[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

                               ----------                              

                              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
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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

                              ----------                              

                                       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

                              ----------                              

                               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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \2\ See the discussion of Legislative Developments in the next 
section of this chapter for the most recent legislative changes.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \3\ Income eligibility limits are 25 percent higher in Alaska and 
15 percent higher in Hawaii.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \1\ The American Health Care Association website. Facts and Trends 
http://www.ahca.org/secure/top15.htm October 17, 2000.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \3\ CMS is the agency formerly known as the Health Care Finance 
Administration (HCFA).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.)
---------------------------------------------------------------------------

               (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.
---------------------------------------------------------------------------

                 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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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
---------------------------------------------------------------------------
    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:
---------------------------------------------------------------------------
    \28\ The Qualified Medicare Beneficiary (QMB) Program was enacted 
in 1988. Additional categories were added by the Balanced Budget Act of 
1997.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

                       (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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \40\ Department of Health and Human Services Office of Inspector 
General. Access to Home Health Care After Hospital Discharge 2001. July 
2001.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \41\ Department of Health and Human Services Office of Inspector 
General. Medicare Beneficiary Experiences with Home Health Care. July 
2001.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \42\ Department of Health and Human Services. Quality of Care in 
Nursing Homes: An Overview. Office of Inspector General, March 1999, 
OEI-99-00060.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \45\ Edelman, Toby. Draft of Providing Technical Assistance to 
Facilities. Center for Medicare Advocacy, Washington, D.C. July 2001.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

                 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\
---------------------------------------------------------------------------
    *\1\ See Housing the Poor: Federal Housing Programs for Low-Income 
Families-By Morton J. Schussheim. CRS Report 98-860 E. October 20, 
1998.
---------------------------------------------------------------------------

              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]
------------------------------------------------------------------------
                        Age Groups                           1990   2000
------------------------------------------------------------------------
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
------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \9\ There is usually a 2-year time lag in availability of estimates 
of State population from the U.S. Census Bureau.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \10\ U.S. General Accounting Office. Older Americans Act: Title III 
Funds Not Distributed According to Statute. GAO/HEHS-94-37. January 
1994.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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].
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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].
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \6\ For further information see: [http://www.aarp.org/press/2001/
nr052301.html], p. 22-23.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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].
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

                        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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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].
---------------------------------------------------------------------------
    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

                                
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