[Senate Report 108-265]
[From the U.S. Government Publishing Office]
108th Congress Rept. 108-265
SENATE
2nd Session Volume 1
======================================================================
DEVELOPMENTS IN AGING: 2001 and 2002
VOLUME 1
----------
R E P O R T
of the
SPECIAL COMMITTEE ON AGING
UNITED STATES SENATE
pursuant to
S. RES. 66, SEC. 17(c), FEBRUARY 26, 2003
Resolution Authorizing a Study of the Problems of the Aged and Aging
May 14, 2004.--Ordered to be printed
108th Congress Rept. 108-265
SENATE
2nd Session Volume 1
======================================================================
DEVELOPMENTS IN AGING: 2001 and 2002
VOLUME 1
__________
R E P O R T
of the
SPECIAL COMMITTEE ON AGING
UNITED STATES SENATE
pursuant to
S. RES. 66, SEC. 17(c), FEBRUARY 26, 2003
Resolution Authorizing a Study of the Problems of the Aged and Aging
May 14, 2004.--Ordered to be printed
-----
29-010 U.S. GOVERNMENT PRINTING OFFICE
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SPECIAL COMMITTEE ON AGING
LARRY CRAIG, Idaho, Chairman
RICHARD SHELBY, Alabama JOHN B. BREAUX, Louisiana, Ranking
SUSAN COLLINS, Maine Member
MIKE ENZI, Wyoming HARRY REID, Nevada
GORDON SMITH, Oregon HERB KOHL, Wisconsin
JAMES M. TALENT, Missouri JAMES M. JEFFORDS, Vermont
PETER G. FITZGERALD, Illinois RUSSELL D. FEINGOLD, Wisconsin
ORRIN G. HATCH, Utah RON WYDEN, Oregon
ELIZABETH DOLE, North Carolina BLANCHE L. LINCOLN, Arkansas
TED STEVENS, Alaska EVAN BAYH, Indiana
RICK SANTORUM, Pennsylvania THOMAS R. CARPER, Dalaware
DEBBIE STABENOW, Michigan
Lupe Wissel, Staff Director
Michelle Easton, Ranking Member, Staff Director
(ii)
LETTER OF TRANSMITTAL
----------
U.S. Senate,
Special Committee on Aging,
Washington, DC, 2004.
Hon. Dick Cheney,
President, U.S. Senate,
Washington, DC.
Dear Mr. President: Under authority of Senate Resolution
66, agreed to February 26, 2003, I am submitting to you the
annual report of the U.S. Senate Special Committee on Aging,
Developments in Aging: 2001 and 2002, 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 2001 and 2002 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,
Larry Craig, Chairman.
(iii)
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.......... 2
1. Background............................................ 2
2. Financing and Social Security's Relation to the Budget 4
3. Benefit and Tax Issues and Legislative Response....... 10
B. Social Security Disability Insurance...................... 18
1. Background............................................ 18
2. Issues and Legislative Response....................... 18
Chapter 2: Employee Pensions:
Background................................................... 21
A. Private Pensions.......................................... 21
1. Background............................................ 21
2. Issues and Legislative Response....................... 23
B. State and Local Public Employee Pension Plans............. 29
1. Background............................................ 29
C. Federal Civilian Employee Retirement...................... 30
1. Background............................................ 30
2. Issues and Legislative Response....................... 36
D. Military Retirement....................................... 37
1. Background............................................ 37
2. Issues and Legislative Response....................... 39
E. Railroad Retirement....................................... 41
1. Background............................................ 41
2. Issues and Legislative Response....................... 42
3. Outlook in the 108th Congress......................... 46
Chapter 3: Taxes and Savings:
A. Taxes..................................................... 47
1. Overview of Important Provisions...................... 47
2. Tax Legislation in the 107th Congress................. 53
Chapter 4: Employment:
A. Age Discrimination........................................ 57
1. Background............................................ 57
2. The Equal Employment Opportunity Commission........... 58
3. The Age Discrimination in Employment Act.............. 59
B. Federal Programs.......................................... 70
1. The Adult and Dislocated Worker Program Authorized
Under the Workforce Investment Act..................... 70
2. Title V of the Older Americans Act.................... 75
Chapter 5: Supplemental Security Income:
Overview..................................................... 77
A. Background................................................ 77
B. Issues.................................................... 79
1. Limitations of SSI Payments to Immigrants............. 79
2. SSA Disability Determination Process.................. 80
3. Employment and Rehabilitation for SSI Recipients...... 81
4. Fraud Prevention and Overpayment Recovery............. 83
Chapter 6: Food Assistance Programs and Food Security Among the
Elderly:
Overview..................................................... 85
A. Background on the Programs................................ 86
1. Food Stamps........................................... 86
2. The Commodity Supplemental Food Program............... 101
3. The Child and Adult Care Food Program................. 102
4. The Senior Farmer's Market Nutrition Program.......... 102
B. Legislative Developments.................................. 103
C. Food Security Among the Elderly........................... 103
Chapter 7: Health Care:
A. National Health Care Expenditures......................... 105
1. Introduction.......................................... 105
2. Medicare and Medicaid Expenditures.................... 106
3. Hospitals............................................. 108
4. Physicians' Services.................................. 110
5. Nursing Home and Home Health Costs.................... 111
6. Prescription Drugs.................................... 113
7. Health Care for an Aging U.S. Population.............. 115
Chapter 8: Medicare:
A. Background................................................ 119
1. Hospital Insurance Program (Part A)................... 120
2. Supplementary Medical Insurance (Part B).............. 121
3. Medicare+Choice (Part C).............................. 124
4. Supplemental Health Coverage.......................... 125
B. Issues.................................................... 127
1. Prescription Drugs.................................... 127
2. Medicare Solvency and Cost Containment................ 127
Chapter 9: Long-Term Care:
Overview..................................................... 130
Federal Programs............................................. 140
1. Medicaid.............................................. 141
2. Medicare.............................................. 144
Private Long Term Care Insurance............................. 146
Chapter 10: Employer Health Benefits for Retirees:
A. Background................................................ 153
1. Who Receives Retiree Health Benefits?................. 155
2. Design of Benefit Plans............................... 156
3. Recognition of Employer Liability..................... 158
4. Pre-Funding........................................... 158
B. Benefit Protection Under Existing Federal Laws............ 160
1. ERISA................................................. 160
2. COBRA................................................. 161
3. HIPAA................................................. 161
C. Outlook................................................... 162
Chapter 11: Health Research and Training:
A. Background................................................ 165
B. The National Institutes of Health......................... 166
1. Mission of NIH........................................ 166
2. The Institutes........................................ 166
a. National Institute on Aging....................... 167
b. National Cancer Institute......................... 168
c. National Heart, Lung, and Blood Institute......... 168
d. National Institute of Dental & Craniofacial
Research........................................... 169
e. National Institute of Diabetes and Digestive and
Kidney Diseases.................................... 169
f. National Institute of Neurological Disorders and
Stroke............................................. 170
g. National Institute of Allergy and Infectious
Diseases........................................... 170
h. National Institute of Child Health and Human
Development........................................ 171
i. National Eye Institute............................ 171
j. National Institute of Environmental Health
Sciences........................................... 171
k. National Institute of Arthritis and
Musculoskeletal and Skin Diseases.................. 172
l. National Institute on Deafness and Other
Communication Disorders............................ 172
m. National Institute of Mental Health............... 172
n. National Institute on Drug Abuse.................. 173
o. National Institute of Alcohol Abuse and Alcoholism 173
p. National Institute of Nursing Research............ 174
q. National Human Genome Research Institute.......... 174
r. National Institute of Biomedical Imaging and
Biomedical Engineering............................. 174
s. National Center for Research Resources............ 174
t. National Center for Complementary and Alternative
Medicine........................................... 175
u. National Center on Minority Health and Health
Disparities........................................ 175
v. John E. Fogarty International Center.............. 175
w. Office of the Director, NIH....................... 176
C. Issues and Congressional Response......................... 176
1. NIH Appropriations.................................... 176
2. NIH Authorizations and Related Issues................. 177
3. Alzheimer's Disease................................... 178
4. Arthritis and Musculoskeletal Diseases................ 183
5. Geriatric Training and Education...................... 185
6. Social Science Research and the Burdens of Caregiving. 186
D. Conclusion................................................ 186
Chapter 12: Housing Programs:
Overview..................................................... 189
A. Rental Assistance Programs................................ 190
1. Introduction.......................................... 190
2. Housing and Supportive Services....................... 191
3. Public Housing........................................ 192
4. Section 8 Rental Assistance........................... 195
5. Project-based and Tenant-based Vouchers............... 195
6. Rural Housing Services................................ 196
7. Federal Housing Administration........................ 201
8. Low-Income Housing Tax Credit......................... 202
B. Preservation of Affordable Rental Housing................. 203
1. Introduction.......................................... 203
2. Portfolio Re-Engineering Program...................... 204
C. Homeownership and the Elderly............................. 205
D. Innovative Housing Arrangements........................... 215
1. Shared Housing........................................ 215
2. Accessory Apartments.................................. 216
E. Fair Housing Act and Elderly Exemption.................... 217
F. Homeless Assistance....................................... 217
G. Housing Cost Burdens of the Elderly....................... 219
Chapter 13: Energy Assistance and Weatherization:
Overview..................................................... 221
A. Background................................................ 222
1. The Low-Income Home Energy Assistance Program......... 222
2. The Department of Energy Weatherization Assistance
Program................................................ 226
Chapter 14: Older Americans Act:
Historical Perspective....................................... 229
1. Title I--Declaration of Objectives.................... 232
2. Title II--Administration on Aging..................... 232
3. Title III--Grants for State and Community Programs on
Aging.................................................. 232
4. Title IV--Training, Research, and Discretionary
Projects and Programs.................................. 235
5. Title V--Community Service Employment For Older
Americans.............................................. 235
6. Title VI--Grants for Services for Native Americans.... 238
7. Title VII--Vulnerable Elder Rights Protection
Activities............................................. 238
Chapter 15: Social, Community, and Legal Services:
A. Block Grants.............................................. 243
1. Background............................................ 243
2. Issues................................................ 246
3. Federal Response...................................... 250
B. Adult Education and Literacy.............................. 251
1. Background............................................ 251
2. Federal Programs...................................... 252
C. Domestic Volunteer Service Act............................ 253
1. Background............................................ 253
D. Transportation............................................ 257
1. Background............................................ 257
2. Federal Response...................................... 257
3. Issues in Transportation Services for Older Persons... 260
E. Legal Services............................................ 265
1. Background............................................ 265
2. Issues................................................ 270
3. Federal and Private Sector Response................... 274
Chapter 16: Crime and the Elderly:
1. Background............................................ 281
2. Legislative Response.................................. 282
A. Elder Abuse............................................... 282
1. Background............................................ 282
2. Federal Programs...................................... 283
B. Consumer Frauds and Deceptions............................ 283
1. Background............................................ 283
2. Legislative Response.................................. 285
SUPPLEMENTAL MATERIAL
List of Hearings and Forums Held in 2001 and 2002................ 287
108th Congress Rept. 108-265
SENATE
2nd Session Volume 1
======================================================================
DEVELOPMENTS IN AGING: 2001 AND 2002--VOLUME 1
_______
May 14, 2004.--Ordered to be printed
_______
Mr. Craig, from the Special Committee on Aging, submitted the following
R E P O R T
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CHAPTER 1
SOCIAL SECURITY--OLD AGE, SURVIVORS AND DISABILITY
OVERVIEW
Social Security continues to be an important topic of
national debate. In May 2001, President George W. Bush
established the President's Commission to Strengthen Social
Security. The Commission was 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 issued its final report in December 2001 and
presented three alternative plans for reforming Social
Security. Under all three plans, workers could choose to invest
in personal retirement accounts, and their traditional Social
Security benefit would be reduced by some amount. The first
plan would make no other changes to the program. The second
plan would slow the growth of Social Security through one major
provision that would index initial benefits to prices rather
than wages. The third plan would slow future program growth
through a variety of measures. To mitigate the effects of
benefit reductions, the latter two plans would guarantee a
minimum benefit and enhance benefits for widow(er)s.
Elements of the Commission's recommendations were reflected
in a number of bills introduced in the 107th 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. None of
these measures were acted upon during the 107th Congress.
Lawmakers, however, took up a number of other Social
Security measures during the 107th Congress. On February 8,
2001, Representative Herger introduced H.R. 2, which attempted
to create points of order against measures that would cause the
budget surpluses to be less than Social Security and Medicare
HI surpluses. H.R. 2 was passed by the House of Representatives
on February 13, 2001.
On March 20, 2002, Representative Shaw introduced H.R.
4069, the Social Security Benefit Enhancements for Women Act of
2002. This bill was designed to enhance benefits for certain
divorced spouses and disabled and elderly widow(er)s. The cost
of H.R. 4069, approximately $3.3 billion over 10 years, would
have been partially offset by three tax provisions expected to
increase revenue by $694 million over 10 years. On May 14,
2002, the House passed H.R. 4069 as amended, by a vote of 418-
0. The Senate did not take up the bill before the close of the
107th Congress.
In recent years, Congress has put an emphasis on reducing
waste, fraud, and abuse in the Social Security program. On
March 20, 2002, Representative Shaw introduced H.R. 4070, the
Social Security Program Protection Act of 2002. This bipartisan
bill would have imposed stricter standards on individuals and
organizations that serve as representative payees for Social
Security and Supplemental Security Income (SSI) recipients;
made non-governmental representative payees liable for
``misused'' funds and subjected them to civil monetary
penalties; tightened restrictions on attorneys who represent
Social Security and SSI disability claimants and limited
assessments on attorney fee payments; prohibited fugitive
felons from receiving Social Security benefits; and made other
changes designed to reduce program fraud and abuse. According
to the Congressional Budget Office, the House version of H.R.
4070 would have resulted in net savings of $541 million over 10
years. On June 26, 2002, the House of Representatives passed
H.R. 4070, as amended, by a vote of 425-0. The Senate passed a
modified version of the bill on November 18, 2002 by unanimous
consent. The House did not take up the Senate-passed version of
the bill before the 107th Congress adjourned sine die.
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 that 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 2002, $454
billion in monthly benefits were paid to more than 50 million
Social Security recipients, with payments to retired workers
averaging $895 and those to disabled workers averaging $834. In
2002, administrative expenses were $4.1 billion, representing
less than 1 percent of total revenues.
The Social Security program touches the lives of nearly
every American. In December 2002, there were 46.5 million
Social Security recipients: 29.2 million retired workers (62.8
percent of total recipients); 5.5 million disabled workers
(11.8 percent); 4.9 million dependent family members of retired
and disabled workers (10.5 percent); and 6.9 million surviving
family members of deceased workers (14.8 percent). In 2002,
there were an estimated 153 million workers in Social Security-
covered employment, representing more than 95 percent of the
total American work force.
In 2003, Social Security contributions are paid on earnings
up to $87,000, 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 to cover both the employee
and employer share, 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 2002, the Social
Security trust funds held assets totaling $1.38 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 among 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 ``full
benefit'' retirement age from 65 to 67 was scheduled to be
gradually phased in from 2003 to 2027.
(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, the 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 one
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 payments.
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 2003 is estimated to be 288 percent.
(D) OASDI NEAR-TERM FINANCING
Combined Social Security trust fund assets are expected to
increase over the next 5 years. According to the 2003 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 $7.5 trillion
in 2027.
(E) OASDI LONG-TERM FINANCING
In the long run, the Social Security trust funds will
experience just more than one decade of rapid growth, followed
by declining fund balances thereafter. Beginning in 2018,
Social Security's expenditures are projected to exceed tax
income (i.e., income excluding interest). Beginning in 2028,
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 2003 and 2077 varies
considerably. In the first 25-year period (2003 to 2027) income
is expected to exceed costs on average by approximately 4.5
percent. Annual balances are projected to remain positive
through 2027, with negative balances occurring thereafter. The
contingency fund ratio is projected to peak at 471 percent at
the beginning of 2016. In the second 25-year period (2028 to
2052) the financial condition of OASDI deteriorates and the
trust funds are projected to become insolvent late in the
period (2042) under intermediate projections. On average,
program costs are expected to exceed income by 33 percent. The
third 25-year period (2053 to 2077) is expected to be one of
continuous deficits. As annual deficits persist, program costs
are expected to exceed income on average by 44 percent.
(1) Midterm Reserves
It is projected that, from 2001 to 2027, 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 2018). 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, decrease publicly held
debt, or reduce taxes. During the period of OASDI shortfalls,
the Federal securities previously invested will be redeemed,
causing an increase in taxes, a decline in government
expenditure, or increased publicly held debt 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, spending will have to be drastically cut, or
publicly held debt will have to rise when the debt to Social
Security has to be repaid.
(2) Long-Term Deficits
The long-run financial strain on Social Security results
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 4.38 percent of
GDP. Under intermediate assumptions, Social Security
expenditures are expected to rise to 6.94 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 budget 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 a
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 George H.W. Bush Administration's
interpretation of the new law. This interpretation was 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 107th
Congress, 12 bills were introduced to liberalize the taxation
provision. Seven bills (H.R. 122, H.R. 192, H.R. 1018, H.R.
2548, H.R. 4789, H.R. 5568, and S. 237) would have repealed 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. One
bill, H.R. 2106, would have raised the thresholds at which 85
percent of Social Security benefits are subject to income tax
from $34,000 to $80,000 for individuals and from $44,000 to
$100,000 for married couples filing jointly. Three bills (H.R.
1532, H.R. 4790, and S. 181) would also have repealed the 1983
provision, and thus restore the original tax-free status of
Social Security benefits. One bill, H.R. 209, would have
excluded tax-exempt interest income from the computation of how
much of the Social Security benefit is taxable. None of these
bills was legislatively active.
(B) SOCIAL SECURITY EARNINGS TEST
The earnings test is a provision in the law that reduces
the Social Security benefits of recipients below the full
retirement age 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.
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 $30,720 in 2003.)
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 ($30,720 in 2003) 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. In 2003, recipients below the full retirement
age may earn up to $11,520 with no reduction in benefits. If
they earn more than $11,520, their benefits are reduced $1 for
every $2 of earnings above that amount. This benefit reduction
is widely viewed as a disincentive to continued work efforts by
workers who retire before the full retirement age and 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
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 the
test would increase poverty as most everyone would take early
retirement.
In the 107th Congress, two bills (H.R. 1731 and H.R. 3497)
would have repealed the earnings test for workers who attained
age 62 and over. Neither bill was legislatively active.
(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 over indexing 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 a 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. In the 107th
Congress, five bills were introduced that would have provided
additional cash benefits to workers born in the notch years
(and their dependents and survivors). However, there was no
legislative action on these measures.
(D) BENEFIT EXPANSIONS FOR WOMEN
The Social Security program provides benefits to retired
and disabled workers, to their dependents, and to the survivors
of deceased workers. In 2002, there were 46 million Social
Security recipients (not including new awards). Of those, 57
percent were women, compared to 43 percent men. Benefit amounts
varied by gender as well. The average benefit was $983 for men
and $740 for women. For spouses of retired workers, the average
benefit was $256 for men and $454 for women. For nondisabled
widow(er)s the average benefit was $663 for men and $863 for
women.
Social Security prevents many of the elderly from falling
into poverty. For example, in 2000, 8.5 percent of elderly
Social Security recipients were poor. Without Social Security,
48.1 percent would have been poor. Poverty rates for elderly
Social Security recipients vary by gender and marital status.
In 2000, the poverty rate for married Social Security
recipients was 2.8 percent, compared to13.8 percent for
nonmarried men and 16.2 percent for nonmarried women. For
widowed recipients, the rate was 12.3 percent for men and 15.0
percent for women. For never-married recipients, the rate was
25.9 percent for men and 19.5 percent for women. For divorced
recipients, the rate was 9.7 percent for men and 18.5 percent
for women. These statistics illustrate the importance of Social
Security for women in particular. On average, women earn lower
benefits than men because they earn less and spend more time
outside the labor force. In addition, women are likely to live
longer than men, are less likely to have other sources of
retirement income, and are more likely to be poor.
On March 20, 2002, Representative Shaw introduced H.R.
4069, the Social Security Benefit Enhancements for Women Act of
2002. This bill was designed to enhance benefits for certain
divorced spouses and disabled and elderly widow(er)s. Although
the benefit changes in H.R. 4069 were gender neutral, the bill
targeted benefits most often paid to women. H.R. 4069 would
have eliminated the requirement that surviving spouses must
become disabled within 7 years of the worker's death in order
to qualify for widow(er)s benefits from ages 50-59 (i.e., it
would have allowed disabled surviving spouses to qualify for
widow(er)s benefits from ages 50-59 regardless of when the
disability occurred). The bill would also have allowed a
divorced spouse to claim Social Security benefits on their
former spouse's work record immediately rather than 2 years
after the divorce if their former spouse marries another
individual within that 2-year period. Finally, in the case of a
worker who retires and subsequently dies prior to the full
retirement age (FRA), H.R. 4069 would have raised the limit on
the widow(er)'s benefit payable on the worker's record by
treating months following a deceased worker's death that occur
prior to the FRA as nonpayment months under the earnings test.
The cost of H.R. 4069, approximately $3.3 billion over 10
years, would have been partially offset by three tax provisions
expected to increase revenue by $694 million over 10 years. On
May 14, 2002, the House passed H.R. 4069 as amended, by a vote
of 418-0. The Senate did not take up the bill before the close
of the 107th Congress.
(E) PROGRAM PROTECTIONS
In recent years, Congress has put an emphasis on reducing
waste, fraud, and abuse in the Social Security program. On
March 20, 2002, Representative Shaw introduced H.R. 4070, the
Social Security Program Protection Act of 2002. This bipartisan
bill would have imposed stricter standards on individuals and
organizations that serve as representative payees for Social
Security and Supplemental Security Income (SSI) recipients;
made non-governmental representative payees liable for
``misused'' funds and subjected them to civil monetary
penalties; tightened restrictions on attorneys who represent
Social Security and SSI disability claimants and limited
assessments on attorney fee payments; prohibited fugitive
felons from receiving Social Security benefits; and made other
changes designed to reduce program fraud and abuse. According
to the Congressional Budget Office, the House version of H.R.
4070 would have resulted in net savings of $541 million over 10
years. On June 26, 2002, the House of Representatives passed
H.R. 4070, as amended, by a vote of 425-0. The Senate passed
the bill on November 18, 2002 by unanimous consent. The Senate-
passed version of H.R. 4070 closely resembled the House-passed
version, however, it contained several additional provisions.
The Senate version would have made ineligible for benefits in
any trial work period month individuals who are convicted of
fraudulently concealing work activity during the trial work
period for disability and would have made such individuals
liable for repayment of those benefits as well as any other
applicable penalties, fines or assessments; amended the ``last
day rule'' under which an individual is exempt from the
Government Pension Offset (GPO) if he or she worked in a Social
Security-covered position on his or her last day of employment
by requiring an individual to work in a Social Security-covered
position for the last 5 years of employment to be exempt from
the GPO; and, made several technical changes to the Railroad
Retirement program. The Social Security Administration
estimated that the Senate-passed version of H.R. 4070 would
have had a negligible effect on the long-range actuarial status
of the trust funds. The House did not take up the Senate-passed
version of the bill before the 107th Congress adjourned sine
die.
(F) FINANCING OF SOCIAL SECURITY TRUST FUNDS
Focus on the long-term solvency of the Social Security
trust funds has limited proposals to increase benefits or cut
payroll taxes. With the return of Federal budget deficits,
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 have primarily
focused on protecting Social Security surpluses or wholesale
restructuring of the system.
(1) 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 105th Congress. In his State of the Union message
in 1998 President Clinton 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 reemerged, 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
was ultimately passed.
In the 107th Congress, nine bills (H.R. 2, H.R. 120, H.R.
373, H.R. 560, H.R. 816, H.R. 1065, H.R. 1204, H.R. 1207, and
S. 21) were introduced that attempted to alter Social
Security's budget treatment. Some of these measures attempted
to keep Social Security surpluses from being used to offset
increased spending or tax cuts by establishing points of order
against any budget resolution or legislation that would create
or increase an on-budget deficit or that would cause unified
budget surpluses to be smaller than the surpluses in the Trust
Funds. Others attempted to preserve all budget surpluses until
legislation is enacted to extend OASDI and HI solvency by
making it out of order in the House or Senate to consider any
budget resolution, legislation or amendment that uses any part
of the on- or off-budget surpluses. Still others attempted to
make Social Security truly off-budget by prohibiting the
receipts and disbursements from the OASDI or HI Trust Funds
from being counted in the budget and requiring official
statements from the Office of Management and Budget and the
Congressional Budget Office to use only on-budget numbers. One
bill, H.R. 2, saw legislative action and was passed by the
House of Representatives on February 13, 2001. H.R. 2 again
attempted to create points of 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.
(2) Privatization
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 was 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
December 21, 2001, the Commission issued a final report that
included three alternative plans for reforming Social Security.
