forms of elder abuse are
physical and psychological abuse, financial exploitation, and
neglect.
The NCEA has been collecting data on reports of domestic
elder abuse since 1986. A groundbreaking study, completed by
the NCEA in 1998, assessed the incidence of elder abuse
nationwide. The study was completed in collaboration with
Westat, Inc. for the Administration for Children and Families,
and AoA, in the Department of Health and Human Services (HHS).
This study found that over 550 thousand persons aged 60 and
over experienced various forms of abuse, neglect, and/or self-
neglect in domestic settings in 1996. Based on an estimate of
unreported incidents, the study concluded that almost four to
fives times more new incidents of elder abuse, neglect, and/or
self-neglect were unreported in 1996. Generally, elder abuse is
difficult to identify due to the isolation of older persons and
reluctance of older persons and others to report incidents.
Underreporting of abuse represents what some researchers have
called the ``iceberg'' theory, that is, the number of cases
reported is simply indicative of a much larger societal
problem. According to this theory, the most visible types of
abuse and neglect are reported, yet a large number of other,
less visible forms of abuse go unreported.
Victims of elder abuse are more likely to be women and
persons in the oldest age categories. Abusers are more likely
to be male and most are related to victims. The NCEA study
indicated that adult children represent the largest category of
abusers.
According to AoA, State legislatures in all States have
enacted some form of legislation that authorizes States to
provide protective services to vulnerable adults. In about
three-quarters of the States, these services are provided by
adult protective service (APS) units in State social services
agencies; in the remaining States, State agencies on aging
carry out this function. Most States have laws that require
certain professionals to report suspected cases of abuse,
neglect and/or exploitation. In 1996, 23 percent of all
domestic elder abuse reports came from physicians, and another
15 percent came from service providers. In addition, family
members, neighbors, law enforcement, clergy and others made
reports.
2. Federal Programs
The primary source of Federal funds for elder abuse
prevention activities are the Social Services Block Grant
(SSBG) and the Older Americans Act (OAA)program. The SSBG
(along with State funds) support activities of APS units in all
States. The Older Americans Act supports a number of activities
including training for APS personnel, law enforcement
personnel, and others; coordination of State social services
systems, including the use of hotlines for reporting; technical
assistance for service providers; and public education.
B. CONSUMER FRAUDS AND DECEPTIONS
1. Background
An AARP report entitled ``Beyond 50 A Report to the Nation
on Economic Security'' found that incomes and asset levels
among retirees (over the age of 50) have steadily risen over
the past 20 years. The same study reported that per capita net
worth of the over-50 age category increased 36 percent between
1983 and 1998.\6\ This fact contributes to making the elderly
prime targets of consumer frauds and deceptions. Unfortunately,
con artists who prey on the elderly are extremely effective at
defrauding their victims. To the poor, they make ``get rich
quick'' offers; to the rich, they offer investment properties;
to the sick, they offer health gimmicks and new cures for
ailments; to the healthy, they offer attractive vacation deals;
and to those who are fearful of the future, they offer a
confusing array of useless insurance plans.
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\6\ For further information see: [http://www.aarp.org/press/2001/
nr052301.html], p. 22-23.
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The victimization of the elderly through telemarketing
fraud remains one of the leading areas of concern in the fight
to combat crime against older Americans. According to an AARP
fact sheet, ``there are approximately 140,000 telemarketing
firms in the country [and] up to 10 percent, or 14,000 may be
fraudulent.'' \7\ Telemarketers prey on the repeated
victimization of the elderly. According to a 1999 survey done
by AARP, ``. . . older consumers are especially vulnerable to
telemarketing fraud. Of the people identified by the survey who
had suffered a telemarketing fraud, 56 percent were age fifty
or older.'' \8\ In one case, the FBI reported a fraudulent
telemarketing scam wherein nearly 80 percent of the calls were
directed to older consumers.\9\
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\7\ See: [http://www.aarp.org/fraud/1fraud.htm].
\8\ See: [http://www.ojp.usdoj.gov/ovc/assist/nvaa2000/academy/N-
14-ELD.htm].
\9\ See: [http://www.aarp.org/fraud/1fraud.htm].
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One scheme frequently used by fraudulent marketeers is the
so-called ``sweepstakes'' or ``free giveaways'' scheme.
According to the National Consumer League's (NCC) National
Fraud Information Center (NFIC), ``sweepstakes were the No. 1
form of telemarketing consumer fraud reported in 1995, 1996 and
1997.''\10\ Senator Thad Cochran, in his opening remarks during
a September 1998 hearing reported that 52 percent of the
complaints received by the Federal Trade Commission are related
to sweepstakes, and over $40 billion is lost to consumers
annually as a result of telemarketing and sweepstakes
scams.\11\
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\10\ See: [http://www.aarp.org/wwstand/testimony/1999/
080499a.html].