Under all three plans, workers could choose to invest in
personal retirement accounts and their traditional Social
Security benefit would be reduced upon retirement(the amount of
the offset would vary under the three plans). The first plan
would make no other changes to the program. The second plan
would slow the growth of Social Security through one major
provision that would index initial benefits to prices (rather
than wages). The third plan would slow future program growth
through a variety of measures. To mitigate the effects of
benefit reductions, the latter two plans would guarantee a
minimum benefit and enhance benefits for widow(er)s.
Under Plans One and Two, a portion of existing payroll tax
contributions would be used to fund the accounts (a ``carve-
out'' funding approach). Under Plan Three, workers could make
additional payroll tax contributions to fund their accounts (an
``add-on'' funding approach) and receive matching contributions
``carved out'' of existing payroll taxes. These additional
contributions would be subsidized for lower-wage workers.
According to the Commission's report, Plan One would not
restore solvency to the Social Security system. Plans Two and
Three were reported to restore solvency on average over the
next 75 years, but cash-flow deficits would occur at points
during the projection period, requiring the use of general
revenues to close the system's financing gap.
Representative Matsui introduced three bills (H.R. 4022,
H.R. 4023, and H.R. 4024) that would have enacted into law the
three reform plans put forth by the President's Commission to
Strengthen Social Security. Six other bills introduced in the
107th Congress (H.R. 849, H.R. 2771, H.R. 3497, H.R. 3535, H.R.
5734, and S. 5) would have created voluntary or mandatory
personal accounts as part of Social Security reform. However,
none of these measures was legislatively active.
B. SOCIAL SECURITY DISABILITY INSURANCE
1. Background
Generally, the goal of disability insurance is to replace a
portion of a worker's income should illness or disability
prevent him or her from working. Individuals may receive
disability benefits from either Federal or state governments,
or from private insurers. The Social Security Disability
Insurance (SSDI) program was enacted in 1956 and provides
benefits to insured disabled workers under the full retirement
age (and to their spouses, surviving disabled spouses, and
children) in amounts related to the disabled worker's previous
earnings in covered employment. Individuals receiving
Disability Insurance benefits have their benefits converted to
Retirement Insurance benefits when they reach the full
retirement age.
In recent years, Congress has raised concern over SSA's
administration of SSDI, the largest national disability
program. In particular, there was concern over the backlog of
cases in the disability determination process. However, no
bills were introduced in the 107th Congress to address the
backlog of disability cases.
2. Issues and Legislative Response
(A) 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 did 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 planned 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. Over the
last 7 years, SSA has spent more than $39 million to test and
implement various initiatives designed to improve the
timeliness, accuracy, and consistency of its disability
decisions and to make the process more efficient and
understandable for claimants. 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. According
to GAO, those state DDSs operating under the prototype awarded
a higher percentage of claims at the initial decision level,
while the overall accuracy of their decisions remained
comparable to those made under the traditional process.
Furthermore, because the prototype eliminated the
reconsideration step, appeals reached a hearing office about 70
days faster than under the traditional process. However, SSA
indicated that more denied claimants would appeal to
administrative law judges (ALJs) under the prototype than under
the traditional process, resulting in longer waiting times for
other claimants, increased workloads for hearings offices,
higher backlogs in the hearings offices, higher administrative
costs, more awards from the ALJs and higher benefit costs under
the prototype. As a result, SSA decided in December 2001 to not
extend the prototype to other states.\1\
---------------------------------------------------------------------------
GAO, ``Disappointing Results from SSA's Efforts to Improve the
Disability Claims Process Warrant Immediate Attention,'' February 2002.
---------------------------------------------------------------------------
The Disability Claim Manager initiative attempted to make
the initial part of the claims process easier for claimants by
creating a new position to explain the disability process and
program requirements and serve as the claimant's main point of
contact on their claims. The initiative was completed in June
2001. According to GAO, the results of the pilot test were
mixed; claims were processed faster and customer and employee
satisfaction improved, but administrative costs were
substantially higher. SSA concluded that the overall
improvements were not worth additional implementation of the
initiative.\2\
---------------------------------------------------------------------------
\2\ Ibid.
---------------------------------------------------------------------------
In addition, SSA implemented a third initiative, a Hearings
Process Improvement Plan, nationwide in 2000, 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. However, according to GAO, this initiative has
actually slowed the processing time in hearings offices from
318 days to 336 days, leading to increased backlogs.\3\ SSA is
studying the situation to determine what changes are needed.
---------------------------------------------------------------------------
\3\ Ibid.
---------------------------------------------------------------------------
A fourth SSA initiative, the Appeals Council Process
Improvement initiative, sought to alter the processes for
handling appeals of claims denied by the state DDSs. Under
current law, if the DDS denies a claim, the claimant can
request a hearing before an ALJ. If the claim is denied at the
ALJ level, the claimant can make a final appeal to an Appeals
Council. This initiative was implemented in FY2000 and,
according to GAO, has reduced the time required to process a
case in the Appeals Council by 11 days and subsequently reduced
the backlog of cases.\4\
---------------------------------------------------------------------------
\4\ Ibid.
---------------------------------------------------------------------------
A fifth SSA initiative, the Quality Assurance initiative,
sought to improve the process that SSA uses to ensure accuracy
in its disability decisions. This process would evaluate
accuracy throughout the disability determination process.
However, because of disagreements on how to achieve this goal,
this initiative has been put on hold.\5\
---------------------------------------------------------------------------
\5\ Ibid.
---------------------------------------------------------------------------
At a September 25, 2003 Ways and Means hearing before the
Subcommittee on Social Security, the Commissioner of Social
Security laid out her plans to improve the disability
determination process. Among the proposed changes are
implementing an electronic disability folder system and
changing the number and types of reviews/appeals. In addition,
the SSA requested additional funding for FY2004 to help
eliminate the backlog of cases within 5 years.
According to the Commissioner's testimony, the Accelerated
Electronic Disability System (AeDIB), an electronic disability
claims system, is a prerequisite for all of SSA's plans for
other long-term changes in the process. When fully implemented,
this system would allow Social Security field offices, state
DDS offices, hearings offices, and others to access and manage
all aspects of a claimant's file electronically. The agency
plans to roll out AeDIB nationwide over an 18-month period
beginning January 2004.
The proposed new disability determination process would be
comprised of seven steps, compared to the six steps of the
current process. The biggest change in the process would be to
provide a ``quick decision'' granting benefits to certain
``obviously disabled'' claimants before their cases reach the
state DDS. Some examples of cases that would be approved at
this level would be those with end-stage renal disease,
aggressive cancers, and ALS (Lou Gehrig's Disease). This review
of cases would occur in a Regional Expert Review Unit before a
case would even reach the state DDS. In addition to speeding
the delivery of benefits to these categories of claimants, this
new step would reduce the number of cases that would reach the
DDS, allowing them to focus their attention on the more
complicated and time-consuming cases. The other changes would
eliminate reconsideration at the DDS level and replace it with
an independent review by a Federal Reviewing Official, and
eliminate the Appeals Council review and replace it with an
Oversight Panel review.\6\
---------------------------------------------------------------------------
\6\ For more information about the SSA's proposed changes to the
disability determination process, see the Sept. 25, 2003 testimony of
the Commissioner of Social Security before the House Committee on Ways
and Means Social Security Subcommittee at [http://
waysandmeans.house.gov/hearing.asp?formmode=view&id=761].
---------------------------------------------------------------------------
CHAPTER 2
EMPLOYEE PENSIONS
BACKGROUND
Many workers participate in retirement plans other than
Social Security. In 2002, 49 percent of all workers in the
United States between the ages of 21 and 64 participated in an
employer-sponsored retirement plan. Forty-four percent of all
wage and salary workers in the private sector and 75.4 percent
of employees in the public sector participated in an employer-
sponsored retirement plan in 2002.\1\ Because employer-
sponsored pension plans play a significant role in providing a
secure source of income for retired Americans, Congress has
over the years passed many laws intended to expand access to
these plans and strengthen their financing.
---------------------------------------------------------------------------
\1\ CRS analysis of the March 2003 Current Population Survey.
---------------------------------------------------------------------------
The Economic Growth and Tax Relief Reconciliation Act
(EGTRRA) of 2001 (P.L. 107-16) increased the maximum annual
contribution to employer-sponsored retirement Sec. 401(k)
plans, to Sec. 403(b) annuity plans of nonprofit employers, and
Sec. 457 deferred compensation plans sponsored by state and
local governments. Other measures in this law are intended to
encourage employers to offer pensions, and to increase
participation by eligible employees. The law raised limits on
benefits under traditional defined benefit plans, improved
asset portability between jobs, strengthened legal protections
for plan participants, and reduced regulatory burdens on plan
sponsors. Due to budgetary constraints, provisions of the law
that reduce Federal tax revenue are scheduled to sunset after
10 years.
A. PRIVATE PENSIONS
1. Background
Income from employer-sponsored retirement plans is the
third most common and the third-largest source of income among
Americans age 65 and older. In 2001, 91 percent of people 65
and older received income from Social Security, 58 percent
received income from assets that they owned, and 40 percent
received income from an employer-sponsored retirement plan.
Also in 2001, Social Security provided 39 percent of total
income received by the elderly, earnings provided 24 percent of
their income, and pensions provided 18 percent of total income
among the elderly.\2\
---------------------------------------------------------------------------
\2\ Social Security Administration, Office of Policy, Income of the
Aged Chartbook, 2001, April 2003.
---------------------------------------------------------------------------
Over the past 25 years, there has been a shift in the
distribution of retirement plans and of plan participants from
defined benefit plans to defined contribution plans. According
to the U.S. Department of Labor, only 22 percent of full-time
workers in the private sector participated in defined benefit
pension plans in 2000, while 42 percent participated in defined
contribution plans.\3\ In a defined benefit or ``DB'' plan, the
retirement benefit is usually paid as a lifelong annuity based
on the employee's length of service and average salary in the
years immediately preceding retirement. In the private sector,
DB plans usually are funded entirely by the employer. The
employer's contributions and their investment earnings are held
in a trust fund that is protected from the claims of creditors
in the event that the employer becomes insolvent. In the public
sector, defined benefit plans are typically funded by
contributions from both the employer and the participating
employees. A defined contribution or ``DC'' plan is much like a
savings account maintained by the employer on behalf of each
participating employee. The employer contributes a specific
dollar amount or percentage of pay, which is invested in
stocks, bonds, or other assets. The employee usually
contributes to the plan, too. In a defined contribution plan,
it is the employee who bears the investment risk. At
retirement, the balance in the account is the sum of all
contributions plus interest, dividends, and capital gains--or
losses. The account balance is usually distributed as a single
lump sum. Many large employers recently have converted their
traditional DB pensions to hybrid plans that have
characteristics of both DB and DC plans, the most popular of
which has been the cash balance plan. In a cash balance plan,
the accrued benefit is defined in terms of an account balance.
The employer makes contributions to the plan and pays interest
on the accumulated balance. However, these account balances are
merely bookkeeping devices. They are not individual accounts
owned by the participants. Legally, therefore, a cash balance
plan is a defined benefit plan.
---------------------------------------------------------------------------
\3\ Nine percent participated in both types of plan. National
Compensation Survey, U.S. Department of Labor.
---------------------------------------------------------------------------
Private pensions are provided voluntarily by employers.
Federal law has long required, however, that in exchange for
favorable tax treatment, employer-sponsored retirement plans
must benefit a broad class of workers without discriminating in
favor of highly paid employees. Pension trusts receive
favorable tax treatment in three ways: (1) Employers can deduct
their current contributions to the plan from their taxable
income; (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 and the likelihood that income will be subject to a
lower marginal tax rate in retirement. The preferential tax
treatment of retirement plans provides a strong financial
incentive for employers to establish such plans. The Employee
Retirement Income Security Act (ERISA) of 1974, (P. L. 93-406),
established minimum eligibility standards for pension plans to
ensure a broad distribution of benefits among employees and to
limit the use of pension plans as tax shelters for company
owners and officers. ERISA also established pension funding
standards, defined rules for administering pension trusts, and
added an employer-financed insurance program to secure the
pension benefits of workers whose employers become financially
insolvent.
Title XI of the Tax Reform Act of 1986 (P.L. 99-514) made
major changes in pension and deferred compensation plans in
four general areas. The Act:
(1) limited an employer's ability to ``integrate''
pension benefits with Social Security to reduce the
benefits of lower-paid workers;
(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-qualified plans.
In 1987, Congress strengthened pension plan funding rules
and limited employer contributions to fully funded plans. These
rules were tightened further by the Retirement Protection Act
of 1994 (P.L. 103-465), and insurance premiums were increased
for underfunded plans. The increased oversight of pension
administration and funding was revisited in 1996 with the
passage of the Small Business Job Protection Act of 1996 (P.L.
104-188). Legislative and regulatory actions over the last 20
years had improved the security of pensions, but the complexity
of the new rules was blamed for the decline in the number of
employers that sponsored a plan. More complex rules resulted in
higher administrative costs to the plans, and failure to comply
could result in a plan losing its preferred tax status. The
Small Business Job Protection Act of 1996 was intended to begin
reducing some of the perceived over-regulation of pension
plans. While the number of defined benefit pension plans has
continued to decline in recent years, the number of defined
contribution plans has risen steadily. Small businesses,
especially, are more likely to sponsor a defined contribution
plan than a defined benefit plan, and while the percentage of
workers in firms with 100 or more employees who participate in
a retirement plan fell from 71.0 percent in 1994 to 66.6
percent in 2002, the percentage of workers in firms with fewer
than 100 employees who participate in a plan rose from 31.5
percent to 35.0 percent during this period.
2. Issues and Legislative Responses
(A) COVERAGE
Employers who offer pension plans do not have to cover
every employee. ERISA requires that employees be eligible for
the employer's retirement plan if they are 21 or older, have
worked for the employer for a year or more, and work 1,000
hours or more during the year. An employer also may not tailor
a plan to benefit only highly compensated employees. The Tax
Reform Act of 1986 increased the proportion of an employer's
work force that must be covered under an employer-sponsored
plan. While Congress and the IRS have sought to restrict the
practice of designing plans to provide disproportionately large
benefits to company owners and officers, the regulations are
complex and difficult to administer. Some 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 reduce some of the regulatory obstacles that small
employers face when establishing a retirement plan. Since 1999,
salary deferral plans have been exempt from these rules if the
plan adopts a ``safe-harbor'' design authorized under the law.
In addition, the coverage rules apply only to DB plans. Another
important change was the repeal of the family aggregation
rules. Under prior law, related employees were 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).
Participating in a pension plan does not ensure that a
worker will receive retirement benefits. To receive retirement
benefits, a worker must ``vest'' under the company plan.
Vesting entails remaining 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 Tax Reform Act of 1986 required more rapid
vesting. Employees must now be fully vested after 5 years of
service if vesting occurs all at once or after 7 years if
vesting is gradual. Employees are always fully vested in their
own contributions to a defined contribution plan, and they must
be fully vested in employer matching contributions to such
plans in no more than 5 years if vesting occurs all at once and
in no more than 7 years if vesting is gradual. Under the EGTRRA
of 2001, vesting schedules have been accelerated. Employees
must be fully vested in employer matching contributions in a
maximum of 3 years under ``cliff'' vesting and in no more than
6 years under gradual vesting.
(1) Access
Workers at large firms are substantially more likely than
employees of small businesses to work for an employer that
sponsors a retirement plan. In 2002, 31.7 percent of full-time
workers in businesses with fewer than 25 employees were
employed at firms that sponsored a retirement plan. Among
workers in firms with 25 to 99 employees, 56.3 percent were
employed at firms that sponsored a retirement plan in 2002,
compared to 59.0 percent in 1999 and 53.4 percent in 1994.
Among employees at businesses with 100 or more workers, 76.8
percent worked at firms that sponsored a retirement plan in
2002.
Not all employees whose employer sponsors a retirement plan
are eligible to participate. For example, employees under age
21, or who have been employed for less than 1 year, or who work
fewer than 1,000 hours per year can be excluded. In firms with
fewer than 25 employees, 27.3 percent of full-time employees
between the ages of 25 and 64 participated in a retirement plan
in 2002. In firms with 25 to 99 employees, 47.8 percent of
workers participated in a retirement plan in 2002.
Participation in retirement plans among workers in firms with
100 or more employees was much higher, at 66.6 percent.
One of the goals of the Small Business Job Protection Act
of 1996 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. The Act
increased access to DC plans by restoring to nonprofit
organizations the right to sponsor 401(k) plans, which had been
taken away by The Tax Reform Act of 1986. State and local
government entities are still prohibited from offering 401(k)
plans, but they can sponsor plans under I.R.C. section 403(b)
and section 457. The SBJPA 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.
Originally, an employee could contribute up to $6,000 annually
to a SIMPLE plan, indexed yearly for inflation in $500
increments. The EGTRRA of 2001 increased this limit to $7,000
in 2002 and by $1,000 annual increments thereafter until it
reaches $10,000 in 2005. The $10,000 dollar limit will be
indexed to inflation in $500 increments. 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 deferred benefits from the
plan when they reach retirement age. Benefits that can be paid
only at retirement 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. Employers may make distributions without
the consent of the employee on amounts of $5,000 or less. The
participant's written consent is required for such
distributions if the value of the distribution exceeds this
amount. Some workers that receive lump-sum distributions spend
them rather than save them. Thus, distributions could reduce
future retirement income.
Formerly, the primary incentive to save lump-sum
distributions was to continue the deferral of income taxes
until retirement. 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. The EGTRRA of 2001 allows a plan sponsor to
disregard benefits attributable to rollover contributions for
purposes of determining whether a lump-sum distribution will be
greater than $5,000. In the case of involuntary distributions
of $1,000 or more, the law makes direct rollover to an IRA the
required method of distribution unless the participant directs
otherwise.
(B) TAX EQUITY
Private pensions are encouraged through tax deductions and
deferrals. In return, Congress regulates private plans to
prevent them from being used to provide benefits solely to
highly paid employees. Efforts to prevent the discriminatory
provision of benefits have focused on tests that reveal the
proportion of total benefits or contributions that accrue to
highly compensated employees.
(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. 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 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 EGTRRA of 2001 increased the
allowable contribution to an IRA--either traditional or Roth--
to $3,000 in 2002, 2003, and 2004; to $4,000 in 2005, 2006, and
2007; and to $5,000 in 2008, after which it will be indexed to
inflation. For individuals age 50 and older, the maximum
allowable contribution to an IRA will increase by an additional
$500 in 2002 through 2005 and by $1,000 in each year
thereafter.
EGTRRA increased the limit on annual elective deferrals
under Section 401(k) plans, Section 403(b) annuities, and
salary-reduction Simplified Employee Pensions (SEPs) from
$10,500 in 2001 to $11,000 in 2002 and by $1,000 each year
thereafter until it reaches $15,000 in 2006. In years after
2006, the annual limit on salary deferrals will be indexed to
inflation in $500 increments. Beginning in 2006, a Section
401(k) plan or a Section 403(b) annuity will be permitted to
allow participants to elect to have all or a portion of their
elective deferrals under the plan treated as after-tax
contributions, called ``designated Roth contributions.'' These
contributions will be included in current income, but qualified
distributions from designated Roth contributions will not be
included in the participant's gross income. Such contributions
will otherwise generally be treated the same as elective
deferrals for purposes of the qualified plan rules.
The maximum deferral under a Section 457 plan for employees
of state and local governments was $8,500 in 2001. EGTRRA
raised this limit to $11,000 in 2002, $12,000 in 2003, $13,000
in 2004, $14,000 in 2005, and $15,000 in 2006. The limit will
be indexed in $500 increments thereafter. For the 3 years
immediately preceding retirement, the limit on deferrals under
a Section 457 plan will be twice the otherwise applicable
dollar limit. The law also repealed the rules coordinating the
dollar limit on Section 457 plans with contributions under
other types of plans.
Also as a result of the EGTRRA of 2001, the maximum annual
benefit payable by a tax-qualified defined benefit pension was
increased from $140,000 to $160,000 beginning in 2002.
Thereafter, it is indexed to inflation in $5,000 increments.
The annual limit on benefits is reduced if benefits begin
before age 62 and increases if benefits begin after age 65. The
limit on compensation that may be taken into account under a
plan was increased from $170,000 in 2001 to $200,000 in 2002.
It is indexed in $5,000 increments. The limit on annual
additions to defined contribution plans--comprising the sum of
employer and employee contributions--was increased from $35,000
in 2001 to $40,000 in 2002, and it is indexed in $1,000
increments.
EGTRRA permits individuals who are age 50 or older to make
additional contributions to a retirement plan authorized under
section 401(k), 403(b), or 457 of the tax code. The maximum
permitted additional contribution is $2,000 in 2003, $3,000 in
2004, $4,000 in 2005, and $5,000 in 2006. This amount will be
indexed to inflation in years after 2006. Catch-up
contributions to a Section 401(k) plan or similar plan will not
be subject to any other contribution limits and will not be
taken into account in applying other contribution limits;
however, they will be subject to the nondiscrimination rules.
(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, 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. ERISA also requires pension plans to diversify their
assets. Plans are prohibited from buying, selling, exchanging,
or leasing property with a ``party-in-interest,'' (e.g., a
company officer), and they are prohibited from using the assets
or income of the trust for any purpose other than the payment
of benefits or reasonable administrative costs.
Before 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 pension insurance to guarantee the vested benefits of
participants in single-employer defined-benefit plans. This
program guaranteed benefits up to $44,386 in 2004 (adjusted
annually). The single-employer program is funded through annual
premiums paid by employers to the Pension Benefit Guaranty
Corporation (PBGC)--a Federal 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. The current (2004) premium is
$19 per participant per year. 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, companies terminated plans 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 30 percent of the
company's net worth. The PBGC was unable to collect much from
the financially troubled companies because they were likely to
have little or no net worth.
The OBRA of 1987 established a ``full funding limit'' for
tax-qualified defined benefit plans equal to 150 percent of the
plan's accrued liability. EGTRRA raised this limit to 165
percent of current liability for plan years beginning in 2002
and to 170 percent for plan years beginning in 2003. The
current-liability full-funding limit was repealed for plan
years beginning in 2004 and thereafter. A special rule allowing
a deduction for unfunded current liability generally has been
extended to all defined benefit pension plans covered by the
Pension Benefit Guaranty Corporation (PBGC). In determining the
amount of pension contributions that are not deductible, an
employer is permitted to disregard contributions to a defined
benefit plan except to the extent that they exceed the accrued-
liability full-funding limit. If an employer so elects,
contributions in excess of the current-liability full-funding
limit are not subject to the excise tax on nondeductible
contributions.
Because pension benefits under multi-employer plans are
generally based on factors other than compensation--such as a
flat benefit per month of service--the limits on benefits
provided for under Sec. 415 of the tax code can result in
significant benefit reductions for workers who are covered by
these plans and whose compensation varies from year to year.
The EGTRRA of 2001 eliminates the cap on benefits (equal to 100
percent of compensation) for multi-employer plans and provides
that multi-employer plans are not to be aggregated with single
employer plans for purposes of applying the 100 percent-of-
compensation cap to those plans. The law also clarifies the
method of determining the tax year to which an employer
contribution to a multi-employer plan is attributable.
(D) ISSUES FOR THE 108TH CONGRESS
About half of all workers in the United States participate
in an employer-sponsored retirement plans, a rate that has not
changed much since 1980. Workers in small firms are only about
half as likely as those in firms with 100 or more workers to
have access to an employer-sponsored retirement plan. Another
trend in pension coverage has been the shift away from
traditional defined benefit plans toward retirement savings
arrangements, in which the employee bears much of the
responsibility for choosing to participate, how much to
contribute to the plan, and how to invest those contributions.
Defined benefit plans have changed, too, as about one-fourth of
all participants in these plans are now covered under ``cash
balance'' arrangements in which the accrued benefit is defined
in terms of an account balance rather than as an annuity.
Conversions of traditional defined benefit plans to cash
balance plans have been controversial because they can cause
some older workers to experience significant decreases in the
rate at which future benefits will be earned. The legal status
of cash balance plans is uncertain as Federal courts have not
agreed on whether the design of these plans complies with ERISA
and the Age Discrimination in Employment Act. So far, Congress
has not amended these statutes to clarify how they apply to
cash balance plans.
The financial status of the Pension Benefit Guaranty
Corporation once again became a serious concern in 2003. As the
result of three consecutive years of declines in the major
stock market indices and a prolonged period of low interest
rates, the value of pension plan assets fell as the present
value of the plans' liabilities increased. (The value of a
defined benefit plan's obligations moves in the opposite
direction in which interest rates move.) The Federal pension
agency covers about 33,000 pension plans for a total of 44
million workers. The number of plans is down from more than
100,000 in the mid-1980's. As of August 2003, the amount owed
by the Pension Benefit Guaranty Corporation to participants in
plans it had taken over exceeded the PBGC's assets by $8.8
billion. The Director of the PBGC told the Senate Special Aging
Committee on October 14, 2003 that the PBGC ``has sufficient
assets on hand to pay benefits for a number of years in the
future,'' but that ``there are serious structural issues that
require fundamental reform to the defined benefit system now.''
The PBGC Director said that several reforms might reduce the
risks to the program's long term financial viability. These
include replacing the 30-year Treasury bond interest rate--
which is used to calculate pension plan liabilities--with an
interest rate based on investment-grade long-term corporate
bonds. Changes in pension funding rules could set stronger
funding targets, foster more consistent contributions, mitigate
volatility, and increase flexibility for companies to fund up
their plans in good economic times, according to PBGC
officials.
B. STATE AND LOCAL PUBLIC EMPLOYEE PENSION PLANS
1. Background
Ninety-eight percent of full-time employees of state and
local governments participated in an employer-sponsored
retirement plan in 1998, according to the U.S. Department of
Labor. Defined benefit plans are much more common in the public
sector than in the private sector, covering 90 percent of full-
time state and local government employees. State and local
governments are not subject to the requirements of ERISA, being
governed instead by the laws passed by state legislatures.
Although some public plans are not adequately funded, most
state plans and local 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.
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, state and local officials 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.
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. 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 amount that workers have paid is
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 7.0 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. So long as the ``balance'' of
the securities in the fund exceeds the annual cost of benefit
payments, the Treasury has the authority to write annuity
checks without congressional action. Because interest and other
payments are credited to the fund annually, the fund continues
to grow, and the system faces no shortfall of authority to pay
benefits well into the future. Nevertheless, the balance in the
fund does not cover every dollar of future pension benefits to
which everyone who is, or ever was, a vested Federal worker
will have a right from now until they die. Because benefits
under the old Civil Service Retirement System were not fully
funded by employer and employee contributions, general revenues
will be needed to pay some CSRS pension obligations.
Critics of the Federal pension plans sometimes cite the
unfunded liability of the plans as a threat to future benefits.
They note that Federal law requires private employers to pre-
fund their pension liabilities. However, there is an important
difference between private plans and Federal plans. Private
employers may become insolvent or go out of business;
therefore, they must have on hand the resources to pay, at one
time, the present value of all future benefits to retirees and
vested employees. The Federal Government is not likely to go
out of business. The estimated Federal pension plan liabilities
represent a long-term, rolling commitment that never comes due
at any time. The Government's obligation to pay Federal
pensions is spread over the retired lifetimes of past and
current Federal workers, including very elderly retirees who
retired many years ago and younger workers who only recently
began their Federal service and who will not be eligible for
benefits for another 30 years or so.
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.
Nevertheless, 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. The concept of unfunded liability, while
indicative of future costs that must be financed by government
over a long time period, is not particularly relevant as a
measure of a sum that might have to be paid at a point in time.
(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 pre-retirement Federal
salary. The pre-retirement 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 7.0 percent of their gross
Federal pay. 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 pay part of 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 also may receive an annuity. 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.--Federal 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 ($87,900 in 2004). The wage base is indexed to the
annual growth of wages in the national economy. Employees
enrolled in FERS contribute 0.8 percent of their full base pay
to the civil service retirement and disability fund.
(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 as a 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 waived the survivor benefit or elected a lesser amount.
FERS retiree annuities are reduced by 10 percent to pay part of
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. In 2004,
employees can contribute up to 14 percent of their salaries to
the TSP, not to exceed $13,000. 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 five funds: a
stock index fund based on the Standard & Poor's 500, a stock
index fund of small and mid-size company stocks, a stock index
fund of international companies, a bond index fund that tracks
corporate bonds, and a fund that pays interest based on the
yields on certain Treasury securities.
2. Issues and Legislative Response
(A) 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. 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 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. 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 1960 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.
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).
However, the Congress began taking notice publicly of
potential problems related to Redux in 1997. Subsequently,
during the fall of 1998, the Clinton Administration announced
that it supported congressional calls for repeal of Redux and
restoration of the option to retire with unreduced benefits
with 20 years of service. Eventually, the FY2000 National
Defense Authorization Act (Secs 641-644, P.L. 106-65, October
5, 1999; 113 Stat. 512 at 662) 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 2003, 2.0 million retirees and survivors
received military retirement benefits, with total Federal
military retirement outlays of an estimated $36.2 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 FY2002 was 43 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 total military
compensation being received by active duty personnel at the
time they retire(the remaining parts of RMC and other cash
components comprising the rest).
Retirement benefits are computed using a percentage of the
retired pay computation base. Because each military member has
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 1 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. Until enactment of legislation in November 2003
(see below), an1891 law had required that military retired pay
be reduced by the amount of any VA disability compensation
received. Since the late 1980's, some military retirees had
sought a change in law to permit receipt of all or some of
both, and legislation to allow this had 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 had 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 alleged 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 argued against concurrent receipt
usually cite its cost estimated by the Congressional Budget
Office as, for full concurrent receipt, $3 billion in FY2004
and, if implemented, almost $41 billion for the FY2004-FY2013
timeframe. They also were concerned that eliminating this
offset would be the ``camel's nose in the tent,'' leading to
pressure to eliminate other offsets which would cost the
Federal Government tens of billions of dollars yearly.
Interestingly, some analysts also asserted that the reason
there was no analogous offset for VA disability compensation
and civilian benefits was that, in fact, the military retiree
situation was unique. They noted that the combinations of
benefits other than the simultaneous receipt of military
retirement and VA disability compensation involved receiving
two separate benefits from the same Federal agency, unlike the
military retirement-VA compensation situation, where benefits
from two separate Federal agencies were involved.
After over a decade of failed attempts, legislation
authorizing concurrent receipt for a substantial number (the
largest estimates are approximately 300,000) of military
retirees was enacted as part of the FY2004 National Defense
Authorization Act (Sections 641-642, Act of November 24, 2003).
This legislation:
Authorizes the progressive implementation,
over a 10-year period, of full concurrent receipt for
those military retirees with at least a 50 percent
disability. This is the first time since 1891 that the
statutory prohibition of concurrent receipt has been
modified.
Greatly expands the scope of so called
``Combat-Related Special Compensation'' (CRSC), first
enacted in 2002, to provide the financial equivalent of
full concurrent receipt to military retirees who have
(1) been awarded a Purple Heart for wounds incurred in
combat, regardless of the degree of disability; or (2)
possess at least a 60 percent disability resulting from
involvement in ``armed conflict,'' ``hazardous
service,'' ``duty simulating war,'' or ``through an
instrumentality of war.'' This appears, in lay terms,
to encompass combat with any kind of hostile force;
hazardous duty such as diving, parachuting, using
dangerous materials such as explosives, and the like;
individual and unit military training and exercises in
the field; and ``instrumentalities of war'' such as
accidents in military vehicles, naval vessels, or
aircraft, and accidental injuries due to occurrences
such as munitions explosions, injuries from gases and
vapors related to combat training, and the like.
Opens CRSC to reserve retirees, who had,
when it was first enacted in 2002, been almost
universally excluded.
(B) CHANGING THE 20-YEAR RETIREMENT NORM
For more than 30 years, the military retirement system, in
particular its central feature of allowing career personnel to
retire at any age with an immediate annuity upon completing 20
years of service, has been the object of intense criticism and
equally intense support among military personnel, politicians,
and defense manpower analysts. Critics of the system have
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 by inducing too many personnel to stay until the 20-
year mark and too few to stay beyond the 20-year mark. Others
have strongly defended the existing system as essential to
recruiting and maintaining sufficient high-quality career
military personnel who could withstand the rigors of arduous
peacetime training and deployments as well as war. They tend to
agree with the statement that ``20-year retirement makes up
with power what it lacks in subtlety,'' by providing a 20-year
``pot of gold at the end of the rainbow.''
Secretary of Defense Rumsfeld and other senior defense
officials have suggested on several occasions that the existing
20-year retirement paradigm should be modified. Legislative
proposals sent to Congress by DOD in late April 2003, included
provisions to extend or eliminate a variety of age and years-
of-service limits for general officers. The net effects of
these provisions would be to prevent the mandatory retirement
of skilled high-level officers who might otherwise want to stay
on active duty; give DOD and the military services more
flexibility in managing the senior uniformed leadership of the
services; allow generals and admirals to serve longer tours of
duty and minimize too-frequent rotation of assignments; and
provide greater compensation incentives related to the greater
lengths of service. However, some opposed to them are concerned
about longer terms for generals and admirals resulting in
excessive stultification and stodginess in the senior uniformed
leadership; an excessive slowing of promotions, as more people
stay on active duty in the same grade for longer periods of
time; and, combined with other measures in the proposed bill, a
greater alignment of the senior generals and admirals with the
senior appointed political leadership of DOD, and, hence, the
Administration and political party in power. Only one of these
proposals arguably one of the less significant ones was adopted
in the FY2004 National Defense Authorization Act specifically,
the reduction in years in grade before an officer is allowed to
retire in that grade.
E. RAILROAD RETIREMENT
1. Background
The Railroad Retirement program is a federally managed
retirement system that covers employees in the rail industry,
with benefits and financing coordinated with Social Security.
The system was first established during the 1934-37 period,
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 primarily through a combination of employee and
employer payments to a trust fund, with the exception of vested
dual (or ``windfall'') benefits, which are paid with annually
appropriated Federal general revenue funds through a special
account.
In fiscal year 2002, $8.6 billion in total benefits were
paid to 684,000 beneficiaries of the Railroad Retirement
program. In January 2003, the Railroad Retirement equivalent of
Social Security benefits (Tier I benefits) increased by 1.4
percent as a result of the annual Cost-of-Living Adjustment
(COLA) applied to Social Security benefits. The industry
pension component of Railroad Retirement (Tier II benefits)
increased by 0.5 percent because of an annual adjustment equal
to 32.5 percent of the Tier I COLA. As of February 2003,
average monthly benefits were $1,509 for retired workers and
$595 for spouses. The average monthly benefit for aged
widow(er)s was $968.
2. Issues and Legislative Response
(A) 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 Railroad Retirement Act of 1974 (hereafter cited
as the 1974 Act) fundamentally altered the Railroad Retirement
program by creating a two-tier benefit structure, with Tier I
benefits intended as an equivalent to Social Security benefits
and Tier II benefits intended as a private pension. More
recently, the Railroad Retirement and Survivors' Improvement
Act of 2001 (hereafter cited as the 2001 Act) made a number of
benefit and financing changes to the Railroad Retirement
system. Specifically, the 2001 Act expanded benefits for the
widow(er)s of rail employees; lowered the minimum retirement
age at which employees with 30 years of experience are eligible
for full retirement benefits; reduced the number of years
required to be fully vested for Tier II benefits; eliminated
the limit on total monthly Railroad Retirement benefits payable
to an employee and spouse; expanded the system's investment
authority; phased in changes to the Tier II tax structure; and
repealed the supplemental annuity work-hour tax paid by
employers. These changes were negotiated by rail labor
organizations and rail freight carriers.
Workers are eligible for benefits from the Railroad
Retirement program if they have at least 10 years of railroad
service, or in some cases at least 5 years of railroad service
after 1995. Tier I benefits are based on combined earnings
credits from rail and nonrail employment. Tier II benefits are
based solely on railroad employment. The 1974 Act continued the
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 rail and nonrail employment.
A special study group created in the early days of the
Clinton Administration the National Performance Review (NPR)
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, because program costs are borne by the industry through
payroll taxes, 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 RAILROAD UNEMPLOYMENT/SICKNESS
INSURANCE BENEFITS
The railroad industry finances: (1) Tier I benefits paid
under criteria that differ from Social Security (i.e.,
unrecompensed benefits); (2) Tier II benefits; (3) supplemental
annuities for long-time employees; and (4) benefits payable
under the Unemployment/Sickness Insurance program.
Railroad retirement and survivor benefits are financed by:
(1) payroll taxes paid by employees and employers on covered
railroad earnings; (2) income from the Social Security
financial interchange; (3) appropriations from general revenues
(including transfers of income taxes collected on benefits);
and (4) investment income. In an effort to increase the
Railroad Retirement System's return on investments, the 2001
Act established the National Railroad Retirement Investment
Trust (NRRIT), a nongovernmental entity administered by a Board
of Trustees authorized to invest Railroad Retirement program
funds in nongovernmental securities, such as equities and debt
securities. Previously, the RRB was authorized to invest
Railroad Retirement funds only in U.S. Government or U.S.
government-guaranteed securities. With the assistance of
independent advisors and investment managers, the Board of
Trustees of the NRRIT invests assets, pays administrative
expenses and transfers funds to a private disbursing agent
responsible for the payment of benefits (the U.S. Treasury
serves as the interim disbursing agent).
The Federal Government finances vested dual (or
``windfall'') benefits under an arrangement established by the
1974 Act. Prior to the 1974 Act, individuals could qualify for
Railroad Retirement and Social Security benefits concurrently.
The 1974 Act coordinated Railroad Retirement and Social
Security benefit payments to eliminate certain dual benefits
considered to be a ``windfall'' for persons receiving benefits
under both systems. Vested dual benefits were preserved for
employees who qualified for both Railroad Retirement and Social
Security benefits prior to the 1974 Act. 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, current and former rail employees, and Federal
taxpayers. Congress then 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 through employment in the rail industry,
paid by the rail 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 by Congress. The Tier I payroll
tax is the same as that for Social Security (Old-Age,
Survivors, and Disability Insurance) and Medicare Hospital
Insurance (Medicare Part A)--6.2 percent of earnings up to a
maximum ($87,000 in 2003) and 1.45 percent of total earnings,
paid by employers and employees.
Tier II benefits are also financed by payroll taxes. In
2003, the Tier II payroll tax is 14.2 percent for employers and
4.9 percent for employees on the first $64,500 of a worker's
covered railroad wages. Under the 2001 Act, the Tier II tax
rate paid by employers was lowered from 16.1 percent to 15.6
percent in 2002 and 14.2 percent in 2003. The Tier II tax rate
paid by employees remained unchanged at 4.9 percent in 2002 and
2003. Beginning in 2004, tax rates will be adjusted annually
based on the 10-year average ratio of certain asset balances to
the sum of benefits and administrative expenses (the ``average
account benefits ratio''). Depending on the average account
benefits ratio, Tier II tax rates for employers will be between
8.2 percent and 22.1 percent. Tier II tax rates for employees
will be between 0 percent and 4.9 percent.
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 purpose of the financial interchange is to place Social
Security in the same financial position as if railroad
employment had been covered at the beginning of Social
Security. Every year since 1957, the net interchange has been
in the direction of Railroad Retirement, primarily due to a
steady decline in the number of rail industry jobs.
When Congress, with the support of rail labor and rail
management, 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 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
FY2002, Congress appropriated $146 million, which includes the
estimated amount of income taxes paid on dual benefits. For
FY2003, Congress appropriated $131 million, including income
tax transfers. If, for any given year, the appropriation is not
sufficient to pay dual benefits in full, benefits are subject
to reduction. Currently, dual benefits are paid to about 12
percent of railroad retirement beneficiaries and average $147
per month.
Supplemental annuities are paid to employees beginning at
age 60 with at least 30 years of railroad service, or at age 65
with 25-29 years of railroad service, and a current connection
with the rail industry. The supplemental annuity equals $23 for
25 years of service, plus $4 for each additional year of
service, up to a maximum of $43 per month. Employees first
hired after October 1, 1981, are not eligible for supplemental
annuities.
(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 benefits. Under those rules, up to
50 percent of the Tier I benefit is taxable if modified
adjusted gross income (i.e., adjusted gross income plus tax-
exempt interest income plus one-half of the Tier I benefit)
exceeds $25,000 for an individual or $32,000 for a married
couple, with proceeds credited to the Social Security trust
funds to help finance Social Security and Railroad Retirement
Tier I benefits. Up to 85 percent of the Tier I benefit is
taxable if modified adjusted gross income exceeds $34,000 for
an individual or $44,000 for a married couple, with proceeds
credited to the Medicare Hospital Insurance trust fund.
Unrecompensed Tier I benefits (Tier I benefits paid in
excess of Social Security benefit levels) and Tier II benefits
are taxed as ordinary income, on the same basis as all other
private pensions. Under 1983 legislation to strengthen Railroad
Retirement financing, 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.
(D) FINANCIAL OUTLOOK FOR THE RAILROAD RETIREMENT SYSTEM
The Railroad Retirement Board, the Federal agency that
administers the Railroad Retirement and Unemployment/Sickness
Insurance programs, is required to submit annual reports to
Congress on the financial status of the programs, including any
financing recommendations. The Board's 2003 report to Congress
on the Railroad Retirement program indicated no cash-flow
problems over the 75-year projection period under the
optimistic and moderate employment assumptions. Only the most
pessimistic assumptions resulted in cash-flow problems,
starting in 2022. Overall, the report concluded that ``barring
a sudden, unanticipated, large drop in railroad employment, the
railroad retirement system will experience no cash-flow
problems during the next 19 years. The long-term stability of
the system, however, is not assured. Under the current
financing structure, actual levels of railroad employment and
investment return over the coming years will determine whether
additional corrective action is necessary.'' The Board's 2003
report to Congress on the status of the Unemployment Insurance
System stated that, under all three sets of employment
assumptions (optimistic, moderate and pessimistic), experience-
based contribution rates are projected to respond to
fluctuating employment and unemployment levels maintaining fund
solvency over the 11-year projection period. The report
recommended no financing changes at this time.
The combinations of RUIA and retirement taxes projected by
the Board 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.
3. Outlook in the 108th Congress
The benefit and financing changes enacted in 2001 are being
implemented. Congress is not expected to consider major program
changes during the 108th Congress.
CHAPTER 3
TAXES AND SAVINGS
A. TAXES
1. Overview of Important Provisions
While the general rules of the Federal income tax apply to
older Americans, the Internal Revenue Code recognizes their
special needs in various ways. Social Security the single most
important source of income for older Americans is not taxed in
the case of a majority of beneficiaries. Medicare the most
important form of health insurance for older Americans provides
tax-exempt coverage and payments for all beneficiaries. The
exclusion of gains from the sale of one's principal residence,
while not aimed at or restricted to older Americans, benefits
those who want to move to less expensive or rental housing. The
additional standard deduction for the elderly allows many to
reduce their tax liability and frees some from having to file a
tax return. These and other provisions are described below,
followed by a brief summary of recent tax legislation.
The Federal income tax also recognizes the special needs of
older Americans before they become 65. So they will have money
in retirement, the Code has significant incentives for
employers to offer pension and other qualified retirement plans
and for employees to participate in these plans across their
working lives. It encourages individuals to save additional
sums through individual retirement accounts (IRAs). These
policies are described in other sections of this report.
In enacting these special rules, Congress recognized that
older Americans often are confronted with rising costs and
fixed or shrinking resources; as most are not employed, they
cannot bring in additional income or increase their savings by
working more. In addition, many older Americans face
significant involuntary expenditures for health care, sometimes
for prolonged periods. Some older Americans also have long-term
care needs that are expensive to meet, even if they remain in
their homes.
At the same, time, older Americans are not a homogenous
group. Some are employed, many have pension income and assets,
and many enjoy good health, at least for a number of years.
Special treatment for their income thus may seem unfair to
younger taxpayers. Striking the right balance between helping a
population that generally has special needs and treating all
taxpayers equitably will continue to be a challenge as the
Nation's population ages.
(A) SOCIAL SECURITY BENEFITS
For more than four decades, Social Security benefits were
completely exempt from the Federal income tax. Their tax-free
status arose from a series of administrative rulings in 1938
and 1941 by 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.
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, up to
one-half of Social Security benefits became subject to taxation
in the case of beneficiaries whose other income plus one-half
their Social Security benefits exceeds a threshold of $25,000
($32,000 for joint filers). (Similar tax treatment applies to
equivalent tier I Railroad Retirement benefits, which railroad
workers would have received had they been covered by Social
Security.) Tax-exempt interest (such as from municipal bonds)
is included in the other income used in this determination.
While tax-exempt interest itself remains free from taxation, it
can have the effect of subjecting some people's benefits to
taxation.
The 1983 legislation reflects continuing congressional
concern that the benefits of lower and moderate income
taxpayers not be subject to taxation. Because the tax
thresholds are not indexed for inflation, however, with time
beneficiaries of more modest means will also be affected.
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, defined as those
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 up to one-half of
their benefits.
In 2000, approximately 40 percent of Social Security
beneficiaries had part of their benefits subject to taxation.
Revenue attributable to the taxation of benefits due to the
1983 legislation (i.e., taxation of up to 50 percent of the
benefit) is credited to the Social Security trust funds. Based
on the intermediate assumptions in the 2003 Social Security
trustees' report, an estimated $13.4 billion is to be credited
to the Social Security trust funds in fiscal year 2003. Revenue
attributable to the taxation of benefits due to the 1993
legislation (i.e., taxation of the additional part up to 85
percent of the benefit) is credited to the Medicare Part A
trust fund; in fiscal year 2002, $8.3 billion was credited to
it.
(B) MEDICARE COVERAGE AND BENEFITS
Medicare has two parts, Part A (insurance for
hospitalization, skilled nursing facilities, hospice care, and
some home health care) and Part B (supplemental insurance for
doctors' fees, outpatient hospital services, some physical and
occupational therapy, and some home health care). Part A is
funded through an employment tax on both the employer and the
employee; individuals age 65 and over generally are entitled to
benefits if they or their spouse have at least 10 years of
covered employment. (Individuals with disabilities who are
under age 65 may also receive Part A benefits after they have
Social Security benefits for 24 months.) The employment tax is
not a deductible medical expense, though voluntary payments of
premiums for Part A by those who do not otherwise qualify may
be counted toward the itemized deduction for medical expenses,
subject to a 7.5 percent adjusted gross income floor (described
below). Medicare Part B premiums may also be considered for
purposes of the deduction.
Coverage under either Part A or Part B of Medicare is not
taxable income. Similarly, benefits paid under either part are
not subject to taxation. The exemptions are based upon Internal
Revenue Service revenue rulings in 1966 (Rev. Rul. 66-216) and
1970 (Rev. Rul. 70-341) that the benefits are in the nature of
disbursements made in furtherance of the social welfare
objectives of the Federal Government.
The Balanced Budget Act of 1997 authorized a limited number
of Medicare beneficiaries to elect Medicare+Choice medical
savings accounts (MSAs) instead of traditional Medicare.
Contributions to these accounts, to be made only by the
Secretary of Health and Human Services, are exempt from taxes,
as are account earnings. Withdrawals are likewise not taxed nor
subject to penalties if used to pay unreimbursed medical
expenses, with some exceptions. As no insurer has yet offered a
Medicare+Choice MSA plan, no beneficiary has been able to take
advantage of this provision.
(C) SALE OF PRINCIPAL RESIDENCE
Gains from the sale of a principal residence are exempt
from income, subject to certain limits. For married couples
filing a joint return, gains of up to $500,000 may be excluded;
for other tax filers, gains of up to $250,000 may be excluded.
The residence must have been owned and used by the taxpayer as
the principal residence for at least 2 years of the 5-year
period that ends on the date of the sale. Exceptions to the 2-
year rule are allowed for changes in the place of employment,
health problems, and certain other unforeseen circumstances.
Though the provision is neither aimed nor restricted to
older taxpayers, it helps many who want to move to less-
expensive or rental housing. The exclusion helps both by
eliminating (or at least reducing) the tax liability at the
time of sale and by freeing many taxpayers from having to
maintain detailed records of expenditures that affect their
home's tax basis.
The exclusion was included in the Taxpayer Relief Act of
1997. It replaced a once-in-a-lifetime exclusion of gains
(limited to certain amounts, at that time $125,000) that had
been available to older taxpayers since 1964. Taxpayers not
qualifying for this earlier exclusion could defer gains from
the sale of their principal residence only if they purchased a
new residence for equal or greater value. The 1997 legislation
repealed this deferral.
(D) BELOW-MARKET INTEREST LOANS TO CONTINUING CARE FACILITIES
With some exceptions, taxpayers are required to recognize
imputed interest income on loans they make that have little or
no interest (such as 1 percent when the market rate is 5
percent) or for which interest is received in the form of
noncash benefits (such as future services). Special rules
exempt loans made by elderly taxpayers to qualified continuing
care facilities. (The loan in this instance is usually an up-
front payment at the time of admission.) For this exception to
apply, either the taxpayer or the taxpayer's spouse must be 65
years of age or older before the end of the year in which the
loan is made. The loan must be made to a facility that is
designed to provide services under continuing care contracts,
and substantially all of the residents must be covered by those
contracts. Substantially all of the facilities which provide
the required services must be owned or operated by the
borrower. Nursing homes per se are excluded.
Under a continuing care contract, the individual or spouse
must be entitled to use the facility for the remainder of their
life. 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 is no longer able to live independently. Further,
the facility must provide personal care services and long-term
nursing care services without substantial additional cost.
The exclusion of imputed interest is based upon loan
amounts that are adjusted annually for inflation. In 2004, a
taxpayer may lend up to $154,500 before being subject to the
imputed interest rules.
(E) DEDUCTION OF MEDICAL AND DENTAL EXPENSES
Taxpayers who itemize their deductions instead of taking
the standard deduction may deduct unreimbursed medical and
dental expenses to the extent they exceed 7.5 percent of
adjusted gross income (AGI). Medical expenses include payments
made by the taxpayer for health insurance premiums (including
premiums for Medicare Part B and for Medigap policies),
qualified long-term care insurance premiums (as discussed
below), nursing home and other long-term care services, and
deductibles and copayments. Some capital expenditures on one's
home can also be taken into account, such as the cost of
constructing wheelchair ramps.