\11\ U.S. Congress. Senate. Subcommittee on International Security,
Proliferation, and Federal Services. Use of Mass Mail to Defraud
Consumers, 1998. Hearing on S. 2141, 105th Cong., 2nd Sess., September
1, 1998. Washington: GPO, 1998. p. 2.
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2. Legislative Response
On August 10, 2000, Congress held a hearing that examined
how seniors are victimized by fraudulent activities.\12\
Several senior citizens testified during the hearing on how
they had been victimized by fraudulent acts. Law enforcement
officials as well as service providers from several states
provided testimony on their respective state laws and programs
that attempt to address fraudulent activities directed to the
elderly.
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\12\ U.S Congress. Senate Special Committee on Aging. Protecting
Seniors From Fraud, 2000 Hearing on S. 3164, 106th Cong., 2nd Sess.,
August 10, 2000. Washington: GPO, 2000.
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The Protecting Seniors From Fraud Act (P.L. 106-534) was
enacted on November 22, 2000. The Act authorized appropriations
for FY2001 through FY2005 for TRIAD programs. The Act requires
the Secretary of Health and Human Services to disseminate
information designed to educate senior citizens and raise
awareness about the dangers of fraud. Additionally, the Act
directs the Attorney General to conduct a study that would
provide assistance in developing new crime prevention
strategies (pertaining to crimes against seniors) and to
include statistics in the National Crime Victimization Survey
on crimes that impact seniors.
The Honesty in Sweepstakes Act of 1998 (P.L. 106-118)
became law on December 12, 1999. Title I of the Act (Deceptive
Mail Prevention and Enforcement) curtails the ``you're a
winner'' language found in many sweepstakes. The law imposes
harsh fines on sweepstakes companies that violate the law and
gives the U.S. Postal Inspection Service authority to stop
illegal mailings. Additionally, Title I of the law amends
Chapter 30 of Title 39, United States Code, by strengthening
the current prohibition against mail solicitations by a
nongovernmental entity for a product or service, for
information, or for the contribution of funds or membership
fees, which contain a seal, insignia, trade or brand name which
could reasonably be construed as implying any Federal
Government connection or endorsement.\13\
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\13\ The amended language specifies all possible federal
connections (i.e., ``Postmaster General, citation to a federal statute,
name of a federal agency, department, commission ...'') that could
reasonably be construed as implying any federal government connection
or endorsement.
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The AARP, along with local law enforcement officials and
citizens, continues to combat elderly victimization. In 1988
TRIAD was formed after the AARP, the International Association
of Chiefs of Police, and the National Sheriff's Association
signed a cooperative agreement to work together to reduce both
criminal victimization and unwarranted fear of crime affecting
older persons. The cornerstone of TRIAD is the exchange of
information between law enforcement and senior citizens.
Additionally, TRIAD programs sponsor various crime prevention
activities such as involvement in neighborhood watch, victim
assistance, and training for deputies and officers in
communicating with and assisting older persons. TRIAD programs
also provide social assistance to the elderly (i.e., buddy
system and adopt-a-senior for shut-ins, senior walks at parks
or malls, and senior safe shopping trips for groceries). TRIAD
can be found in many communities throughout the Nation as well
as the world.\14\ The Federal Government provides some funding
for TRIAD programs through the Bureau of Justice Assistance and
the Office of Victims of Crime.
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\14\ For additional information on TRIAD programs, visit AARP's
website at [http://www.aarp.org] and [http://www.vbe.com/~jonvon/triad-
1.htm].
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Ironically, as older Americans increase in size as a
cumulative market with growing consumer purchasing power, many
elderly live close to the poverty line and have little
disposable income. Consequently, crimes aimed at the
pocketbooks of the elderly frequently have devastating effects
on their victims. Elderly consumers are frequently the least
able to rebound from being victimized. While there are several
reasons why the elderly are disproportionately victimized, the
older victims' accessibility is a major factor. Since they
often spend most of their days at home, older consumers are
easier to contact by telephone, mail, and in person. The
dishonest telemarketer usually gets an answer when he or she
telephones an older person. Door-to-door salespeople hawking
worthless goods are more likely to find someone at home when
they ring the doorbell of a retired person. Deceptive or
fraudulent mass mailings are likely to be given more attention
by retired individuals with more leisure time. In addition,
older citizens are often trusting and willing to talk to
strangers, and they often lack the skills to end a potentially
fraudulent phone call.