This itemized deduction is not widely used. In 2000, about
one-third of all returns filed had itemized deductions, and of
these about 15 percent (i.e., about 5 percent of all returns)
claimed the deduction for medical and dental expenses. While
older taxpayers have higher than average medical expenses,
their Medicare and supplemental private insurance
reimbursements often preclude their meeting the 7.5 percent AGI
floor. However, the deduction may be of use to elderly
taxpayers who have high prescription drug charges (which
Medicare with some exceptions currently does not cover) or
nursing home fees (which may be considered in their entirety,
notwithstanding they partly cover what might be considered
ordinary living expenses.)
The deduction for health care expenses was first allowed in
1942. It has been modified many times, sometimes to exempt
individuals age 65 and over from the floor, sometimes to impose
a ceiling on expenses, and sometimes to have different
treatment for health insurance and for prescription drugs. The
present form of the deduction with the 7.5 percent AGI floor
was established by the Tax Reform Act of 1986.
(F) LONG-TERM CARE INSURANCE
Qualified long-term care insurance is treated as accident
and health insurance, and its benefits are treated as amounts
received for personal injuries and sickness and for
reimbursement of medical expenses actually incurred. As a
consequence, long-term care insurance benefits are exempt from
taxation. In 2004, the exemption for insurance benefits paid on
a per diem or other periodic basis is limited to the greater of
$230 a day or the cost of long-term care services.
As discussed above, unreimbursed long-term care expenses
are allowed as an itemized deduction to the extent they and
other unreimbursed medical expenses exceed 7.5 percent of
adjusted gross income. Long-term care insurance premiums can be
counted among these expenses subject to age-based limits. In
2004, these limits range from $260 for persons age 40 or less
to $3,250 for persons over age 70.
Self-employed individuals are allowed to include long-term
care insurance premiums in determining their above-the-line
deduction (a deduction not limited to itemizers) for health
insurance expenses. Only amounts not exceeding the age-based
limits can be counted.
Employer contributions to the cost of qualified long-term
care insurance premiums are exempt from both income and
employment taxes. Age-based limits do not apply. The exemption
does not cover insurance provided through employer-sponsored
cafeteria plans or flexible spending accounts.
Qualified long-term care insurance is a contract that
covers only qualified long-term care services; does not pay or
reimburse expenses covered under Medicare; is guaranteed
renewable; does not provide for a cash surrender value or other
money that can be paid, assigned, pledged as collateral for a
loan, or borrowed; applies all refunds of premiums and all
policy holder dividends or similar amounts as a reduction in
future premiums or to increase future benefits; and meets
certain consumer protection standards. Policies issued before
January 1, 1997, and meeting a state's long-term care insurance
requirements at the time the policy was issued are considered
qualified.
Qualified long-term care services are necessary diagnostic,
preventive, therapeutic, curing, treating, mitigating, and
rehabilitative services, and maintenance or personal care
services, which are required by a chronically ill individual,
and are provided according to a plan of care prescribed by a
licensed health care practitioner. Services provided by a
spouse or relative generally cannot be taken into account.
Chronically ill persons are individuals who are:
unable to perform without substantial
assistance from another individual at least two of the
following six activities of daily living (ADLs)for a
period of at least 90 days due to a loss of functional
capacity: bathing, dressing, transferring, toileting,
eating, and continence;
have a level of disability similar to the
level of disability specified for functional
impairments (as determined by the Secretary of the
Treasury in consultation with the Secretary of Health
and Human Services); or
require substantial supervision to protect
them from threats to health and safety due to severe
cognitive impairment.
A licensed health practitioner (such as a physician,
registered professional nurse, or licensed social worker) must
have certified within the past 12 months that the person for
whom services are provided meets these criteria.
Provisions governing the tax treatment of long-term care
insurance were added to the Code in 1996 by the Health
Insurance Portability and Accountability Act of 1996. The
provisions clarified a murky area of taxation and indicated
congressional support for helping families insure against the
catastrophic costs of caring for people who are frail or have
disabilities.
(G) ADDITIONAL STANDARD DEDUCTION
Taxpayers may claim a standard deduction or itemized
deductions, whichever is greater, in calculating their taxable
income. The standard deduction is based upon one's filing
status and is adjusted for inflation each year. For 2004, the
standard deduction is $4,850 for single filers, $7,150 for
heads-of-household filers, and $9,700 for married couples
filing jointly (married individuals filing separately each have
a standard deduction of $4,850).
Some taxpayers who claim the standard deduction may also
claim an additional standard deduction for being blind or age
65 or older. Taxpayers who are both blind and 65 or older may
claim two additional standard deductions; if married and filing
a joint return, it is possible for the couple to claim up to
four additional standard deductions. In 2004, each additional
standard deduction is $950 for married individuals and $1,200
for unmarried individuals.
The additional standard deduction reduces taxpayers'
taxable income and thus their tax liability. It could also free
some taxpayers from having to file a tax return since the
filing threshold is increased by the amount of the additional
deduction. Taxpayers must file a return if their gross income
is equal to or above their filing threshold. For most
taxpayers, the threshold is equal to the sum of their personal
exemption ($3,100 each in 2004), their standard deduction, and
any additional standard deduction. Different thresholds apply
if the taxpayer could be claimed as a dependent by another
taxpayer, as sometimes occurs with the elderly.
The additional standard deduction for the blind or elderly
was established by the Tax Reform Act of 1986; it replaced an
additional personal exemption for people with these
characteristics that had been in the Code since 1948. One
reason for the change is that the additional standard deduction
is less likely to benefit higher income taxpayers, who are more
likely to itemize their deductions.
(H) THE TAX CREDIT FOR THE ELDERLY AND PERMANENTLY AND TOTALLY DISABLED
This credit was initially established to correct inequities
in the taxation of different types of retirement income. Since
Social Security benefits were originally tax-free, as described
above, it was considered appropriate to shield other forms of
retirement income from taxation as well.
The credit has changed over the years, with the current
version enacted as part of the Social Security Amendments of
1983. Individuals age 65 or older are provided a tax credit of
15 percent of their taxable income up to an 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
investment income as well as retirement income. The initial
amount for computing the credit is $5,000 for a single taxpayer
age 65 or older. In the case of a married couple filing a joint
return where both spouses are 65 or older the initial amount is
$7,500. A married individual filing a separate return has an
initial amount of $3,750. Not being adjusted for inflation,
these amounts have remained the same since 1983.
Additional limitations apply. The initial amount is reduced
by tax-exempt retirement income, such as Social Security,
received by the taxpayer. It is also reduced by $1 for each $2
that 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. Due to these limitations
and the absence of an inflation adjustment, the number of
taxpayers claiming this credit has declined sharply: in 1980
the credit was claimed on 561,918 returns (for a total of
$134,993,000) while in 2000 it was claimed on 155,796 returns
(for a total of $32,608,000).
2. Tax Legislation in the 107th Congress
(A) ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001
The Economic Growth and Tax Relief Reconciliation Act of
2001 (EGTRRA, P.L. 107-16) made significant changes to Federal
tax laws, some of which are important for older Americans. In
order to comply with the Congressional Budget Act of 1974,
EGTRRA provided that none of its changes would apply to tax
years beginning after 2010; thus, barring subsequent
congressional action, the changes discussed below will expire
after 10 years.
For many individuals, the most notable change made by
EGTRRA was the reduction in tax rates on ordinary (as opposed
to capital) income. Before EGTRRA, statutory tax rates were 15
percent, 28 percent, 31 percent, 36 percent, and 39.6 percent,
depending upon one's taxable income. EGTRRA added a new 10
percent bracket for the first band of taxable income and
immediately reduced the statutory rates above 15 percent by 0.5
percent; it further reduced those rates to 25 percent, 28
percent, 33 percent and 35 percent starting in tax year 2006.
The Act also provided some marriage-penalty relief, starting in
2005, by gradually increasing the standard deduction and the
size of the 15 percent bracket for married couples filing
jointly to twice the amounts for single filers. Alternative
minimum tax (AMT) exemptions were increased by $4,000 for
married couples and $2,000 for other filers; this change
reduces the AMT increase that some middle income and higher
income taxpayers will experience due to the rate reductions on
ordinary income. In addition, individual retirement account
(IRA) contribution limits were gradually increased from $2,000
to $5,000 by 2008, and additional contributions were permitted
for individuals age 50 and over.
EGTRRA made numerous changes to pensions. For defined
benefit plans, the Act increased the compensation limits taken
into account in determining deductible employer contributions;
it also increased the limit on allowable annual benefits. For
defined contribution plans, the Act increased the limit for
deductible employer contributions and no longer requires them
to take account of certain elective deferrals. Limits on
employees' elective deferrals were increased for 401(k)
accounts, section 457 deferred compensation plans, and section
403(b) annuity plans among others, and additional contributions
were permitted for individuals age 50 and over. Rules were
repealed that reduced deferral amounts in section 457 plans by
contributions to other qualified plans. Rollovers from one type
of qualified plan to another were made easier.
EGTRRA allowed small employers a new tax credit for the
startup costs of establishing or maintaining a new employee
retirement plan. In addition, low and middle income taxpayers
were allowed a new nonrefundable tax credit for contributions
to retirement savings plans; the maximum credit is 50 percent
for married couples filing a joint return whose adjusted gross
income does not exceed $30,000 ($22,500 for heads of household
and $15,000 for single filers); the credit is reduced at higher
incomes and then eliminated for joint filers with adjusted
gross incomes over $50,000 ($37,500 for heads of household and
$25,000 for single filers).
EGTRRA also made important changes to the estate, gift, and
generation-skipping taxes. Estate and generation-skipping taxes
were completely abolished after 2009. Since this change, like
other EGTRRA changes, expires at the end of 2010 the abolition
may be temporary. Prior to 2010, other changes become
effective. The exclusion amount applicable to the gift tax was
increased from $675,000 in 2001 to $1 million starting in 2002,
while the exclusion amount for the estate tax was increased
from $675,000 in 2001 to $1 million in 2002 and 2003, $1.5
million in 2004 and 2005, $2 million in 2006, 2007, and 2008,
and $3.5 million in 2009. The maximum rates for all three taxes
were gradually reduced across these years.
(B) THE JOB CREATION AND WORKER ASSISTANCE ACT OF 2002
The Job Creation and Worker Assistance Act of 2002 (P.L.
107-147) included a number of minor changes and technical
corrections that may affect some older Americans. Amended
provisions included the standard deduction for married
individuals filing separately, Medicare+Choice medical savings
accounts, pension plans, and the estate and gift taxes.
(C) TRADE ADJUSTMENT ASSISTANCE REFORM ACT OF 2002
The Trade Adjustment Assistance Reform Act of 2002, part of
the Trade Act of 2002 (P.L. 107-210), authorized a new Federal
income tax credit for health insurance starting in December,
2002. The credit, known by various names including the health
coverage tax credit (HCTC) and the Trade Adjustment Assistance
(TAA) credit, reimburses eligible taxpayers for 65 percent of
the cost of their insurance. As the credit is refundable,
taxpayers may claim it even if they have no Federal income tax
liability. The credit is also advanceable, so taxpayers need
not wait until they file their returns in order to benefit.
The credit is available to three groups of taxpayers: (1)
individuals who are receiving an allowance under the Trade
Adjustment Assistance (TAA) program (or who would be except
their unemployment benefits are not yet exhausted); (2)
individuals age 50 and over who are receiving the new
alternative TAA benefit, and (3) individuals age 55 and over
who are receiving a pension benefit from the Pension Benefit
Guarantee Corporation or who took a lump sum payment from it
after August 5, 2002. The credit applies to ten categories of
insurance, including continuation coverage required by Federal
or state law, state-based or state-arranged plans, and, in
limited instances, individual market insurance.
The credit is not available once individuals become
entitled to Medicare (normally at age 65) or are enrolled in
various insurance plans, including a plan maintained by the
individual's or spouse's employer or former employer that pays
50 percent or more of the cost, the Federal Employees Health
Benefit Program, Medicaid; or the State Children's Health
Insurance Program. The Medicare restriction precludes most
older Americans from using the credit, but individuals in their
50's and early 60's (particularly those in the second and third
eligibility groups above) may find it especially helpful since
they often have high health insurance costs. Maintaining health
insurance coverage for people in these age groups is important
for helping them preserve assets they will need in retirement.
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 2002, the EEOC received 19,921 complaints and
filed suits in just 29 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 was
similar but not identical to H.R. 2554, ``Firefighters and
Police Retirement Security Act of 1993,'' introduced by
Representative Murphy 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.
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\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'' ' (quoting Texas Dept. of Community Affairs v.
Burdine, 450 U.S. 248, 254 n. 7 (1981).
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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.
In 2002, the Court considered whether a complaint in an
employment discrimination lawsuit must contain specific facts
that establish a prima facie case of discrimination under the
McDonnell-Douglas framework. In Swierkiewicz v. Sorema, 534
U.S. 506 (2002), the petitioner alleged that he had been
terminated on account of his national origin in violation of
Title VII and on account of his age in violation of the ADEA.
The petitioner's complaint had been dismissed by a U.S.
district court because it was found to have not adequately
alleged a prima facie case. The court maintained that the
complaint had not adequately alleged circumstances that
supported an inference of discrimination. The Second Circuit
affirmed the district court's decision.
The Court reversed the Second Circuit's decision. The Court
noted that the imposition of a heightened pleading standard in
employment discrimination cases conflicted with rule 8(a)(2) of
the Federal Rules of Civil Procedure. Rule 8(a)(2) requires
that a complaint include only ``a short and plain statement of
the claim showing that the pleader is entitled to relief.''
This statement must simply give the defendant fair notice of
the plaintiff's claim and the grounds upon which it rests.
The Court also observed that it would be inappropriate to
require a plaintiff to plead facts that establish a facie case
because the McDonnell-Douglas framework does not apply in every
employment discrimination case. An employee may prevail on an
employment discrimination claim, and avoid the McDonnell-
Douglas framework, by producing direct evidence of
discrimination. Thus, the Court maintained that ``[u]nder the
Second Circuit's heightened pleading standard, a plaintiff
without direct evidence of discrimination at the time of his
complaint must plead a prima facie case of discrimination, even
though discovery might uncover such direct evidence.'' The
court found it ``incongruous'' to require a plaintiff to plead
more facts than he may ultimately need to prove to succeed on
the merits if direct evidence of discrimination is discovered.
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 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 second full year of WIA implementation ended
June 30, 2002.
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 FY2002
appropriation for adult activities is $945.4 million, and for
dislocated workers is approximately $1.5 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. For the period between July 1, 2001 and June 30, 2002,
over 10,000 adults who exited the WIA adult program were age 55
or older, representing 6 percent of total adult exiters.
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. For the period
between July 1, 2001 and June 30, 2002. nearly 15,000
dislocated workers who exited the WIA dislocated worker program
were age 55 or older, representing 11 percent of total
dislocated worker exiters.
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.
The Labor Market Experience of Older Workers
Older workers, a group with varying definitions, tend to be
less disadvantaged economically than some other groups (e.g.,
minorities and women). The older worker group, for example, has
a lower unemployment rate and a higher wage than the typical
labor force participant. According to data from the U.S. Bureau
of Labor Statistics (BLS), the unemployment rate in 2002 of
persons age 55 and older was below 4 percent compared to the
rate for all workers of almost 6 percent. Similarly, among
full-time wage and salary workers in 2002, median weekly
earnings were $649 for persons at least 55 years old as opposed
to $609 for all workers. For this reason, the labor market
difficulties of older workers sometimes have been overlooked.
As members of the large baby-boom cohort (those born
between 1946 and 1964) are now in the middle or nearing the end
of their working lives, it is likely that size alone will bring
more attention to the labor market problems of older persons.
The age of baby-boomers will range from the mid-40's to the
mid-60's by 2010. BLS projects that the number of workers age
45-64 will increase by 30 percent during the current decade,
which is more than twice the growth rate of the labor force as
a whole (12 percent). As a result, baby-boomers could account
for almost 37 percent of the entire labor force in the last
year of the 2000-2010 projection period (some 58 million out of
158 million workers). The addition of workers age 65 and older,
who are projected to expand to the same degree as baby-boomers,
could bring the number of workers age 45 and older in 2010 to
over 63 million or 4 out of every 10 members of the labor
force.\1\
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\1\ Howard N. Fullerton, Jr. and Mitra Toossi, Labor Force
Projections to 2010: Steady Growth and Changing Composition, Monthly
Labor Review, Nov. 2001.
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Another demographic change could operate to the advantage
of older workers in the coming years. Older workers will become
more noticeable not just because of their absolute size, but
also because of the comparatively small cohort (the baby bust)
that immediately followed the baby-boom generation into the
labor force. The comparatively small supply of 35-44 year olds
projected to be available in 2010 to fill jobs older workers
have held might make it more costly for employers to engage in
what may be discriminatory behavior. That is to say, the
impending scarcity of experienced mid-career workers \2\ could
prompt employers to cast aside stereotypical notions concerning
the productivity of older workers and make firms less reluctant
to hire them.\3\ Without a large supply of individuals to
replace older employees, firms also could become more
interested in retaining them and less reluctant to provide them
with any needed skill upgrading or retraining. (Companies more
often provide training to younger employees, in part because
they perhaps incorrectly assume a longer time horizon over
which they can recoup training expenditures on younger compared
to older workers.\4\) As of 2003, however, it appears that a
majority of firms have not changed their employment practices
in response to the aging of the labor force.\5\ And, some
members of the business community wonder whether employers will
wait to make changes until they perceive a labor shortage has
occurred rather than acting in advance to avoid its
development.\6\
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\2\ Ibid. Note: Between 2000 and 2010, the number of 35-44 year
olds in the labor force is projected to contract by 1.1 percent,
bringing their total to almost 34 million or 22 percent of the 2010
labor force--down from 27 percent in 2000.
\3\ Glenn M. McEvoy and Mary Jo Blahna, Engagement or
Disengagement? Older Workers and the Looming Labor Shortage, Business
Horizons, v. 44, issue 5, Sept. 2001.
\4\ Older workers generally are less mobile than the typical
employee. According to BLS data for 2002, the median tenure of all
employees was 3.7 years. In contrast, half of 55-64 year olds have been
with their current employers for more than 9.9 years and half less than
9.9 years. The median tenure of employed persons at least 65 years old
in 2002 was similarly long (8.7 years).
\5\ SHRM Survey Shows Organizations Slowly Preparing for Worker
Shortage in 2010, US Newswire, June 22, 2003.
\6\ Committee for Economic Development, New Opportunities for Older
Workers, Washington, D.C.: 1999.
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Long Spells of Unemployment and Discouragement over Job Prospects
Despite the aforementioned positive experience of older
persons in the labor market, some older workers who lose their
jobs are likely to continue having above-average difficulty
finding new ones. This is reflected by the group's
comparatively lengthy spells of unemployment. In 2002, the
average duration of unemployment was 16.6 weeks; workers age
55-64 were jobless 5 weeks longer and workers age 65 and over
were jobless almost 6 weeks longer. While 18 percent of all
unemployed persons went without jobs for 27 or more weeks, 26
percent of workers between 55 and 64 years old and 27 percent
of those at least 65 years old were unable to find jobs for
half the year.\7\ Thus, older workers are more likely than
other job losers to exhaust Unemployment Insurance benefits for
which they may be eligible.
---------------------------------------------------------------------------
\7\ BLS data.
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Unemployment data understate the labor market problems
encountered by older workers because they are more likely than
others to withdraw from the labor force. An individual must
either have a job (employed) or have recently sought a job
(unemployed) to be counted as a member of the labor force. As
the unemployment rate is the number of unemployed persons
divided by the number of labor force participants, an
individual who has given up seeking work is not tabulated in
this and other labor force statistics.
Older workers might be more prone to exit the labor force
because they may have accumulated more wealth than younger
workers and because they may be eligible for alternatives to
employment that provide them income and health security (e.g.,
pension and Social Security benefits, and Medicare). In
addition, society does not stigmatize older persons for leaving
the labor force for retirement. Although retirement generally
is characterized as a voluntary decision, it is argued that
some older persons take the option because they think they
really have no other choice. They may, for example, come to
this conclusion after having engaged in a lengthy and fruitless
job search, or after realizing they cannot get jobs with wages
that compare favorably with their former pay levels or with
their private/public pensions.
Two percent (884,000) of individuals at least 55 years old
who were not in the labor force in 2002 indicated that they
wanted a job. Somewhat over one-fifth (191,000) of them had
both looked for jobs in the previous year and were currently
available for work, that is, they were not ill or disabled for
example. Some regard this group as a component of the hidden
unemployed, whose joblessness reduces the rate of economic
growth and the nation's standard of living below what they
otherwise would be. Almost 27 percent of the 191,000 older
persons available for work reported that they had not more
recently sought employment because of discouragement over their
prospect of success. In other words, they previously had been
unable to find jobs, believed no work was available or that
they lacked the necessary education or training for the
available jobs, or they perceived their age to be a hiring
barrier. Empirical studies typically have found that
discouragement is more prevalent among older individuals than
among persons in the prime work years.\8\
---------------------------------------------------------------------------
\8\ Suzanne Heller Clain, The Effect of Increases in the Level of
Unemployment on Older Workers, Applied Economics, Oct. 1995 v. 27, n.
10.
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The Employment and Wage Consequences of Displacement
Long-tenured workers tend to be older workers and seniority
often protects individuals from job loss. Thus, older workers
are often sheltered from displacement associated with
insufficient work and the abolition of a position or shift
(e.g., caused by a national recession, changes in the nature of
consumer demand, and corporate reorganization). However,
seniority affords no protection from job loss linked to plant
or company closures, or relocations. According to a nationally
representative survey, plant/company shutdowns or moves caused
the displacement of 51 percent of all workers at least 55 years
old who lost long-held jobs between January 1999 and December
2001. In contrast, this was the cause of displacement for 46
percent of comparable younger workers.\9\
---------------------------------------------------------------------------
\9\ BLS, Worker Displacement, 1999-2001, USDL 02-483, Aug. 21,
2002. Note: BLS uses a tenure cutoff of 3 or more years to capture
workers who have developed an attachment to their positions and are
more likely to have difficulty adjusting to the loss of their jobs. All
of the discussion above concerning displaced workers relates to persons
who fulfilled the job tenure requirement.
---------------------------------------------------------------------------
Older workers are more likely than the typical worker to
suffer adverse consequences from displacement. As of January
2002, fewer workers age 55 and older displaced from jobs over
the 1999-2001 period were able to find new positions: while the
average reemployment rate was 64 percent, the share of 55-64
year olds in new jobs was 51 percent and of those age 65 and
over, 20 percent. Many more older workers withdrew from the
labor force as well. Only 15 percent of all displaced workers
were not in the labor force in January 2002, compared to 29
percent of displaced workers age 55-64 and 60 percent of those
at least 65 years old. The higher incidence of labor force
withdrawal among older displaced workers could partly reflect
the much larger share of them who experienced lengthy
joblessness. Among those who were employed in January 2002, 11
percent of all workers were jobless for 27 or more weeks during
the 1999-2001 survey period in contrast to 21 percent of
workers age 55 and older.\10\
---------------------------------------------------------------------------
\10\ Ibid.
---------------------------------------------------------------------------
The greater adversity encountered by older dislocated
workers does not end upon their reemployment. An above-average
share of workers 55 or more years old who lost full-time jobs
between 1999 and 2001 were employed part-time in January 2002
(9 percent versus 6 percent), and fewer hours of employment
yields smaller paychecks. Older displaced workers who found new
full-time jobs more often earned less than they had on their
lost jobs: 60 percent of displaced workers age 55 and older
versus 52 percent across all displaced workers. Numerous
empirical studies have shown that ``older job losers, who are
more likely to have lost a high-tenure job, suffer larger wage
declines than do younger workers.'' \11\ In addition, older
workers have a shorter time horizon in which to try to recover
from their displacement-induced wage declines.
---------------------------------------------------------------------------
\11\ Henry S. Farber, Job Loss in the United States, 1981-2001,
Working Paper 9707, National Bureau of Economic Research, Cambridge,
Mass., May 2003, p. 25.
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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 1960s as a
demonstration program under the Economic Opportunities Act, and
later authorized under the Title V of the Older Americans Act,
it is the only federally subsidized jobs programs for older
persons. 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 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.
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 October 2003, 6.9 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 2002,
the elderly poverty rate was 10.4 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
the Social Security Administration 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 making benefit
payments in 1974, providing a nationally uniform guaranteed
minimum income for qualifying elderly, disabled, and blind
individuals. 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, by paying an administrative
fee, 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, $564 for an individual and $846 for a couple in 2004.
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 2004, this totals $376 for a
single person and $564 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 2002, 4.2 percent, or 284,369 recipients
came under this ``one-third reduction'' standard. Sixty-seven
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,
P.L. 105-306, the Noncitizen Benefit Clarification and Other
Technical Amendments Act of 1998, and P.L. 106-386, the Victims
of Trafficking and Violence Protection Act of 2000. Provisions
in these laws (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 2002, it was estimated that 5.4 million disabled adult
SSI beneficiaries received benefits from SSA. The workload for
initial disability claims was 1.7 million in fiscal year 2002.
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. In 2000, SSA introduced the Hearings Process
Improvement Initiative. In these efforts, SSA has taken steps
to reduce hearing processing times from the peak of 397 days in
fiscal year 1997 to about 343 days as of June 2002, but the
number of pending SSI cases has increased by 29,000 from
December 2000 to December 2002.
In response to concerns raised by the General Accounting
Office (GAO), Congress, and disability advocates, SSA has moved
forward from these past inefficient efforts to new initiatives
that utilize technology and collaboration. The solution
presented by SSA focuses on streamlining the determination
process and improving service to the public.
In 2003, SSA introduced the Accelerated Electronic
Disability System (AeDIB) and the Electronic Disability Collect
System (EDCS). These systems are intended to address near-term
and longer-term operational policy and disability process
issues in an effort 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, the
replacement of many paper forms and evaluation materials, 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 processes will take advantage of the improvement of
secure data bases and files, a major privacy and security
concern of the past. SSA has selected areas as the sites of
implementation trials, but once sufficient data has been
gathered on these test sites, SSA will decide whether to extend
the process to other areas.
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 99,276 in 1980 to
340,910 in December 2002, which represents 6.3 percent of the
SSI benefit population.
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 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.
In 2002, unveiled its Corrective Action Plan, a response to
GAO's listing of SSI as a Federal program at ``high risk'' for
abuse, mismanagement, and overpayment. The plan incorporates
many of the hearing and appeals initiatives mentioned above,
and also includes plans to conduct reviews of beneficiaries in
current payment status to verify income, resources, and living
arrangements to confirm SSI eligibility, as well as payment
simplification, and increased punitive actions and debt
collection efforts . Though the plan has yet to be fully
implemented, its initiatives and scope impressed GAO enough
that the agency did not list SSI a ``high risk'' program in
January 2003, the first time the SSI program was absent from
the list since 1996.
CHAPTER 7
HEALTH CARE
NATIONAL HEALTH CARE EXPENDITURES
1. Introduction
The nation's spending for health care in 1960 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 $696 billion, or 12.0 percent of the GDP, according
to figures from the Centers for Medicare and Medicaid Services
(CMS, formerly known as the Health Care Financing
Administration.) Health care spending increases of almost 10
percent between 1985 and 1992 focused attention on the problems
of rising costs and led to unsuccessful health care reform
efforts in the 103d Congress.
Changes in financing and delivery of health care in the
mid-1990's, such as the emerging use of managed care by public
and private insurers, decreased the rate of health care
spending. While spending for health care reached $1 trillion
for the first time in 1996, growth in spending between 1993 and
2000 was much lower than in previous years with an average
annual growth rate of only 5.7 percent. 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.
National spending for health care, however, rose by 8.7
percent from 2000 to 2001, reaching $1.4 trillion. This
represented the highest annual growth in health care spending
in a decade. National health care spending's share of the GDP,
a measure of the nation's economy devoted to health care, also
jumped from 13.3 percent in 2000 to 14.1 percent in 2001. The
Centers for Medicare and Medicaid Services attributes the
growth in health spending to increased use of inpatient and
outpatient hospital services and prescription drugs along with
the declining influence of managed health care. CMS expects
national health spending to grow to $3.1 trillion by 2012 or
approximately 17.7 percent of GDP.
Expenditures are primarily influenced by 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
may also contribute significantly to increases in health care
expenditures. For example, Meara, White, and Cutler found that
the average per capita health spending for Americans age sixty-
five and older in 1999 was more than triple that for Americans
ages 34-44. For Americans age 75 and older, many of whom rely
on costly nursing home care, it was more than five times as
high.\1\
---------------------------------------------------------------------------
\1\ As quoted in Uwe E. Reinhardt, ``Does the Aging of the
Population Really Drive the Demand for Health Care?'' Health Affairs,
vol. 22, no. 6, November/December 2003, p. 27.
---------------------------------------------------------------------------
National health expenditures include public and private
spending on health care, services and supplies, funds spent on
the construction of health care facilities, as well as public
and private noncommercial research spending. In 2001, 87
percent of the $1.4 trillion spending for health care in the
United States was for personal health care, or services used to
prevent or treat illness and disease in the individual. The
remaining 13 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 direct payments, cost-sharing, insurance
premiums, taxes, and charitable contributions. 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 2001, individual out-of-pocket spending (including
coinsurance, deductibles, and any direct payments for services
not covered by an insurer) represented only 14.4 percent of all
health expenditures.
Private funds represented 75.1 percent of national health
expenditures in 1965, while public sources represented 24.9
percent of national health expenditures. Since the enactment of
the Medicare and Medicaid programs, however, this gap between
payments by private and public sources has closed. While all
private sources combined (out-of-pocket, private health
insurance, and other private funding such as philanthropy)
continued to finance most health care spending in 2001 ($777.9
billion or 54.9 percent), public sources (Federal, state, and
local governments) also provided a major share of funding
($646.7 billion or 45.4 percent.) The Federal Government's
share rose from 11.4 percent in 1965 to represent one-third of
all health spending in 1996 and 1997. Since that time, the
Federal portion of health expenditures has decreased somewhat
and, in 2001, the Federal Government spent $454.8 billion or
31.9 percent of total national health 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) provides all benefits covered under Part A
and Part B, and may include additional benefits not covered
under traditional Medicare. Beneficiaries enrolled in Part C
receive their care through private plans, such as health
maintenance organizations (HMOs). 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.
During fiscal year 1967, the first full year of the
program, total Medicare outlays amounted to $3.4 billion. In
fiscal year 2002, Medicare expenditures totaled $256.9 billion.
This increase in outlays since the program's first year
represents an average annual growth rate of 13.2 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 1997 period, total
outlays grew from $35.0 billion to $210.4 billion, for an
average annual rate of growth of 11.1 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. Despite increases in
enrollment, in FY1998, the Medicare growth rate slowed to a
record low of just 1.4 percent with expenditures of $213.4
billion. In 1999, Medicare spending decreased for the first
time in the program's history to $211.9 billion. Expenditures
increased slightly (3.5 percent) in 2000 to $219.3 billion. The
Balanced Budget Refinement Act of 1999 (BBRA) and the Benefits
Improvement and Protection Act of 2000 (BIPA 2000), however,
restored some of the payment reductions. This is reflected in
spending increases of 10 percent in 2001 to $241.2 billion and
6.5 percent in 2002 to $256.9 billion. According to CBO's
August 2003 baseline projections (prior to passage of the
Medicare Prescription Drug, Improvement, and Modernization Act
of 2003), total Medicare outlays will be $523 billion in
FY2013.
Medicaid is a joint Federal-state entitlement program that
pays for medical services on behalf of certain groups of low-
income persons. Medicaid funds long-term care for chronically
ill, disabled, and aged individuals; provides comprehensive
health insurance for low-income children and families; and
assists hospitals with the cost of uncompensated care through
the disproportionate share (DSH) program. Each state designs
and administers its own program within broad Federal
guidelines. The Federal Government shares in a state's Medicaid
costs by means of a statutory formula designed to provide a
higher Federal matching rate to states with lower per capita
incomes. These rates, or Federal medical assistance percentages
(FMAPs) ranged from 50 percent to 76 percent in 2002.
Medicaid expenditures have historically been one of the
fastest growing components of both Federal and state budgets.
During the period from FY1965 to FY1972 when Medicaid was
enacted and states began to develop programs, the portion of
Medicaid expenditures paid by the Federal Government grew from
$300 million to $4.6 billion, an average of 53 percent a year.
From FY1973 to FY1980, Federal Medicaid expenditures grew from
$4.6 to $14 billion. This annual growth rate of 15 percent
reflected the implementation of the Supplemental Security
Income (SSI) program for aged and disabled persons and new
state options for institutional coverage. For the next 8 years,
FY1981 to FY1989, the annual growth for Federal Medicaid
expenditures was 11 percent. During this period, there were a
number of conflicting Federal budget measures to either reduce
costs or expand eligibility thus increasing spending. From
FY1990 to FY1992, a time of economic downturn, some states used
creative financing mechanisms to transfer part of the medical
costs normally paid by states to the Federal Government. These
increased Federal payments, particularly for DSH, caused
Federal Medicaid spending to escalate at an annual rate of 28
percent from $41.1 billion to $67.8 billion. From FY1993 to
FY1998, the economy strengthened, DSH payments were reformed
slowing growth, Medicaid enrollment decreased due to
implementation of welfare legislation and states used managed
care to control costs. The average annual growth rate slowed to
6 percent during this period with expenditures increasing from
$75.8 billion in 1993 to $100.1 billion in FY1998.\2\
---------------------------------------------------------------------------
\2\ Andy Schneider and David Rousses, ``Medicaid Financing,'' The
Medicaid Resource Book, The Kaiser Commission on Medicaid and the
Uninsured, July 2002, Chapter 3, pp.91-93.
---------------------------------------------------------------------------
Since 1998, Medicaid costs appear to have entered a new
phase of growth, particularly for certain services such as
prescription drugs. Federal expenditures for Medicaid grew 7.3
percent in FY1999 to $107.4 billion, 8.8 percent in FY2000 to
$116.9 billion, and 11 percent in FY2001 to $129.8 billion. In
FY2002, Federal and state expenditures for Medicaid benefits
and program administration totaled $258.2 billion, with the
Federal Government's share at $146.2 billion or 57 percent of
total expenditures. This is an increase of 13 percent from the
$129.8 billion spent by the Federal Government in FY2001. CMS
attributes this growth to the recession, state program
expansions for the uninsured, and relaxed Medicaid eligibility
standards. Some states were also using ``intergovernmental
transfers'' with county and city service providers in order to
claim a higher Federal matching payment. The Congressional
Budget Office (CBO) projects that Medicaid spending will grow
at an average annual rate of 10.6 percent between FY2002 and
FY2010.
3. Hospitals
Hospital care costs are a major component of the nation's
health care bill and, in 2001, comprised 31.7 percent ($451.2
billion) of total health care expenditures. In 1965, $13.8
billion was spent on hospital services, and by 1970, following
passage of Medicare, spending had more than doubled to $27.6
billion. Between 1970 and 1980, total spending on hospital care
increased at an average rate of 13.9 percent per year. From
1980 to 1990, however, with the implementation of Medicare's
prospective payment system (PPS) in 1983, growth in national
expenditures slowed to 9.6 percent annually. Total hospital
care expenditures declined even further from 1990 to 1993 with
an average growth rate of 8.0 percent, and 3.5 percent from
1993 to 1999. This continued slow down in growth of total
expenditures was partially attributed to the impact of managed
care and reforms in Medicare which is the largest single payer
for hospital services. The Balanced Budget Act of 1997 (BBA)
included a 1-year freeze on PPS rates for inpatient services
and required the development of PPS for additional Medicare
covered services, including outpatient hospital care and
hospital-based home health agencies.
With these constraints on spending, hospitals became more
efficient, downsized, and consolidated, and were able to
bargain with insurance companies for increased payments. The
Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of
1999 (BBRA), a package of funding increases helped lessen the
impact of the BBA on rural hospitals and hospitals with a
disproportionate share of indigent patients. The Benefits
Improvement and Protection Act of 2000 (BIPA 2000), further
increased Medicare payment rates and national hospital
expenditures grew by 5.8 percent in 2000. This increase in the
rate of spending growth increased further in 2001 to 8.3
percent, its fastest growth in 10 years. CMS also attributes
this growth to increased utilization due to a shift to less
restrictive managed care plans.
In 2001, public (Federal, state, and local) sources
accounted for 58.3 percent of hospital service expenditures, or
$263.1 billion. The Federal Government is the single largest
payer for hospital services, and with the passage of Medicare,
its share grew from 14.6 percent in 1965 to 49.7 percent in
1997. Following BBA97, this portion dropped to 47.9 percent and
was at 46.4 percent in 2001, ($209.4 billion). Included in
Federal Government spending for hospital care are Medicare
payments which were responsible for 29.9 percent of hospital
expenditures in 2001, or $135 billion. Federal and state
spending for hospital care under Medicaid has grown from $2.6
billion in 1970 to $77.1 billion in 2001 and represents 17.1
percent of hospital expenditures.
Out-of-pocket expenditures by consumers represented
approximately 20 percent of payments for hospital care before
the enactment of Medicare and Medicaid, but in 2001,
represented only 3.1 percent. In 1965, private health insurance
was responsible for 41.2 percent of all hospital spending. In
1990, this portion was at 38.3 percent. This share fell to 32.3
percent in 1995 as a larger amount of care was provided in
ambulatory settings, and managed care plans negotiated lower
prices for services. Since that time, this percentage has again
increased to 33.7 percent in 2001.
Hospital utilization in the United States has undergone
major change in the past twenty years, greatly influenced by
technology, health care policy, and population dynamics. During
the 1970's, hospital admissions increased consistently reaching
highs of over 36 million in the early 1980's. With the
introduction of PPS in 1983, which encouraged more cost
efficient treatment methods, admissions declined dramatically
for several years. After 1987, total admissions continued to
decrease, though more slowly, and reached a low of 30.7 million
in 1994. Declines in inpatient admissions were attributed to
advances in drug therapies, aggressive utilization controls by
managed care organizations, and technological advances which
enabled hospitals to provide services in more cost-effective
outpatient settings favored by insurers. Since 1994, hospital
admissions have again increased each year, due in part to the
growing health care needs of adults 65 and older and the
weakening impact of managed care. Close to 34 million people
were admitted to hospitals in 2001, a level comparable to that
of 1985.
The average length of a hospital stay also decreased as a
result of Medicare PPS, from 7.3 days for persons of all ages
in 1980 to 6.5 days in 1985. This was even greater for patients
over 65 who saw a decline in length of stay from 10.7 in 1980
to 8.7 in 1985. In the latter part of the 1980's as outpatient
visits increased, patients admitted to hospitals tended to be
those with more severe illnesses which required longer
hospitals stays and the average length of stay stabilized and
even increased for those 65 and over. Beginning in the early
1990's, however, declines occurred which were even steeper than
in the first years of PPS. This decline was attributed to
greater insurance coverage of post-acute care alternatives to
hospitalization, an increase in managed care and other cost-
containment programs, as well as continuing advances in
technology. The average length of stay in 2001 was 4.9 for all
ages, compared to 6.4 in 1990, a decrease of 23 percent. For
persons over the age of 65, the average length of stay declined
33 percent from 8.7 days in 1990 to 5.8 days in 2001.
4. Physicians' Services
Utilization of physicians' services increases with age. In
2001, the population as a whole made an estimated 880.5 million
visits to physician offices, which translates to about 3.1
visits per person. In contrast, patients age 65 to 74 years of
age had 6.3 visits and those over age 75 visited physician
offices 7.4 times each during the year.
Physician services continue to be the second largest
component of personal health care expenditures and, in 2001,
represented 22 percent of all health care expenditures. In
1965, $8.3 billion was spent on physician services, and by
1970, spending had reached $14 billion. This increase
represented an average annual growth rate of 11 percent. Over
the next two decades (1970-1990), growth in physician
expenditures was slightly higher at approximately 13 percent.
In the 1990's, however, the annual rate of growth in payments
for physician services was slower than the previous three
decades and grew only 6.3 percent annually from 1990 to 2000.
This slowdown in the rate of growth has been attributed to
several factors, including adjustments in private sector
payment systems which reflected Medicare's fee schedule, and
increased use of managed care. In 2001, however, spending once
again grew by 8.6 percent to $313.6 billion. CMS links this
growth to a decline in managed care utilization review policies
and an increase in imaging procedures and office visits for
prescription drugs.
In 2001, out-of-pocket payments covered approximately 11.2
percent of the cost of physician services. 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 mid-1960's when out-of-pocket expenditures were 58.5
percent of total physician spending. However, unlike hospital
services, the single largest payer for physician services is
not the Federal Government, but rather private health insurance
companies. In 1965, private health insurers contributed 33
percent of the total and by 1993, this figure had reached 47.8
percent. Since 1993, the share of physician services financed
by private insurance has remained relatively stable. In 2001,
private health insurers paid for 48.1 percent of all physician
services.
The share of spending for physician services paid by public
financing grew from 6.9 percent of total physician expenditures
in 1965 to 30.0 percent in 1975. Since that time, however, this
portion has increased more slowly to 33.6 percent ($105.4
billion) of total physician expenditures in 2001. Spending for
physicians services under the Medicare program represented 20.4
percent ($63.9 billion), of total funding for care by
physicians. In 1970, Medicare paid for only 11.8 percent, or
$1.6 billion, of total physician service expenditures. Between
1970 and 1990, the average annual rate of growth in Medicare
payments for physician services was 15.8 percent. Total
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
only 7.1 percent between 1990 and 2001, while national
physician payments rose 6.5 percent 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 disability. Services are provided in
institutions or a wide variety of 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 basic
human 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 necessary for
independent community living. While it is predicted that long-
term care services will be in greater demand in the coming
decades due to increased numbers of older persons, the need for
long-term care assistance affects persons of all ages, not just
the elderly.
In 2002, of the $1.34 trillion spent on all U.S. personal
health care services, $163.2 billion, or 12.2 percent was spent
on long-term care. This amount includes spending for
institutional care (nursing homes and intermediate care
facilities for the mentally retarded (ICFs/MR)), and a wide
range of home and community-based services, such as home health
services, personal care services, and adult day care.
Long-term care is financed chiefly through the Federal-
state Medicaid program. Of all U.S. long-term care spending in
2002, the Medicaid program financed 51 percent, or $82.1
billion. Most of this spending, 70 percent, was for
institutional care in nursing facilities and ICFs/MR. The
balance was spent on home and community-based services (HCBS).
In order to correct a perceived bias in Medicaid's eligibility
and benefit structure toward institutional care, in 1981,
Congress authorized the Secretary of Health and Human Services
(HHS) to waive certain Medicaid provisions in order to assist
states in expanding HCBS. Spending for the Section 1915c home
and community based waiver program has increased rapidly since
FY1990, reaching $16.4 billion in FY2002.
After Medicaid, private out-of-pocket spending is the next
primary source of funding for long-term care. The average cost
of nursing home care is in excess of $3,600 a month, and
persons who enter a nursing home encounter significant
uncovered liability for this care. In 2003, out-of-pocket
spending for long-term care was $32.4 billion, representing
almost 20 percent of all U.S. spending on long-term care. Most
out-of-pocket long-term care spending was for nursing home care
(80 percent of the $32.4 billion total). Private insurance
coverage is limited and covered only 8.8 percent of spending in
2002, or $14.4 billion. The private long-term care insurance
market is growing, however, with the number of policies
purchased increasing by about 18 percent per year, on average,
between 1987 and 2001.
Medicare is not intended to be a primary funding source for
long-term care. Its role is limited to financing care in
skilled nursing facilities (up to 100 days after a
hospitalization for persons who need continued skilled care),
and home health services for persons who need skilled nursing
care on a part-time or intermittent basis, or physical or
speech therapies. Medicare spent $24.3 billion on skilled
nursing facility care and home health care services in 2002,
representing almost 15 percent of all U.S. spending on long-
term care. Of this amount, about 53 percent was for skilled
nursing facility care, and the balance was for home health
care.
In addition to health expenditures for long-term care, a
variety of other Federal social service programs provide
support for long-term care though funding is more limited.
Primarily these are the Older Americans Act and the Social
Services Block Grant Program, both of which fund a variety of
home and community-based services. The Older Americans Act
authorizes the National Family Caregiver Support program which
offers assistance to family caregivers of the frail elderly.
Over 80 percent of adults who receive long-term care assistance
reside in the community, not in institutions, and family and
friends (unpaid caregivers) are the major providers of this
care. Of those persons age 65 and older receiving assistance in
the community, almost 60 percent depend on care from unpaid
caregivers, while 7 percent rely exclusively on paid services.
The percent of people 65 years and over living in nursing
homes declined from 5.1 percent in 1990 to 4.5 percent in 2000.
While Americans are not entering nursing homes at the same rate
as they have in previous years, nursing home residence
increases dramatically with age. In 1994, of persons age 65-74
receiving long-term care assistance, about 1 percent reside in
nursing homes. However, of persons 85 years and older receiving
assistance, 23 percent resided in nursing homes. This latter
age group which is most likely to need nursing home care, is
projected to increase from 4.2 million in 2000 to 8.9 million
in 2030.
6. Prescription Drugs
CMS's National Health Expenditures provides data on
spending for prescription drugs purchased from retail
pharmacies, including community pharmacies, grocery store
pharmacies, mail-order facilities, and mass-merchandising
establishments. According to this data, in 2001, prescription
drug expenditures in the United States were approximately
$140.6 billion, or about 10.0 percent of total health care
spending. 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 2001, spending on hospital care grew 27.0 percent,
physician services spending rose 36.7 percent, and nursing home
spending grew 23.7 percent. Spending on prescription drugs in
the same period grew 109.2 percent. The increase in spending is
due to an increase in the amount of drugs being prescribed, new
and more expensive drugs, and inflation in the cost of drugs.
Most older Americans receive health care coverage through
Medicare, but the program provides limited coverage for drugs.
There are circumstances where coverage is provided. Drugs
administered to beneficiaries who are hospital inpatients are
covered as part of the Medicare payment to the hospital.
Medicare also pays physicians for drugs provided to
beneficiaries. These are drugs that 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. (However, if a drug is generally
self-administered by injection (such as insulin), it is not
covered.) Medicare law also specifically authorizes coverage
for certain classes of outpatient drugs that may be self-
administered: those used for the treatment of anemia in
dialysis patients, immunosuppressive drugs following an organ
transplant paid for by Medicare, certain oral cancer and
associated anti-nausea drugs, and certain immunizations. In
2001, Medicare, which covered approximately 40 million
beneficiaries (35 million of whom were elderly), paid $2.4
billion for outpatient prescription drugs.
In general, however, Medicare does not provide coverage for
outpatient prescription drugs, such as those obtained through
pharmacies or through the mail. Many Medicare beneficiaries
have no coverage for these prescription drugs. According to an
analysis of the 1998 Medicare Current Beneficiary Survey, in
1999, 34.5 percent of beneficiaries aged 65-74, 40.5 percent of
those aged 75-84, and 45.1 percent of those over age 85 had no
coverage. For the beneficiaries who had coverage, employer-
sponsored plans were the primary source, followed by
Medicare+Choice plans, Medigap plans, and Medicaid. In
addition, several states and the pharmaceutical industry offer
assistance with prescription drug costs for low-income
individuals. Beneficiaries with supplementary prescription drug
coverage use prescriptions at a considerably higher rate than
those without supplementary coverage.\3\
---------------------------------------------------------------------------
\3\ A more detailed discussion of the extent of beneficiary
prescription drug coverage is available in Laschober, Mary et al.
Trends in Medicare Supplemental Insurance and Prescription Drug
Coverage, 1996-1999, Health Affairs, Web Exclusive. February 27, 2002.
---------------------------------------------------------------------------
The Congressional Budget Office (CBO) has estimated that in
2003, average per capita spending for prescription drugs will
be $2,318. CBO projected that this figure will rise to $5,727
by 2013. However, expenditures on drugs by Medicare
beneficiaries are skewed. For example, in 2000, about 26
percent of beneficiaries had expenditures of $2,000 or more,
accounting for 65 percent of the Medicare population's total
drug spending. On the other hand, 32 percent of beneficiaries
had expenditures of $500 or less, accounting for 4 percent of
total spending.\4\
---------------------------------------------------------------------------
\4\ Prescription Drug Coverage and Medicare's Fiscal Challenges,
Congressional Budget Office testimony before the House Ways and Means
Committee, April 9, 2003. http://www.cbo.gov/
showdoc.cfm?index=4159&sequence=0
---------------------------------------------------------------------------
Much of this spending is not covered by insurance. Despite
the presence of insurance coverage, on average, beneficiaries
pay almost half of their drug costs out-of-pocket. The
percentage of out-of-pocket expenses varies, depending on
whether the beneficiary has supplementary coverage. For
example, in 2003, persons without coverage paid an average of
$1,356 for prescription drugs, 100 percent of it out-of-pocket.
Beneficiaries with coverage through Medigap policies or
Medicare+Choice plans incurred $2,091 in costs, but paid
$1,094, or 52 percent, out-of-pocket. Those with coverage
through an employer-sponsored plan had average costs of $2,775,
but paid only $880, or 31.7 percent, out-of-pocket.\5\
---------------------------------------------------------------------------
\5\ Medicare and Prescription Drug Spending Chartpack, Kaiser
Family Foundation, June 2003. http://www.kff.org/medicare/
loader.cfm?url=/commonspot/security/getfile.cfm&PageID=14382
---------------------------------------------------------------------------
As indicated above, beneficiaries with supplemental drug
coverage spend more on prescription drugs than those with no
coverage. In 1998, persons with coverage used an average of
24.3 prescriptions per year while those without coverage used
an average of 16.7 prescriptions per year. This can have an
effect on the health of beneficiaries with no supplemental
coverage. A 2001 survey \6\ indicated that beneficiaries who
lack drug coverage did not fill prescriptions or skipped doses
to make thir medications last longer. Regardless of
supplemental insurance coverage, 22 percent of seniors
indicated that, due to cost, they had either not filled a
prescription or skipped doses. The percentage was higher (35
percent) for those with no supplemental coverage and lower (18
percent) for those with coverage.