Con artists are well organized, sophisticated, and
effective. Police authorities report that it is not uncommon
for a con artist, upon leaving one successful location, to
exchange the addresses of his easiest victims with another con
artist who is just moving into the area. To avoid being caught,
con artists usually avoid leaving a paper trail. Whenever
possible they deal in cash. They avoid written estimates, avoid
properly drawn contracts, and insist on quick decisions to take
advantage of a ``today only'' special price. Increasingly, con
artists operate on a very sophisticated level. New technology
provides a variety of clever ways to defraud consumers. Schemes
now exist that victimize even the most cautious and skeptical
among us, especially the elderly.
SUPPLEMENTAL MATERIAL
List of Hearings and Forums Held in 1999 and 2000
The Senate Special Committee on Aging, convened 30
hearings, 5 field hearings, and 5 forums during the 106th
Congress.
hearings
February 22, 1999--Women and Social Security Reform: Are
Individual Accounts the Answer?
March 1, 1999--Social Security Reform: Is More Money the
Answer?
March 22, 1999--Residents At Risk? Weaknesses Persist in
Nursing Home Complaint Investigation and Enforcement
March 23, 1999--Long-Term Care for the 21st Century: A Common
Sense Proposal to Support Family Caregiver
April 13, 1999--Beneficiary Beware: Inadequate Review of
Medicare Managed Care Plans Results in Incomplete
Information for Consumers
April 26, 1999--Shopping for Assisted Living: What Customers
Need to Make the Best Buy
May 24, 1999--Too Much Information? The Impact of OASIS on
Access to Home Health Care
June 1, 1999--The Impact of Social Security Reform on Women
June 17, 1999--Learning to Save: Innovations in the Pursuit of
Income Security
June 30, 1999--The Nursing Home Initiative: Results at Year One
July 20, 1999--Drugstore Surprise: The Impact of Drug Switching
on Older Americans
September 14, 1999--Going the Distance: Senior Athletes and the
Benefits of Exercise
November 4, 1999--HCFA Regional Offices: Inconsistent, Uneven,
Unfair
November 8, 1999--The Boomers Are Coming: Challenges of Aging
in the New Millennium
February 8, 2000--The Right Medicine? Examining the Breaux-
Frist Prescription For Saving Medicare
March 6, 2000--Colon Cancer: Greater Use of Screenings Would
Save Lives
March 27, 2000--Income Taxes: The Solution to the Social
Security and Medicare Crisis?
April 3, 2000--Hearing on Now Hiring: The Rising Demand for
Older Workers
April 10 and 11, 2000--Funerals and Burials: Protecting
Consumers From Bad Practices
May 2, 2000--Inviting Fraud: Has the Social Security
Administration Allowed Some Payees to Deceive the
Elderly and Disabled?
June 5, 2000--The Cash Balance Condundrum: How to Promote
Pensions Without Harming Participants
June 26, 2000--Kidney Dialysis Patients: A Population At Undue
Risk?
July 11, 2000--Death Planning Made Difficult: The Danger of
Living Trust Scams
July 17, 2000--The End of Life: Improving Care, Easing Pain and
Helping Families
July 27, 2000--Nursing Home Residents: Shortchanged by Staff
Shortages, Part II
September 5, 2000--Nursing Home Bankruptcies: What Caused Them?
September 13, 2000--Long Term Care Insurance: Protecting
Consumers From Hidden Rate Hikes
September 18, 2000--Barriers to Hospice Care: Are We
Shortchanging Dying Patients
September 21, 2000--Joint Hearing on Pension Tension: Does the
Pension Benefit Guaranty Corporation Deliver For
Retirees
September 28, 2000--The Nursing Home Initiative: A Two-Year
Progress Report
field hearings
August 12, 1999--Making Long-Term Care Affordable,
Indianapolis, IN
October 4, 1999--Long-Term Care and the Role of Family
Caregivers: A Rhode Island Perspective, Cranston, RI
October 11, 1999--The Boomers Are Coming: The Challenge of
Family Caregiving, Monroe, LA
March 15, 2000--Elder Fraud and Abuse: New Challenges in the
Digital Economy
August 10, 2000--Protecting Seniors From Fraud, Indianapolis,
IN
forums
June 10, 1999--Passport to Independence: Battling the Leading
Causes of Disability Among Seniors
September 23, 1999--Consumers Assess the Nursing Home
Initiative
November 3, 1999--Nursing Home Residents: Short-Changed by
Staff Shortages
December 14, 1999--Funerals, Burials and Consumers
November 21, 2000--Living Longer, Living Better: The Challenge
to Policymakers