---------------------------------------------------------------------------
\6\ Seniors and Prescription Drugs: Findings from a 2001 Survey of
Seniors in Eight States, Kaiser Family Foundation, et al, July 2002.
http://www.kff.org/medicare/6049-index.cfm
---------------------------------------------------------------------------
The cost of the 50 drugs used most frequently by seniors
rose an average of 3.4 times the rate of inflation from 2002 to
2003, according to a study by Families USA.\7\ Some drugs, such
as Lipitor, Norvasc, Prevacid, and Zocor, rose at approximately
twice the rate of inflation. However, Miacalcin, Klor-Con, and
Claritin rose at more than 10 times this rate. For
beneficiaries living on fixed incomes adjusted only for
inflation, this leads to a larger portion of their incomes
being spent on drugs.
---------------------------------------------------------------------------
\7\ Out-of-Bounds: Rising Prescription Drug Prices for Seniors,
Families USA, July 2003. http://www.familiesusa.org/site/DocServer/
Out--of--Bounds.pdf?docID=1522
---------------------------------------------------------------------------
On several occasions, the Congress has considered adding
coverage for at least a portion of beneficiaries' drug costs.
Coverage for catastrophic prescription drug costs was included
in the Medicare Catastrophic Coverage Act of 1988, but that law
was repealed in the following year. The Health Security Act,
proposed by the Clinton Administration in 1994, would have
added a prescription drug benefit to Medicare, however that
legislation was not enacted. The issue was considered again in
the 106th and 107th Congresses. During the 108th Congress, both
the House and Senate considered and passed legislation adding a
prescription drug benefit to the Medicare program. See Chapter
8, ``Medicare,'' for a discussion of this legislation.\8\
---------------------------------------------------------------------------
\8\ For a complete discussion of this issue, see Medicare
Prescription Drug Coverage for Beneficiaries: Background and Issues, by
Jennifer O'Sullivan, Congressional Research Service, January 6, 2003.
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7. Health Care for an Aging U.S. Population
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. Growth did
slow somewhat during the 1990's because of the relatively small
number of babies born during the Great Depression of the
1930's. This is reflected in the 2000 Census which, for the
first time in the history of the census, indicated that the 65
years and over population did not grow faster than the total
population (12.4 percent and 13.2 percent respectively). During
the 1990's, the most rapid growth in the older population
occurred in the oldest age groups. The population 85 years and
over increased by 38 percent from 3.1 million to 4.2 million in
2000 and is projected to reach 8.9 million in 2030. The total
number of persons 65 and older, 35 million in 2000, will more
than double between the years 2010 and 2030 when the ``baby
boom'' generation reaches age 65. By 2030, there will be 70
million older persons comprising 20 percent of the 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 2000, the average life expectancy at birth increased from
46.3 years to 74.1 years for men, and from 48.3 to 79.5 years
for women. Life expectancy at age 65 has also increased over
the last half of the twentieth century from 13.9 to 17.9 years
for both sexes. 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
2000 Medicare Current Beneficiary Survey (MCBS), 78.6 percent
of the elderly aged 65- 74 rated their health as good, very
good, or excellent. However, this number falls to 64.4 percent
in the 85+ group. While only 6.1 percent of the 65-74 age group
reported that their health was poor, 9.1 percent of the 85+
group reported their health as poor.
Age is not the only factor affecting health status; a
person's race is also important. Among individuals aged 65-74,
18.2 percent of whites and 13.2 percent of Hispanics reported
their health as excellent, compared to 10.9 percent of blacks.
Only 8.7 percent of whites and 10.3 percent of Hispanics aged
85 and over reported their health as poor while 13 percent of
blacks in the same age group reported their health as poor.
Another factor affecting self-reported health status is
insurance coverage. Persons with both individually purchased
and employer-sponsored private health insurance to supplement
their Medicare coverage reported the best health in 2000: 84.3
percent in the good-very good-excellent category and only 4.7
percent in the poor category. This is followed by those
enrolled in Medicare managed care: 77.7 percent reported
excellent, very good, or good health and 6.4 percent reported
poor health. Of those beneficiaries with only Medicare fee-for-
service coverage, 62.9 percent reported their health as
excellent, very good, or good while 13 percent reported poor
health. Beneficiaries with Medicaid as their insurance to
supplement Medicare reported the poorest health (20.4 percent)
with only 46.4 percent reporting their health was excellent,
very good, or good.
Although most elderly Medicare beneficiaries consider their
health good, limitations in activities as a result of chronic
conditions and disability increase with age. In 2001, among
those 65-74 years old, 26 percent reported a limitation caused
by an activity limitation (defined as any limitation due to a
physical, mental, or emotional problem). Of those 75 years and
over, 45 percent reported they were limited by chronic
conditions. The most common of these are arthritis and
hypertension. With age, rates of hearing and visual impairments
also increase rapidly. According to the National Institute on
Aging (NIA), as many as 4.5 million people in the U.S. and
about half the persons 85 years and older have symptoms of
Alzheimer's disease. Because of the growing numbers of persons
age 85 and older, caring for persons with Alzheimer's will be a
major concern over the next several decades.
The extent of need for assistance with activities of daily
living (ADLs) and Instrumental Activities of Daily Living
(IADLs) also increases with age and is an indicator of need for
health and social services. According to the MCBS, elderly
persons reporting the need for personal assistance with
everyday activities increases with age, from 33.1 percent of
persons aged 65-74 to 78 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 2001, 74 percent of persons 65 years
of age and older reported incomes of less than $25,000, and 31
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
persons with disability, women over the age of 85, and the poor
elderly. A large proportion of Medicare payments on behalf of
elderly beneficiaries is directed toward those with modest
incomes: 26 percent is on behalf of those with incomes of less
than $10,000 and 67 percent is for those with incomes of less
than $25,000. Medicaid also plays an important role in helping
very low-income elderly with health benefits not covered under
Medicare such as long-term care services and prescription drugs
or with payment for Medicare premiums and cost-sharing.
According to the U.S. Administration on Aging's report, A
Profile of Older Americans: 2002, the elderly averaged $3,493
in out-of-pocket health care expenditures, an increase of more
than half since 1990. This can be compared to the average out-
of-pocket costs for the total population of only $2,181. The
elderly also direct more of their household expenditures toward
health care. In 2000, for older Americans, 12.6 percent of
their total household expenditures were for health care which
is more than twice that of all consumers who spent only 5.5
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.
While policymakers are concerned about planning for the
long-term care needs of an aging population, it is difficult to
predict the impact of longer life expectancies and growing
number of elderly Americans on health care expenditures. Some
researchers have suggested that increases in longevity will not
necessarily lead to an increased demand for health care.\9\ If
improvements in medical technology and health behavior can
continue to improve the health status of the elderly, future
health care spending on the elderly may grow more slowly.
---------------------------------------------------------------------------
\9\ David M. Cutler, ``Declining Disability Among the Elderly,''
Health Affairs, vol. 20, no. 6, November/December 2001, pp. 11-27.
---------------------------------------------------------------------------
CHAPTER 8
MEDICARE
A. BACKGROUND
Medicare was enacted in 1965 to insure older Americans
against 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
2002, Medicare insured approximately 40.5 million aged and
disabled individuals at an estimated cost of $265.7 billion.
Medicare is the second most costly Federal domestic program,
exceeded only by the Social Security program.
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
have end-state renal disease. Medicare is a Federal program
with a uniform eligibility and benefit structure throughout the
United States. It is a non-means-tested program, that is,
protection 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). The Medicare+Choice program
(Part C), established by the Balanced Budget Act of 1997 (BBA,
P.L. 105-33), provides managed care options for beneficiaries.
These options include preferred provider organizations,
provider-sponsored organizations, private fee for service
plans, and, on a demonstration basis, a limited number of
medical savings accounts in conjunction with a high deductible
health insurance plan.
Although Medicare provides broad protection against the
costs of many, primarily acute care, services, it covers only
about one-half of beneficiaries' total health care expenses.
Most individuals have some coverage in addition to basic
Medicare benefits. Some persons have additional benefits
through a managed care plan. Most other individuals have some
supplemental coverage through individually purchased policies,
commonly referred to as a ``Medigap'' policies, employer-
sponsored retiree plans, or public programs such as Medicaid.
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. BBA and subsequent legislation provided
for program savings through new payment methodologies for
various service categories, including skilled nursing
facilities, home health agencies, and outpatient hospital
services. Benefits have been added to the program, especially
in the area of preventive care.
1. Hospital Insurance Program (Part A)
Most Americans age 65 and older are automatically entitled
to premium-free benefits under Part A because they have worked
40 quarters of Social Security-covered employment. Those who
are not automatically entitled may obtain Part A coverage
provided they pay the monthly premium. Persons with fewer than
30 quarters of Medicare-covered employment pay $316 per month
in 2003; those with 30-39 quarters pay $174. Also eligible for
Part A coverage are disabled persons under age 65 who have
received monthly Social Security or Railroad Retirement
benefits on the basis of disability for 2 years.
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 a tax of 1.45
percent on covered earnings; the self-employed pay both the
employer and employee shares. In 2002, payroll taxes for the HI
Trust Fund accounted for $152.7 billion, 85.5 percent of the
fund's total income. An estimated $149.9 billion in Part A
benefit payments were made in 2002.
Benefits included under Part A, in addition to inpatient
hospital care, are skilled nursing facility (SNF) care, home
health care, and hospice care. For inpatient hospital care, the
beneficiary is subject to a deductible ($840 in 2003) for the
first 60 days of care in each benefit period or ``spell of
illness.''. For days 61-90, a coinsurance payment is required
($210 per day in 2003). For hospital stays longer than 90 days,
a beneficiary may elect to draw upon a 60-day ``lifetime
reserve.'' A coinsurance payment is required for each lifetime
reserve day ($420 in 2003).
Medicare covers up to 100 days of skilled nursing facility
(SNF) services during a spell of illness for beneficiaries who,
following a hospital stay of at least 3 days, need daily
skilled nursing care or other rehabilitative services. Medicare
does not cover SNF care for beneficiaries who need only
custodial care, such as assistance with walking or bathing. A
spell of illness begins when a beneficiary receives inpatient
hospital or covered SNF services and ends when the beneficiary
has not been a hospital inpatient or in a Part A-covered SNF
stay for 60 consecutive days. For each spell of illness,
beneficiaries make no coinsurance payment for the first 20
days; a daily coinsurance payment is required for days 21
through 100 ($105 in 2003).
The home health benefit covers homebound beneficiaries who
are in need of intermittent skilled nursing care, physical or
occupational therapy, or speech language pathology services.
There is no coinsurance payment required. Hospice care is
provided for terminally ill beneficiaries and their families.
The hospice benefit has a limited coinsurance payment required
for prescription drug coverage and inpatient respite care.
Hospital payment.--Most hospitals are paid for their
Medicare patients under a prospective payment system or PPS.
The inpatient prospective payment system (IPPS) pays hospitals
predetermined amounts adjusted for a specific diagnosis. Each
beneficiary admitted to a hospital is assigned to one of
approximately 500 diagnosis-related groups (DRGs). 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 cannot charge
beneficiaries any more than the coinsurance amounts listed
above.
In addition to the basic DRG payment, some hospitals
receive added funds in the form of adjustments to their IPPS
payment or separate payments. Teaching hospitals receive
payments for their direct graduate medical education (GME)
costs, such as resident salaries and faculty costs. Their IPPS
payment is adjusted to reflect their indirect medical education
(IME) costs, i.e., 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,
also receive an adjustment to their Medicare payments called a
disproportionate share hospital (DSH) adjustment. Adjustments
are also made to hospitals for atypically costly cases, known
as ``outliers.''
In general, the IPPS payment rates are increased annually
by an update factor that is determined, in part, by the
projected increase in the hospital market basket index (MBI).
This is a fixed price index that measures the change in the
price of goods and services purchased by hospitals. The update
is established by statute. The update for FY2003 was the MBI
minus 0.55 percentage points.
Certain types of rural hospitals receive special
consideration under the hospital IPPS: sole community hospitals
(facilities located in geographically isolated areas and deemed
to be the sole provider of inpatient acute care hospital
services in a geographic area), Medicare dependent hospitals
(small rural hospitals with a high proportion of patients who
are Medicare beneficiaries), and rural referral centers
(relatively large hospitals, generally in rural areas, that
provide a broad array of services and treat patients from a
wide geographic area). Certain other hospitals (inpatient
rehabilitation facilities, long-term care hospitals) are paid
using prospective payment systems tailored for their patient
care costs. Psychiatric hospitals children's cancer hospitals,
and critical access hospitals are excluded from the IPPS and
are paid on the basis of reasonable costs.
A full discussion of Medicare's skilled nursing facility,
home health, and hospice benefits is provided in the next
chapter.
2. Supplementary Medical Insurance (Part B)
Part B of Medicare, also called supplementary medical
insurance (SMI), covers physicians' services, outpatient
hospital services, physical and occupational therapy, durable
medical equipment, and certain other services. It is a
voluntary program. Anyone eligible for Part A and anyone over
age 65 can obtain Part B coverage by paying a monthly premium
($58.70 in 2003). Beneficiary premiums finance 25 percent of
program costs with Federal general revenues covering the
remaining 75 percent. In general, Part B beneficiaries using
covered services are subject to a $100 deductible and 20
percent coinsurance charges.
Physician Payment.--The Omnibus Budget Reconciliation Act
of 1989 established a fee schedule for physician payment 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 physician work (based on time, skill, and
intensity involved), practice expenses (office rents and
employee salaries), and malpractice expenses. These values are
adjusted for geographic variations in the costs of practicing
medicine. These geographically adjusted relative values are
converted into a dollar payment amount by a conversion factor.
The 2003 conversion factor is $36.7856. Thus, for a service
with a relative value of 2.6, the payment would be $95.64.
Several factors enter into the calculation of the formula used
to update the conversion factor. These include: 1) the
sustainable growth rate (SGR) which is essentially a target for
Medicare spending growth; 2) the Medicare economic index (MEI)
which measures inflation in physicians services; and 3) the
update adjustment factor which modifies the update which would
otherwise be allowed by the MEI, to bring spending in line with
the SGR target.
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. Prior to BBA, the
law was interpreted to prohibit physicians from entering into
private contracts with Medicare beneficiaries to provide
services for which no Medicare claim would be submitted. BBA
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 fully responsible for payments for services rendered under
the contract and the beneficiary must acknowledge that no
Medicare charge limits apply. An affidavit, filed with the
Secretary of Health and Human Services, must be in effect at
the time the services are provided. The affidavit, signed by
the physician, must state that the physician will not be
reimbursed under the Medicare program for any item or service
provided to any Medicare beneficiary for 2 years from the date
of the affidavit.
Certain non-physician practitioner services are paid under
the physician fee schedule. In most cases, these services must
be provided under the supervision of or in conjunction with a
physician's services. Providers are paid a certain percentage
of the fee schedule, depending on their specialty. These
providers include physician assistants, nurse practitioners,
clinical nurse specialists, nurse midwives, certified
registered nurse anesthetists, clinical psychologists, and
outpatient physical and occupational therapists.
Outpatient services.--Medicare beneficiaries receive
services in a variety of outpatient settings, including
hospital outpatient departments (HOPDs), ambulatory surgical
centers (ASCs), rural health clinics (RHCs), and comprehensive
outpatient rehabilitation centers (CORFs). Under the HOPD
prospective payment system, which was implemented in August
2000, the unit of payment is the individual service or
procedure as assigned to one of about 570 ambulatory payment
classifications (APCs). In most cases, all services and items
for a procedure are included or ``bundled'' within each APC.
For example, an APC for a surgical procedure will include
operating and recovery room services, anesthesia, and surgical
supplies. Medicare's payment for HOPD services is calculated by
multiplying the relative weight associated with an APC by a
base payment amount or ``conversion factor.'' Most conversion
factors are geographically adjusted to reflect wage
differences. Unlike other Part B services in which the
beneficiary pays 20 percent of the Medicare-approved payment
amount, for HOPD services the beneficiary pays 20 percent of
the actual charges which can be in excess of the Medicare-
approved amount. BBA addressed this issue by freezing
beneficiary copayments at 20 percent of the national median
charge for the service in 1996, updated to 1999. Over time, as
PPS payments amounts rise, the frozen beneficiary copayments
will decline as a share of the total payment until the
beneficiary share is 20 percent of the Medicare payment.
Medicare uses a fee schedule to pay for ASC facility
services. The associated physician services (surgery and
anesthesia) are paid under the physician fee schedule. There
are currently over 2,400 procedures approved for ASC payment
and categorized into one of nine payment groups that reflect
the national median cost of procedures. These rates are
adjusted to reflect geographic price variation using a hospital
wage index. Payments are also adjusted when multiple surgical
procedures are performed at the same time.
RHCs are paid on the basis of an all-inclusive rate for
each beneficiary visit. An interim payment is made to the RHC
based on estimates of allowable costs and number of visits; a
reconciliation is made at the end of the year to reflect actual
costs and visits. Per-visit payment limits are established for
all RHCs (other than those in hospitals with fewer than 50
beds). Payment limits are updated by the MEI. CORFs provide (by
or under the supervision of physicians) outpatient diagnostic,
therapeutic, and restorative services. Payments for services
are made on the basis of the physician fee schedule.
Durable Medical Equipment (DME) and Prosthetics and
Orthotics (PO).-Medicare covers a wide variety of DME and PO.
DME (including such items as walkers, wheelchairs, oxygen and
oxygen supplies, and hospital beds) must be prescribed by a
physician and must be able to withstand repeated use, be
medically necessary, and be appropriate for use in the home.
Prosthetics and orthotics are items which replace all or part
of an internal organ or body part, such as cardiac pacemakers
and artificial limbs. Most items of DME and PO are paid on the
basis of a fee schedule which is generally updated by the
consumer price index for urban consumers (CPI-U). BBA required
the establishment of competitive bidding demonstration projects
in which suppliers competed for contracts to furnish Medicare
beneficiaries with specific items of DME. Standards were set to
ensure quality of items and services, beneficiary access and
choice of suppliers, and financial viability of the suppliers.
Demonstrations were established in Polk County, FL, and San
Antonio, TX. Savings to Medicare ranged from 17 percent to 22
percent at the two sites.
Preventive care benefits.--In general, Medicare does not
cover preventive services. In recent years, however, Congress
has added a number of specific benefits to the program. The
following preventive services are covered (unless otherwise
noted, beneficiaries are liable for regular Part B cost-sharing
charges: $100 annual deductible and 20 percent coinsurance):
Pneumococcal Pneumonia Vaccination. Not
subject to deductible or coinsurance.
Hepatitis B Vaccination.
Influenza Vaccination. Not subject to
deductible or coinsurance.
Screening Pap Smears and Pelvic
Examinations. Covered once every 3 years. Annual
screening pelvic examination are covered for certain
high-risk individuals. Not subject to deductible;
beneficiaries are liable for coinsurance for the
screening pelvic exam.
Screening Mammography. Annual screening
mammography for all women over age 39. The benefit is
not subject to the deductible; coinsurance is required.
Prostate Cancer Screening. Annual prostate
cancer screening tests for men over age 50. The benefit
will cover digital rectal examinations and prostate
specific antigen (PSA) blood tests. The PSA test is not
subject to deductible or coinsurance.
Colorectal Cancer Screening.
Annual screening fecal-occult blood
tests for beneficiaries over age 49, not
subject to deductible or coinsurance
Screening flexible sigmoidoscopy,
every 4 years for beneficiaries over age 49
Screening colonoscopies every 2
years for beneficiaries at high-risk for colon
cancer, or every 10 years for beneficiaries not
at high risk.
Barium enema tests can be
substituted for either of the two previous
procedures.
Diabetes Self-Management. Educational and
training services, including instructions in self-
monitoring of blood glucose, education about diet and
exercise, and insulin treatment plans 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. Coverage for certain
high-risk beneficiaries.
Glaucoma screening for high-risk
beneficiaries and diabetics.
Medical nutrition therapy for beneficiaries
with diabetes or renal disease.
3. Medicare+Choice (Part C)
The Medicare+Choice program (M+C) was established by the
Balanced Budget Act of 1997. It provides managed care options
for Medicare beneficiaries who are enrolled in both Parts A and
B. These can be a coordinated care plan (such as an HMO, a
preferred provider organization, or a provider sponsored
organization), a private fee-for-service plan, or a high
deductible plan offered with a M+C medical savings account
(although no Medicare MSA plans have ever joined the Program).
A number of protections were established, including a guarantee
of beneficiary access to emergency care, quality assurance and
informational requirements for M+C organizations, and external
review, grievance, and appeal requirements.
In general, the program makes monthly payments in advance
to participating health plans for each enrolled beneficiary in
a payment area (typically a county). Each year the Secretary of
Health and Human Services (HHS) is required to determine the
annual M+C per capita rate for each payment area, and the risk
and other factors to be used in adjusting such rates. Payments
to M+C organizations are made from the Medicare Trust Funds in
proportion to the relative weights that benefits under Parts A
and B represent of the actuarial value of total Medicare
benefits.
For each enrolled beneficiary, Medicare pays M+C
organizations a monthly capitation payment which is based on
the M+C per capita rate. This rate is set at the highest of one
of three amounts: 1) a blended rate, which is the sum of a
percentage of the annual local area-specific M+C capitation
rate for the year and a percentage of the input-price-adjusted
national M+C capitation rate for the year (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); 2) a minimum payment (or floor)
rate; or 3) a minimum percentage increase which is generally
102 percent of the previous year's payment. Once the
preliminary rate is determined for each county, a budget
neutrality adjustment is required by law to determine final
payment rates.
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 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 non-institutionalized, aged
Medicare beneficiaries. Remaining health care expenses are paid
for out-of-pocket or by private supplemental health insurance
(such as Medigap), by employer-based retiree coverage, by
Medicaid, or other sources. Over 80 percent of beneficiaries
have insurance to supplement their Medicare coverage.
The term ``Medigap'' is commonly used to describe an
individually purchased private health insurance policy that is
designed to supplement Medicare's coverage. These plans offer
coverage for Medicare's deductibles and coinsurance and pay for
some services not covered by Medicare. Generally, there are 10
standardized Medigap benefit packages that 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. Two
additional high-deductible plans offer the same benefits as
either Plan F or J, but the deductible is $1,650 for 2003 and
will be 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. There
are no Federal limits set regarding premium prices.
Some Medicare beneficiaries get supplemental coverage
through retiree plans offered by their former employers. These
plans typically assist with cost-sharing requirements of the
Medicare program and paying for services not covered by
Medicare, such as prescription drugs. Estimates of the
availability of this coverage vary. A 2001 survey by Mercer/
Foster Higgins \1\ shows that over an 8-year period (1993-2001)
the number of employers (with over 500 employees) offering
health plan coverage to Medicare-eligible retirees fell from 40
percent to 23 percent. Coverage of the Medicare-eligible
population increases by size of employer. In 2001, 17 percent
of employers with 500-999 employees offered coverage. This
percentage increased to 25 percent for employers with 1,000-
4,999 employees, 37 percent for those with 5,000-9,999
employees, 37 percent for those with 10,000-19,999 employees,
and 54 percent for those with 20,000 or more employees. A 2002
survey conducted by Hewitt and the Kaiser Family Foundation \2\
of employers with more than 1,000 employees found that the
average monthly premium for the age 65+ retirees was $194; the
retiree paid $79 of this amount. In the future, the survey
found that most employers are considering changing their
retiree plans in order to address the increasing costs of
providing coverage. The employers stated they are considering
such means as increasing retiree contributions, raising cost-
sharing requirements, or raising retiree out-of-pocket limits.
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\1\ Mercer, William M. National Survey of Employer-Sponsored Health
Plans, Key Findings for 2001. April 8, 2002.
\2\ Hewitt and Kaiser Family Foundation. The Current State of
Retiree Health Benefits: Findings from the Kaiser/Hewitt 2002 Retiree
Health Survey. December 2002.
---------------------------------------------------------------------------
Some low-income aged and disabled Medicare beneficiaries
are also eligible for full or partial coverage under Medicaid.
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 covered under both programs. Medicaid picks up
Medicare cost-sharing charges and provides protection against
the costs of services generally not covered by Medicare.
Perhaps the most important service for the majority of dual
eligibles is prescription drugs.
Federal law specifies several population groups that are
entitled to more limited Medicaid protection. These are:
Qualified Medicare Beneficiaries (QMBs)-
aged or disabled persons with incomes at or below the
Federal poverty level having assets below $4,000 for an
individual and $6,000 for a couple. QMBs are entitled
to have their Medicare cost-sharing charges, including
the Part B premium, paid by Medicaid.
Specified Low-Income Medicare Beneficiaries
(SLIMBs). These are persons who meet the QMB criteria,
except that their income limit is between 100 percent
and 120 percent of the Federal poverty level. Medicaid
protection is limited to payment of the Medicare Part B
premium unless the individual is otherwise eligible for
Medicaid.
Qualifying Individuals (QI-1). These are
persons who meet the QMB criteria, except that their
income is between 120 percent and 135 percent of
poverty and they are not otherwise eligible for
Medicaid. Medicaid protection for these persons is
limited to payment of the monthly Medicare Part B
premium.
Other sources of supplemental coverage are available to
certain beneficiaries. Those with a military service connection
may receive coverage through the Department of Defense or the
Department of Veterans Affairs. In addition, as of September
2003, 35 states have enacted laws creating pharmaceutical
assistance programs that provide financial assistance (through
subsidies or discount cards or a combination of both) for
purchasing prescription drugs to low-income Medicare
beneficiaries who do not qualify for Medicaid.
B. ISSUES
1. Prescription Drugs
Medicare provides coverage for prescription drugs used as
part of a hospital stay, but in general does not cover
outpatient prescription drugs. There are some exceptions, which
include:
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 which cannot be self-administered
which are incidental to a physician's service if
provided in the physician's office, such as an
injectable product;
those used in immunosuppressive therapy,
such as cyclosporin, for the first 36 months beginning
after an individual receives a Medicare-approved
transplant, such as a kidney or liver transplant;
oral cancer drugs, in certain cases; and
acute oral anti-emetic (anti-nausea) drugs
used as part of an anticancer chemotherapeutic regimen.
Some Medicare beneficiaries have outpatient prescription
drug coverage through Medicare+Choice plans, employer-sponsored
retiree plans, Medigap policies (Plans H, I, or J), Medicaid,
military-service-related coverage, or state pharmaceutical
programs. However, approximately one quarter of beneficiaries
have no drug coverage. According to the Congressional Budget
Office, the 75 percent of beneficiaries who do have some
coverage pay nearly 40 percent of their drug expenditures out-
of-pocket. Although this is the same percentage paid out of
pocket by the U.S. population as a whole, Medicare
beneficiaries, because they are elderly or disabled and more
likely to have chronic health conditions, tend to use more
prescription drugs than the general population. For example, in
1999, Medicare beneficiaries made up 15 percent of the
population, but accounted for 40 percent of expenditures on
outpatient prescription drugs.\3\
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\3\ Congressional Budget Office. Statement of Dan L. Crippen,
Director, before the United States Senate Committee on Finance.
Projections of Medicare and Prescription Drug Spending. March 7, 2002.
---------------------------------------------------------------------------
2. Medicare Solvency and Cost Containment
Part A (Hospital Insurance [HI]) and Part B (Supplementary
Medical Insurance [SMI]) are financed differently. HI is
financed primarily through payroll taxes levied on current
workers and their employers. Income from these taxes is
credited to the HI trust fund. SMI is financed through a
combination of monthly premiums paid by current enrollees (25
percent) and general revenues (75 percent). Income from these
sources is credited to the SMI trust fund. Each fund is
overseen by a Board of Trustees who make annual reports to
Congress concerning the financial status of the funds.
The 2003 report projects that, under the trustees'
intermediate assumptions, the HI trust fund would become
insolvent in 2026, 4 years earlier than projected in the 2002
report. This revision is due to lower-than-expected HI taxable
payroll and higher-than-expected hospital expenditures.
Although the fund meets the trustees' test for short-range
solvency, it fails by a considerable margin to meet their test
for long-range solvency. Because of the way it is financed, the
SMI fund does not face insolvency; however the trustees are
concerned with the program's continued rapid growth rate. Taken
together, Part A and B costs are projected to more than triple,
relative to growth in the gross domestic product (GDP), over
the next 75 years, growing from 2.6 percent of the GDP in 2002
to 5.3 percent by 2035 to 9.3 percent by 2077.
Beginning in 2011, the program will also begin to
experience the impact of major demographic changes. First, baby
boomers (persons born between 1946-1964) begin to turn age 65
and become eligible for Medicare. The baby boom population is
likely to live longer than previous generations. This will mean
an increase in the number of ``old'' beneficiaries (i.e., those
85 and over). The combination of these factors is estimated to
contribute to the increase in the size of the Medicare
population from 41.1 million in 2002 to 48.2 million in 2011
and 71.5 million in 2025. There will also be a shift in the
number of covered workers supporting each HI enrollee. In 2002,
there were nearly 4.0 workers per beneficiary. This number is
predicted to decrease to 2.4 in 2030 and 2.0 in 2077.
The trustees stress the importance of considering the
entire Medicare program's impact on the economy. They assume
that Medicare per beneficiary expenditures will rise at the
rate of per capita GDP plus 1 percentage point, faster than
either the economy or workers' earnings and thus payroll tax
income. There will also be a shift in the sources of Medicare
income. In 2002, HI payroll taxes accounted for 57 percent of
non-interest income to the program, with general revenues
representing 30 percent. By 2025, payroll tax income will
account for a smaller portion (39 percent) while the portion
paid for by general revenues will grow to 42 percent.
Because of its rapid growth, both in terms of aggregate
dollars, and as a share of the Federal budget, the Medicare
program has been a major focus of deficit reduction legislation
passed by the Congress since 1980. With few exceptions,
reductions in program spending have been achieved largely
through reductions in payments to providers. Of particular
importance were the implementation of the prospective payment
system for hospitals beginning in 1984 and the fee schedule for
physicians services beginning in 1992. The BBA and subsequent
legislation established prospective payment systems skilled
nursing facilities, hospital outpatient departments, home
health agencies, and other service categories. BBA also
established the Medicare+Choice program which increased managed
care options for beneficiaries. Controlling costs and the
solvency of the program continues to be a concern for the
trustees as well as for Congress and the Administration.
CHAPTER 10
EMPLOYER HEALTH BENEFITS FOR RETIREES
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.
The Employer Health Benefits Annual Surveys, conducted by
the Kaiser Family Foundation and Health Research and
Educational Trust (Kaiser/HRET), show a significant decline
since 1988 in the percent of public and private employers
offering health benefits to retirees of all ages. Sixty-six
percent of all large firms (200+ workers) offered retiree
health coverage in 1988, but that figure had fallen to 36
percent by 1993. The percent of employers offering coverage
then rose to 41 percent in 1999, perhaps encouraged by the
economic expansion of the 1990's, and low health care inflation
from 1994 to 1998. Since that time, however, retiree health
coverage has once again fallen from 37 percent in 2000 to 34
percent for 2001 and 2002.\1\ (The survey found no statistical
difference in offer rates by year since 1998, suggesting that
coverage has not declined significantly since 1998.)
---------------------------------------------------------------------------
\1\ Henry J. Kaiser Family Foundation and Health Research and
Educational Trust, Employer Health Benefits 2002 Annual Survey, p. 142.
---------------------------------------------------------------------------
Another employee benefit survey, the Mercer National Survey
of Employer-Sponsored Health Plans 2002, however, provides a
breakdown of beneficiaries into those who are early retirees
versus those who are eligible for Medicare. Mercer found 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 27 percent in 2002. For early retirees, not
yet eligible for Medicare, coverage declined from 46 percent in
1993 to 34 percent in 2002.\2\ (The survey does not indicate if
the changes each year were statistically significant.) Because
they report on employers that offer coverage on a continuing
basis--to new hires as well as retirees, the decrease may be
indicative of changes by employers that will impact future
rather than current retirees.
---------------------------------------------------------------------------
\2\ Mercer Human Resource Consulting, Mercer National Survey of
Employer-Sponsored Health Plans 2002, p. 41.
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Other survey results give cause for increasing concern
about the level of retiree health coverage by the nation's
employers. The largest firms (5,000 or more employees) provide
health insurance coverage for more than 65 percent of retirees,
but these firms were also the most likely to have dropped
retiree coverage.\3\ Small companies are much less likely to
have ever provided retiree health benefits. According to the
2002 Kaiser/HRET Survey, just 5 percent of all small firms (3-
199 workers) offered retiree health benefits, compared to 34
percent of large firms (200+ workers).\4\ The Employee Benefit
Research Institute (EBRI) projects that because retiree health
coverage is generally offered only by large employers, and
``more than half of private-sector workers are in firms with
fewer than 500 employees, very few employees are expected to be
eligible for retiree health benefits in the future.'' \5\ A
study by Stuart and Singhal, using data from the 2000 Medicare
Current Beneficiary Survey, determined there has also been a
significant decrease in the past several years of offer rates
to younger Medicare-eligible retirees (ages 65-69). The
proportion of all aged community-dwelling Medicare
beneficiaries with health coverage from an employer hovered at
39-40 percent from 1996 to 2000, and coverage for retirees age
70 and older remained fairly stable, but the percentage of
Medicare beneficiaries in the 65-69 age group covered by
employer-sponsored health insurance fell from 46 percent to
just over 39 percent.\6\
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\3\ McCormack, p. 174.
\4\ Kaiser/HRET, p. 142.
\5\ Fronstein, Paul and Dallas Salisbury, Retiree Health Benefits:
Savings Needed to Fund Health Care in Retirement, Issue Brief No. 254
(Washington, DC: Employee Benefit Research Institute, February 2003),
p. 5.
\6\ Stuart, Bruce, Puneet K. Singhal, Cheryl Fahlman, Jalpa Doshi,
and Becky Briesacher, ``Employer-Sponsored Health Insurance and
Prescription Drug Coverage for New Retirees: Dramatic Declines in Five
Years,'' Health Affairs, Web Exclusive, July 23, 2003, p. W 3-334.
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Curtailments of retiree health insurance benefits 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 such as through a contract or union agreement. 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. According to the Kaiser/Hewitt 2002
Retiree Health Survey of private-sector businesses with 1000+
employees, 13 percent have recently terminated all subsidized
health benefits for future retirees and almost one in four
employers plan to eliminate future retiree health benefits in
the next 3 years.\7\
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\7\ Henry J. Kaiser Family Foundation and Hewitt Associates, The
Current State of Retiree Health Benefits--Findings from the Kaiser/
Hewitt 2002 Retiree Health Benefit Survey, p. 43.
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1. Who Receives Retiree Health Benefits?
Employment-based retiree health benefits are the primary
source of coverage for the nearly 2.3 million retirees under 65
who do not yet qualify for Medicare. According to 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, and 21 percent have employment coverage
through their spouse. Almost 37 percent have another form of
insurance such as private policies, veteran's health care, or
Medicaid, and 17 percent are uninsured.\8\
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\8\ Fronstein, Paul, Retiree Health Benefits: Trends and Outlook,
Issue Brief No. 236 (Washington, DC: Employee Benefit Research
Institute, August 2001), p. 4. Percentages cannot be totaled to 100 as
individuals may receive coverage from more than one source.
---------------------------------------------------------------------------
Health insurance coverage is a major consideration for
persons making the decision on whether to retire before the age
of 65. 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,
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).\9\
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.\10\
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\9\ Monheit, Alan C. Jessica P. Vistnes, and John M. Eisenberg,
``Moving to Medicare: Trends in the Health Insurance Status of Near-
Elderly Workers, 1987-1996,'' Health Affairs, March/April 2001, p. 210.
\10\ Simantov, Elisabeth, Cathy Schoen and Stephanie Bruegman,
``Market Failure? Individual Insurance Markets for Older Americans,''
Health Affairs, July/August 2001, p. 145.
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For those 23.4 million retirees 65 or older, employer-based
benefits are an important source for filling coverage gaps in
Medicare, such as deductibles and copayments or prescription
drug benefits. According to GAO analysis of the March 2000
Current Population Survey, 98 percent of retirees age 65 and
over were covered by Medicare, with 32 percent also covered by
health benefits from prior employment, and 36 percent by
Medigap supplemental coverage.\11\ Employer-based supplemental
coverage is generally more comprehensive and affordable than is
coverage purchased individually. In 1999, annual out-of-pocket
costs for Medicare beneficiaries with Medigap coverage were
approximately $3,400, versus $2,200 for those with employer-
sponsored supplemental coverage.\12\
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\11\ United States General Accounting Office, Testimony before the
Subcommittee on Employer-Employee Relations, Committee on Education and
the Workforce, House of Representatives, Retiree Health Insurance--Gaps
in Coverage and Availability, GAO-02-178T, November 1, 2001, p.5.
\12\ McCormack, p. 169.
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2. Design of Benefit Plans
Employers who 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 him or her 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.\13\ 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.
---------------------------------------------------------------------------
\13\ Coppock, Steve, Hewitt Associates, LLC., Testimony before U.S.
Senate Committee on Finance Hearing, ``Finding the Right Fit: Medicare,
Prescription Drugs and Current Coverage Options,'' April 24, 2001.
---------------------------------------------------------------------------
During the 1990's, large employers also controlled health
care costs by moving employees and pre-Medicare eligible
retirees into managed care plans in which companies could
negotiate discounts with providers. According to the Kaiser/
Hewitt 2002 Retiree Health Survey, 78 percent of retiree plan
sponsors now provide coverage for pre-65 retirees under PPOs,
56 percent under HMOs, 44 percent offer traditional indemnity
plans, and 37 percent, POS plans. For age 65+ retirees, 57
percent of employers continued to maintain a traditional
indemnity plan to supplement Medicare.\14\ Medicare+Choice or
other HMO plans are offered by 48 percent of employer plans and
allow Medicare-eligible retirees access to routine physicals,
immunizations, and prescription drug coverage not currently
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
employers to return to the traditional Medicare program.
---------------------------------------------------------------------------
\14\ Kaiser/Hewitt, p. 3.
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Retirees who have employer coverage may find that it is of
less value as employers reduce coverage for drugs, vision, and
dental services. While retiree prescription drug coverage from
employers plans held constant slightly above 34 percent from
1996-2000, coverage for younger Medicare beneficiaries (65-69)
declined 4.7 percent from 40 percent in1996 to 35 percent in
2000.\15\ Employers are increasingly also using financial
incentives for retirees to choose less expensive drugs, such as
two-tier or three-tier cost-sharing, mail order discount plans,
and formularies.
---------------------------------------------------------------------------
\15\ Stuart, p. W 3-334.
---------------------------------------------------------------------------
Employer-sponsored retiree health insurance benefits are
also eroding as employers tighten eligibility requirements or
shift costs to retirees. According to Watson Wyatt's 2001
survey of 56 large employers, 72 percent of surveyed plans
require more than 5 years of service for the largest group of
current post-65 retirees, and 86 percent imposed the same
requirement on future retirees.\16\ The Kaiser/Hewitt 2002
survey, over the last 2 years, found 44 percent of companies
have increased the retiree's share of the premium, and 36
percent indicate they have increased cost-sharing requirements
such as deductibles and copayments.\17\ More than 80 percent of
employers plan to raise premiums or copays for current retirees
in the next 3 years.\18\
---------------------------------------------------------------------------
\16\ McDevitt, Roland D., Janemarie Mulvey, and Sylvester J.
Schieber, Retiree Health Benefits: Time to Resuscitate?, Watson Wyatt
Research Report, Watson Wyatt Worldwide, 2002, p. 16.
\17\ Kaiser/Hewitt, pp. 37-38.
\18\ Ibid, p. 43.
---------------------------------------------------------------------------
Large employers also responded to the early-1990's changes
in the Financial Accounting Standards Boards rules (FAS106) by
capping the firm's contribution to retiree health benefits. The
Kaiser/Hewitt survey found that in 2002, 45 percent of large
firms that offer pre-65 retiree health coverage and 50 percent
of the firms that offer age 65+ coverage have such a cap. This
means that retirees will be picking up more costs as medical
costs rise above the level of the pre-determined amount. Of the
companies that have established caps, 49 percent of those that
offer pre-65 retiree health coverage and 57 percent that offer
65+ coverage have already met their limit.\19\ In some cases,
employers may elect to raise the cap, but there is concern
about the accounting implications if this happens regularly.
---------------------------------------------------------------------------
\19\ Ibid, pp. vii-viii.
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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.
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. According to a 2002
Watson Wyatt report, ``only 35 percent of Fortune 1000
companies have set aside assets to fund their future retiree
health liabilities, and, on average, these assets will cover
only about one-third of future costs.'' \20\
---------------------------------------------------------------------------
\20\ McDevitt, p. 47.
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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.
Some employers are considering 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.
The WatsonWyatt report, Retiree Health Benefits: Time to
Resuscitate?, warns that prefunding of retiree health benefits
will not become an attractive option for employers unless tax
incentives are provided, similar to those available for
pensions.\21\ The Department of Labor's Advisory Council on
Employee Welfare and Pension Benefits also recommended in
November 1999 that Section 420 be expanded to allow prefunding
of current retirees' entire future medical obligations.
---------------------------------------------------------------------------
\21\ McDevitt, p. iii.
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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 Omnibus 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
Omnibus 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\1/2\ 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 2002 Mercer/Foster
Higgins Survey found that, over the past 2 years, employer
costs for providing health benefits for pre-Medicare eligible
retirees rose 13.3 percent. For Medicare-eligible retirees,
this figure increased 14.2 percent.\22\ 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.
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\22\ Mercer, p. 43.
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The impact of Medicare reform and other Federal legislation
on employer coverage of retiree health care is also uncertain.
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.
Other reforms have been proposed 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.
The Emergency Retiree Health Benefits Protection Act,
introduced in the 106th and 107th Congresses would more
directly address loss of retiree coverage by prohibiting
profitable 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, and creates a loan
guarantee program to help firms restore benefits. It 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,
P.L. 90-202) 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 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.
Many 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 appears stable at this time, there
are many concerns that this will erode as coverage is decreased
for future retirees. Employees may never qualify for retiree
health benefits if their employers offer coverage only to
workers hired before a specific date. Retirees will bear a much
greater portion of their own medical costs in the years to
come. 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 approximately 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. With passage of the appropriation for fiscal year
2003, Congress completed a 5-year effort to double the NIH
budget. The budget grew about 14-15 percent each year, from a
starting point of $13.6 billion in fiscal year 1998 to a level
of $27.1 billion for fiscal year 2003.
The National Institute on Aging (NIA) is the largest single
recipient of funds for aging research. Fiscal year 2003 NIA
appropriations increased 11.5 percent over fiscal year 2002
funding levels, from $890.8 million in fiscal year 2002 to
$993.6 million in fiscal year 2003. 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 multiyear, trans-NIH study
addressing the prevention of cancer, heart disease, and
osteoporosis in postmenopausal women. The study is ongoing, but
some early results concerning hormone replacement therapy
(discussed below) demonstrated the critical importance of
controlled clinical trials in developing evidence for or
against common health practices.
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. Nearly all of the NIH research institutes and
centers report that they 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 Human Genome Research Institute
National Institute of Biomedical Imaging and
Biomedical Engineering
National Center for Research Resources
National Center for Complementary and Alternative
Medicine
National Center on Minority Health and Health
Disparities
John E. Fogarty International Center
Office of the Director
(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.
NIA scientists and grantees have studied drugs to prevent
the progression of mild cognitive impairment to Alzheimer's
disease, and to target specific abnormal cellular formations in
the brain. Advances have also been made in diagnosis of
Alzheimer's through tracking changes in brain metabolism and
structures. In studies on the biology of aging, investigators
have created a mouse model of premature aging, and have found
that adult neural stem cells can make new functional neurons.
Work on chronic diseases such as cancer, arthritis, and heart
disease holds the promise of reducing disability through use of
appropriate drugs and behavioral approaches such as exercise.
The longest running scientific examination of human aging,
the Baltimore Longitudinal Study of Aging, is being conducted
by NIA at the Gerontology Research Center 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 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, also influences 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. It also supports prevention
and control programs, such as programs to stop smoking. In
2001, 70 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 32 percent of deaths in 2001.
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. In
addition, studies show that the elderly are less likely to be
screened for common cancers such as breast and colorectal
cancers.
NCI is partnering with NIA to integrate research priorities
in cancer and aging. Further work is needed to address the
differences in elderly cancer patients' response to drugs,
survivorship and symptom control, and susceptibility to disease
progression.
(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 2000, approximately 1.2 million deaths
were reported from all of the diseases under the purview of the
institute (49 percent of all U.S. deaths that year). The
projected economic cost in 2003 for these diseases is expected
to be $489 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. In
July 2002, surprising results ended one arm of the study early.
It was found that hormone replacement therapy with estrogen
plus progestin for postmenopausal women did not have the
beneficial effects that had been expected on cardiovascular
disease. Instead, it somewhat increased the risks of heart
attack, stroke, invasive breast cancer, and blood clots.
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 7,200 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. With
the population becoming increasingly overweight, preventing
Type 2 diabetes is critical. A clinical trial called the
Diabetes Prevention Program found that a lifestyle modification
including modest weight loss and physical activity reduced the
incidence of diabetes by 58 percent. 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.
Stroke, 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. NINDS convened a group of leading stroke
experts to develop a national research plan and set priorities.
The institute also leads a public educational campaign called
``Know Stroke'' to raise awareness of the symptoms of stroke
and the need to quickly seek medical care.
(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, particularly important because
pneumococcal disease kills more Americans each year than all
other vaccine-preventable diseases combined. NIAID is working
on an experimental shingles vaccine with the Department of
Veterans Affairs and Merck & Co., the vaccine's developer. Also
important is research 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. NEI's Low Vision Education
Program is aimed at helping people with visual impairment,
primarily the elderly, to make the most of their remaining
sight. One feature, called EYE SITE, is a traveling interactive
educational exhibit of kiosks with touchscreens, which is
designed for use in shopping centers and other consumer areas.
(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. In 2002 NIEHS launched a new
initiative of collaborative centers on Parkinson's disease that
will bring together scientists working on basic Parkinson's
disease research and geneticists, clinicians, and
epidemiologists.
(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 40 specialized and
comprehensive research centers.
Approximately 43 million Americans are affected by the more
than100 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, and
34 million more have low bone mass, putting them 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. Rheumatic diseases are the leading
cause of disability among the elderly.
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 breakdown of joint cartilage by
enzymes, 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. New drugs
that block certain inflammatory reactions of the immune system
are being studied, and some are already available.
(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. The NIMH Aging Research Consortium was
established in January 2002 to stimulate research and provide
better coordination, information, and training on late life
mental disorders.
(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. A growing
problem is prescription drug abuse in elderly populations. NIDA
has a current research program investigating prescription
opioid abuse and dependence in the elderly.
(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. The institute sponsors a program of research on the
epidemiology of alcohol consumption and alcohol-related
problems in older persons.
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. NIAAA has worked with AARP on outreach to older
persons on National Alcohol Screening Day.
(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 HUMAN GENOME RESEARCH INSTITUTE
The National Human Genome Research Institute (NHGRI) leads
the NIH's contribution to the Human Genome Project, a worldwide
effort to completely decipher the genetic instructions in human
DNA. It also researches and develops genome technologies that
can be used to understand and treat diseases with genetic
components, and studies the ethical, legal, and social
implications of these fields of research. Of special interest
to aging research, NHGRI has sponsored discoveries in the
genetics of prostate cancer, Alzheimer's disease, Parkinson's
disease, and the molecular genetics of aging.
(R) NATIONAL INSTITUTE OF BIOMEDICAL IMAGING AND BIOMEDICAL ENGINEERING
The National Institute of Biomedical Imaging and Biomedical
Engineering (NIBIB), established by Congress in 2000, supports
research and training on imaging technologies and engineering
and informatics tools that can be used broadly for diagnosis,
treatment and prevention of disease. It tries to link the
disciplines of biomedical and physical scientists and engineers
to allow rapid translation of research findings into clinically
useful applications. Currently sponsored work includes targeted
drug treatments for osteoporosis, new diagnostic imaging
techniques for Parkinson's disease, tissue-covered scaffolds to
replace damaged cartilage in joints, and microsensors for
quickly diagnosing urinary tract infections.
(S) 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. These
resources, often shared among many researchers, include a
network of General Clinical Research Centers, Biomedical
Technology Research Centers, and a variety of resources for
animal research, instrumentation, and research infrastructure.
NCRR-funded investigators have reported a number of
advances in their fields. Research on osteoporosis has
uncovered a gene mutation that may help in the search for drugs
to build bone, not just prevent bone loss. Researchers at Duke
University identified genes in families of patients with
Alzheimer's disease and Parkinson's disease that control age at
onset. Other scientists have found a mutant gene associated
with glaucoma and have proposed screening the general
population to diagnose the disease before symptoms appear.
(T) 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 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.
(U) 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 are of interest to the Center.
NCMHD worked with the other components of NIH to develop
the first NIH Strategic Research Plan and Budget to Reduce and
Ultimately Eliminate Health Disparities, a 5-year plan covering
fiscal years 2002-2006. The institute also implemented three
programs mandated by Congress to expand research capabilities
in health disparities research: a Centers of Excellence program
called Project EXPORT, an endowment program for institutions
training minority researchers, and two loan repayment programs.
(V) JOHN E. FOGARTY INTERNATIONAL CENTER
The John E. Fogarty International Center (FIC) for Advanced
Studies in the Health Sciences addresses disparities in global
health by supporting research and training internationally. It
funds training and research grants in a wide variety of areas
of concern to less-developed countries: infectious diseases,
nutrition, environmental and occupational health, genetics,
maternal and child health, and medical informatics, among
others. Elderly populations are increasing rapidly in the
developing world, and there are great burdens from chronic
disease. Several FIC programs address clinical and health
services research training, research on brain disorders, and
research on the relationship between health and economic growth
in low- and middle-income nations.
(W) OFFICE OF THE DIRECTOR, NIH
The Office of the Director (OD) is responsible for setting
overall policies for NIH and for planning, managing, and
coordinating the programs of the 27 institutes and centers.
Several program offices within OD focus on planning and
stimulating specific areas of research, and also fund some
research through the institutes. Program areas, all of which
have relevance to the aging population, include women's health,
AIDS research, disease prevention, and behavioral and social
sciences research.
The Office of Research on Women's Health has been
particularly active in funding and co-funding research
addressing the health of older Americans. Areas of funding have
included chronic diseases such as diabetes, arthritis, breast
cancer, cardiovascular diseases, and urinary incontinence, as
well as the impact of diet, physical fitness, obesity, and
tobacco and alcohol use.
C. ISSUES AND CONGRESSIONAL RESPONSE
1. NIH Appropriations
Congress provided NIH with $27.1 billion for fiscal year
2003. 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 fiscal years 1988 and 1998.
Starting with the fiscal year 1999 appropriation, Congress
increased NIH's budget at an even faster rate, commencing a 5-
year plan to double the appropriation by fiscal year 2003. From
the fiscal year 1998 level of $13.6 billion, the appropriation
increased to $15.6 billion in fiscal year 1999, $17.8 billion
in fiscal year 2000, $20.4 billion in fiscal year 2001, $23.5
billion in fiscal year 2002, and finally reached $27.1 billion
for fiscal year 2003.
In report language accompanying the fiscal year 2003
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. The conference report stressed that research
funding should be allocated on the basis of scientific
opportunity, taking into consideration many factors about the
burden of different diseases and the promise of various areas
of research. 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.
With the additional resources available because of the
doubling effort, NIH has focused on promising research areas
across all institutes and centers. These areas of research
potential, aimed at uncovering new scientific knowledge and
applications for diagnosing, treating, and preventing disease,
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. An additional major focus since 2001
has been biodefense and support of research and facilities that
improve our ability to prevent and respond to bioterrorism.
Out of its total appropriation of $27.07 billion for fiscal
year 2003, NIH estimates spending of $2.05 billion on research
related to aging. Appropriations levels for the NIH institutes,
including estimates for aging research, are as follows:
FISCAL YEAR 2003 APPROPRIATIONS FOR NIH
[Dollars in millions]
------------------------------------------------------------------------
Fiscal year
Fiscal year 2003 Aging
Institute or Center 2003 Research
Appropriation (Estimates)
------------------------------------------------------------------------
National Institute on Aging............. $993.6 $957.6
National Cancer Institute............... 4,592.3 153.0
National Heart, Lung, and Blood 2,793.7 95.6
Institute..............................
National Institute of Dental and 371.6 15.7
Craniofacial Research..................
National Institute of Diabetes and 1,622.7 109.0
Digestive and Kidney Diseases..........
National Institute of Neurological 1,456.5 173.0
Disorders and Stroke...................
National Institute of Allergy and 3,705.5 81.9
Infectious Diseases....................
National Institute of General Medical 1,847.0 --
Sciences...............................
National Institute of Child Health and 1,205.9 8.3
Human Development......................
National Eye Institute.................. 633.1 124.2
National Institute of Environmental 697.8 16.3
Health Sciences........................
National Institute of Arthritis and 486.1 58.1
Musculoskeletal and Skin Diseases......
National Institute on Deafness and Other 370.4 16.8
Communication Disorders................
National Institute of Mental Health..... 1,341.0 114.5
National Institute on Drug Abuse........ 961.7 2.1
National Institute of Alcohol Abuse and 416.1 5.8
Alcoholism.............................
National Institute of Nursing Research.. 130.6 19.0
National Human Genome Research Institute 465.1 1.1
National Institute of Biomedical Imaging 278.3 4.1
and Bioengineering.....................
National Center for Research Resources.. 1,138.8 52.0
National Center for Complementary and 113.4 34.4
Alternative Medicine...................
National Center on Minority Health and 185.7 2.2
Health Disparities.....................
Fogarty International Center............ 63.5 0.5
National Library of Medicine............ 300.1 --
Office of the Director.................. 266.2 3.1
Buildings and Facilities................ 628.7 --
Total, NIH,....................... $27,065.5, $2,048.1
------------------------------------------------------------------------
Note: Totals may not add due to rounding. FY2003 includes Superfund
appropriation to NIEHS. FY2003 estimates for aging research are based
on the President's request for FY2003, not on the appropriation.
2. NIH Authorizations and Related Issues
Congress completed the 5-year doubling of the NIH budget in
fiscal year 2003, bringing the total appropriation to $27.1
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. In addition, report
language accompanying the appropriations bills shapes NIH's
research priorities, although almost always without specific
dollar earmarks.
The 107th Congress was not as active as the 106th in adding
new authorizing language affecting NIH. The 106th Congress
enacted laws addressing children's health, clinical research,
minority health, and biomedical imaging, with creation of a new
institute and a new center. The 107th Congress, absorbed to a
large degree with homeland security issues, added or refined
authorities in only a few areas.
Research on various forms of muscular dystrophy was the
focus of the MD-CARE Act (P.L. 107-84), which also provided for
a study on the impact of and need for centers of excellence at
NIH. Expansion of research and education on blood cancers,
especially leukemia, lymphoma, and multiple myeloma, was
mandated by P.L. 107-172, while P.L. 107-280 addressed rare
diseases, codifying in statute the NIH Office of Rare Diseases
and authorizing regional centers of excellence. Additional
funding for Type 1 diabetes research was provided by P.L. 107-
360. The Public Health Security and Bioterrorism Preparedness
and Response Act of 2002 (P.L. 107-188) included several
provisions of interest to NIH (related to antimicrobial
resistance, animal trial data, research on bioterrorism
countermeasures, security of research facilities, regulation of
dangerous biological agents, and food safety) but did not
create any new authorities.
Sponsors and advocates for new authorizing 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. A new NIH
Director, Dr. Elias Zerhouni, came on board in May 2002 and is
leading a reexamination of how NIH as a whole is focusing its
resources. A congressionally mandated study of the
organizational structure of NIH has renewed discussion of the
relative roles of the NIH Director, the individual institutes
and centers, the Congress, and the public in setting NIH's
research priorities.
Potential topics for continued debate in the 108th 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. Aging-related
diseases are among those that research advocates assert could
be benefited by continued investigation and discovery in these
disputed areas.
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 half of AD patients are
cared for at home, while the rest are in different kinds of
care facilities. According to the 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. A
recent study estimated that the annual cost of caring for an AD
patient in 1996 was between $18,400 and $36,100, depending on
how advanced the disease was and whether or not the person was
at home. Nursing home care for dementia patients can be as much
as $64,000 annually, according to the Alzheimer's Association.
Overall, AD is thought to cost 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 15 years, almost all of it funded by
NIH, have rapidly expanded our understanding of AD. NIH
estimates FY2003 AD research spending at $640 million, which is
twice what was spent on AD research in FY1997. The National
Institute on Aging (NIA) accounts for 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), and the National Institute of Nursing Research
(NINR).
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 60. Recent
studies suggest that as many as four additional and as yet
unidentified genes may also be risk factors for late-onset AD.
Identification of 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 develop amyloid plaques, but not neurofibrillary tangles.
In 2001, scientists created a transgenic mouse strain that
expresses one of the human tau mutations and develops
neurofibrillary tangles. However, the tangles in these mice do
not usually form in areas of the brain that are vulnerable to
AD. Researchers have since crossbred the tau mutant mice with
the APP mutant mice to produce a new model, the TAPP mouse. The
TAPP mice produce both amyloid plaques and neurofibrillary
tangles in AD-susceptible regions of the brain, suggesting that
APP or beta-amyloid protein can influence the formation of
neurofibrillary tangles. The TAPP mice provide an opportunity
to investigate the connection between plaque and tangle
formation. Investigators have also found that treatment with an
antibody that recognizes beta-amyloid protein results in the
clearance of plaques from the brain of APP mutant mice. That
raises the possibility that a vaccine might be able to
stimulate the immune system to produce antibodies for the
treatment and prevention of AD.
Another major focus of research has been the 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 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 certain studies, about 40 percent of persons diagnosed with
MCI develop AD within 3 years. The NIA is supporting numerous
dementia-related clinical trials. They include investigations
of experimental drugs, prevention strategies, brain imaging,
behavioral interventions, and genetic and lifestyle risk
factors. 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 four drugs for the
treatment of AD. The first, tacrine (Cognex), has been replaced
by three newer drugs: donepezil (Aricept); rivastigmine
(Exelon); and galantamine (Reminyl). These drugs help boost the
level of acetylcholine--the chemical messenger involved in
memory--which falls sharply as AD progresses. They 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 31 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 human 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. 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. A number of other
studies are examining the factors that contribute to stress and
depression in family caregivers.
As part of the AD Prevention Initiative, NIA and NINR
support the Resources for Enhancing Alzheimer's Caregiver
Health (REACH) program, a large, multi-site intervention study
designed to characterize and test promising interventions for
enhancing family caregiving. In the initial phase of the study,
more than 1,200 culturally and ethnically diverse caregiver/
patient pairs participated in trials involving nine different
social and behavioral interventions and two types of control
conditions (i.e., usual care or minimal support). The
interventions included psychological education support groups,
behavioral skills training, environmental modifications, and
computer-based information and communications systems.
Investigators found that the interventions helped alleviate
caregiver burden, and that active treatments to enhance
caregiver behavioral skills reduced depression. They also found
that specific subgroups of caregivers (e.g., women caregivers,
Hispanic caregivers, and non-spouse caregivers) benefited in
different ways from the same interventions. The second phase of
the study, REACH II, has combined elements of diverse
interventions tested in the first phase into a single, multi-
component intervention for further evaluation.
In addition to the AD research programs supported by NIH,
two other Federal agencies support AD programs. The
Administration on Aging (AoA) administers the Alzheimer's
Disease Demonstration Grants to States program, which provides
funds to 33 states to develop and replicate innovative models
of service for Alzheimer's families in underserved areas,
particularly minority and rural communities. The program
focuses on making existing services work better through
coordination, family caregiver support, and physician
education. The grants have resulted in a number of best
practices, and the emphasis of the program is now on developing
materials, training, and mentoring to replicate the successful
models in new communities. Additionally, the Justice Department
funds the Safe Return Program, which 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 symptomless,
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 were 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 funds specialized centers for research in
osteoporosis, and was 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. A new public-private partnership consisting of NIAMS,
NIA, several other NIH institutes and centers, and four
pharmaceutical companies has launched the Osteoarthritis
Initiative. The 7-year project will work with patients at risk
for knee arthritis to search for biomarkers and surrogate
endpoints for osteoarthritis clinical trials.
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 research registry on RA in the African-American
population is being funded, and the NIAMS intramural program is
investigating the effects of a plant root extract on the pain
and inflammation of RA.
In March 2002, President George W. Bush proclaimed the Bone
and Joint Decade, from 2002 to 2011. NIH institutes are
collaborating with other entities to promote awareness,
prevention, and research on musculoskeletal disorders.
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 FY2003 totaled $27.8 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. Research has found that a greater level
of depression in the patient leads to greater depression in the
family caregiver, indicating that the needs of caregivers must
be addressed early in the course of illness.
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, annual Federal spending for Alzheimer's disease
research has surpassed the $600 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
On October 22, 1999, Congress created the Commission on
Affordable Housing and Health Facility Needs for Seniors in the
21st Century (Seniors Housing Commission) (P.L. 106-74). The
Seniors Housing Commission was directed to study the housing
and health facility needs of seniors today and over the next
generation and to report back to Congress with its findings and
recommendations by June 30, 2002.
The Seniors Housing Commission authorized a number of
studies and reports that paint a picture of the current and
future housing and health facility needs of seniors. They found
that 70 percent of seniors live in owner-occupied housing (over
17 million units). About 10 percent live in unsubsidized rental
housing ( over 3 million units). Another 4 percent live in
rental housing that is subsidized by the Federal Government
(over 1 million units). About 7 percent live in housing with a
non-elderly head of household (over 2 million units) and just
under 9 percent live in supportive seniors housing units, such
as congregate care, assisted living or skilled nursing
facilities (just over 2.5 million units).
The Commission also reported on the incomes of seniors.
They found that almost 40 percent of seniors have incomes less
than 40 percent of the area median income in their local
statistical area, which, by the Department of Housing and Urban
Development's (HUD) standards, would qualify them as very low
income. Ten percent of seniors earn less than the Federal
poverty level. The low incomes of some seniors can lead them to
face serious housing problems, defined as inadequate housing or
housing that costs more than half of a household's income. The
Seniors Housing Commission found that over 3 million senior
households faced serious housing problems and only one unit of
subsidized housing is available for every six of these senior
households.
Given these statistics, the Seniors Housing Commission
concluded the following about the future housing needs of
seniors:
One-third of senior households are expected
to have unmet housing needs in the future;
Almost one-fifth of seniors will likely have
service needs, and current programs are not well
structured to meet those needs;
Current production of affordable housing
does not meet demand;
Subsidized rental units are being lost due
to expiring Section 8 project-based rental assistance
contracts and mortgage prepayments; and
Federal housing and health policies are not
synchronized, often leading to premature
institutionalization as a more costly, yet practical
option.
Based on their conclusions, the majority of the Seniors
Housing Commission made the following five broad
recommendations to Congress
Preserve the existing assisted housing
stock;
Expand successful housing production, rental
assistance program, home and community based services
and supportive housing models;
Link shelter and services to promote and
encourage aging in place;
Reform existing Federal financing programs
to maximize flexibility and increase housing production
and health service coverage; and
Create and explore new housing and service
programs, models and demonstrations.
The majority report of the Seniors Housing Commission
stopped short of recommending specific unit production goals to
Congress, which is why a minority of the Commission members
chose to release their own recommendations that included
specific unit production goals.
While the non-partisan Commission on Affordable Housing and
Health Facility Needs for Seniors in the 21st Century laid out
a set of next steps for Congress, thus far, little legislation
has been introduced in the 108th Congress to address their
recommendations. The following sections explore current
programs and policies designed to meet the housing needs of
seniors.
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.
The Harvard Joint Center for Housing Studies in its 2003
State of the Nation's Housing study, reported that 30 percent
of all households, both owners and renters, have
``affordability problems,'' meaning they pay more than 30
percent of their income toward housing. Data indicate that the
4.8 million assisted units available at the end of fiscal year
2002 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 has
been for low-income elderly households. The relative lack of
management problems and local opposition to elderly units make
elderly projects relatively popular. Yet, even with this
preference for the construction of units for the low-income
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 low-income 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 the 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
Originally created in 1949, the Section 202 Supportive
Housing for the Elderly program has been the Federal
Government's primary financing vehicle for constructing
subsidized rental housing for elderly persons. Since its
revision in 1974 the Section 202 program has provided capital
grants to non-profit sponsors to develop supportive housing for
low-income seniors. These grants are paired with project-based
rental assistance, which allows low-income seniors to pay
income-based rents to live in Section 202 units.
Since 1990, the capital advance has been provided in the
form of a no-interest 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 can 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.
Project-based 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. To be eligible,
tenants must be 62 years of age or older and have income equal
to or below 50 percent of their area median income. Tenants'
portion of the rent payment is 30 percent of their adjusted
income.
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 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.
The FY2000 HUD appropriations bill (P.L. 106-74) authorized
the Assisted Living Conversion Program (ALCP). The ALCP
provides grants to non-profit providers of Section 202
facilities to cover the physical conversion of common spaces
and residential units in current 202 projects to assisted
living facilities. The funds cannot be used to pay for or to
deliver services.
Although the Seniors Housing Commission recommended several
changes to the Section 202 program, no legislation impacting
the program was enacted during the 107th Congress. The Section
202 program was funded at $783 million in FY2002, enough to
fund approximately 6,800 new units, and $776 million in FY2003,
enough to fund approximately 6,600 new units.
(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 payments 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.
HUD has neither solicited nor funded applications for new
grants under CHSP since 1995. Congress, however, has provided
funds to extend expiring grants on an annual basis. Today there
are approximately 240 projects that receive Federal assistance
under the Congregate Housing Services Program.
3. Public Housing
The public housing program was conceived during the Great
Depression as a means of aiding the ailing construction
industry and providing decent, low-rent housing. There are
currently approximately 1.2 million units of public housing.
However, net new units of public housing are no longer
constructed, so the number of units is declining. Approximately
32 percent of public housing units are occupied by elderly
persons.
The public housing program is federally financed, but is
operated by State-chartered local public housing authorities
(PHAs). 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 tenants' rents would pay for the operating costs
of the project such as management, maintenance, and utilities.
Tenants pay 30 percent of their adjusted income toward rent.
Tenant rents have not kept pace with increased operating
expenses, so PHAs receive a Federal subsidy to help defray
operating and modernization costs. 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.
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 reach few residents, leaving a large unmet need. The
Seniors Housing Commission Minority Report included a
recommendation that public housing be eligible for conversion
to assisted living, as in the case of Section 202 properties
and project-based Section 8 properties. No legislation
authorizing such a conversion has been introduced.
Under the National Affordable Housing Act of 1990, Congress
permitted PHAs to use their operating subsidies to hire service
coordinators to serve residents of public housing. The law also
allowed PHAs to claim up to 15 percent of the cost of providing
services to the frail elderly in public housing as an eligible
operating subsidy expense. 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 that surfaced in public housing in recent
years was the mixing of the elderly and the disabled in
designated public housing buildings. In the original housing
legislation, the elderly and disabled were both included under
the definition of elderly used to designate public housing for
the elderly. The definition of ``disabled'' was broadened to
include any individuals who formerly abused drugs and alcohol.
Furthermore, the disabled population with mental illness who
needed housing grew as institutions were closed. Often, elderly
households in these mixed population settings expressed fear of
their neighbors and cultural clashes emerged between the two
populations. The Housing and Community Development Act of 1992
addressed the problem of mixed populations in public housing
projects by providing 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.
Over the past several decades, 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, instead, current public housing tenants should
be provided 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 with
some type of ``reward'' system that offers incentives to PHAs
to improve public housing. The HOPE VI program, created in
1992, seeks to improve the condition of public housing. It
provides competitive grants to local PHAs that can be used, in
conjunction with other public and private financing, to
redevelop distressed public housing.
Title V of the FY1999 VA-HUD Authorization Act (P.L. 105-
276) made many changes to the public housing program designed
to promote work among residents. These provisions did not
impact the elderly, who were exempted from the mandatory work
or community service requirements. No major public housing
legislation was enacted in the 107th Congress. Public housing
was funded at a combined total (including the Operating Fund,
Capital Fund and HOPE VI) of $6.92 million in FY2002 and $6.85
million in FY2003.
4. Section 8 Rental Assistance
Families who live in public housing have few choices as to
what neighborhood they can live in and what type of unit they
can rent . Also, public housing tends to be in neighborhoods
with high rates of poverty and their typical design high
density, multifamily high-rises serves to further concentrate
poverty. Studies have shown that high-poverty neighborhoods are
characterized by high crime rates, stress and negative health
outcomes. To provide consumers with more choice and to
integrate the private market into the low-income housing
business, the Section 8 rental assistance program was created
in 1974.
Section 8 was 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 in paying rents, but also for promoting new
construction and substantial rehabilitation. The buildings were
usually secured by FHA mortgage insurance. By the early 1980's,
the program's costs were escalating and, as a result, authority
to enter into contracts for new construction and rehabilitation
was eliminated in the early 1980's. 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
in previously constructed units, and introduced the Section 8
tenant-based voucher program. Although no new Section 8
construction contracts are being entered into, the rental
assistance contracts on a number of the original buildings
funded with Section 8 new construction and substantial
rehabilitation funds are coming up for renewal. Unless the
rental contract on these buildings is somehow maintained, it is
feared that the buildings will either become market-rate and
therefore unaffordable, or go into default, which will have
costs for the FHA program. (See ``Preservation of Affordable
Rental Housing'' below.) There are approximately 1.6 million
units under Section 8 contract; approximately 60 percent are
occupied by elderly households.
5. Project-based and Tenant-based Vouchers
The voucher program was created in 1983 and became the sole
Section 8 program for new contracts in 1998. Vouchers are
portable subsidies that low-income families can use to lower
their rents in private market units. There are two types of
vouchers: project-based vouchers and tenant-based vouchers.
Under project-based vouchers, rents and the rent-to-income
ratio is capped and the subsidy depends on the rent. A family
who rents a project-based voucher unit pays 30 percent of their
income as rent, and HUD pays the rest based on a fair market
rent formula. Units are rented from private developers who have
vouchers attached to up to 25 percent of the units in their
building. Under the tenant-based voucher program, there are no
caps and the subsidy is fixed. Families pay the difference
between the rent in a unit they choose and a maximum subsidy as
determined by their local PHA. Families generally pay no less
than 30 percent of their incomes and no more than 40 percent.
The family is free to find an apartment and negotiate a rent
with a landlord. Since the voucher is tied to the family, if
the family moves, the voucher moves with them. PHAs can choose
to designate up to 20 percent of their tenant-based vouchers to
be used as project-based vouchers. Also, families who live in
units with project-based vouchers can choose to convert to a
tenant-based voucher and move after 1 year if a tenant-based
voucher is available.
Advocates of tenant-based vouchers argue that this system
avoids segregation and warehousing of the poor in housing
projects, and allows them to live where they choose. Critics of
tenant-based vouchers are concerned that they can present
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. Advocates for the elderly often
argue that project-based vouchers are the best option for
elderly tenants because the vouchers can be tied to accessible
units.
Since 2000, some households with vouchers have been
permitted to use their vouchers for purchasing a home. The
voucher can either be used to supplement monthly mortgage
payments, or, the value of 1-year's worth of voucher payments
can be used by the household toward a downpayment on a home.
The use of vouchers for homeownership is growing, but it is not
considered an option for all households with vouchers because
in order to use a voucher for homeownership, a family must have
a higher income than the average voucher recipient.
Congress has grappled over the past several years with the
escalating costs of the voucher program at the same time that
many vouchers have gone unused. In the FY2003 HUD budget (P.L.
108-7), Congress included provisions designed to increase
utilization and hold costs down. Despite demands from low-
income housing advocates who argue that only one in four
eligible families receives a housing subsidy, Congress did not
create any new vouchers in FY2003.
In FY2002, Congress appropriated $15.6 billion for Section
8 rental assistance and vouchers. In FY2003, Congress
appropriated $17.2 billion for Section 8. In FY2002, Congress
created approximately 34,000 new vouchers; in FY2003, Congress
created no new vouchers. The voucher program currently serves
approximately 1.5 million households, of which about 17 percent
are elderly.
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 two of the programs
(Section 504 grants and Section 515 loan) have been 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 $7,500. The
combination loan and grant may total no more than $27,500.
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), a 1986
provision in the Federal tax code, is the major engine for
subsidizing the production of privately owned rental housing
affordable to lower income households, including a significant
number of elderly households. This $4.1 billion a year program
(estimated tax expenditure for FY2003) is administered at the
state level by housing finance agencies (HFAs) that have a
given amount of tax credits to distribute each year based on
their state's population. HFAs award the tax credits to
developers on a competitive basis according to the state's
housing and community development priorities. Although
estimates vary, at least 1.1 million new and rehabilitated
units have probably received support over the program's 16-year
history. Public Law 106-554 (signed in December, 2000)
increased the housing tax credit program by 40 percent, and
about 120,000 units are now being added each year. A survey in
2001 by the National Council of State Housing Agencies found 16
percent of the tax credit units were targeted for the elderly,
with some states allocating a majority of their credits for
senior housing (for example, Wisconsin, 68 percent; Idaho, 61
percent; Maine, 55 percent, and New Mexico, 53 percent). The
survey also found that other tax credit units were targeted for
assisted living facilities and for housing for disabled people.
The amount of tax credits awarded to developers is based on
the amount they agree to spend to build or rehabilitate the
rental units. Most developers sell their tax credits to
investors who use them to reduce their Federal income taxes
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.
Although the rents that may be charged are limited by a
formula, tenants with particularly low incomes often pay more
than the 30 percent of income maximum used by HUD as a general
standard for ``affordable housing''. In many cases, the tax
credits do not provide enough financial support by themselves
to make the rental project economically viable. This is
particularly the case where HFAs negotiate agreements with
developers 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 housing vouchers. 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. In
July 2001, the General Accounting Office (GAO) released a
study, Costs and Characteristics of Federal Housing Assistance
(GAO-01-901R), that compared the total per-unit cost of five
production programs, including housing tax credits and housing
vouchers. The GAO found that the Federal cost of housing tax
credit units, as a percentage of the Federal cost of a unit
from a housing voucher, was 150 percent in the first year, and
119 percent when costs were averaged over a 30-year cycle.
However, the GAO said a number of other factors must be weighed
against the lower costs of vouchers. For example, there are
additional services that can more readily be provided for
special populations, such as the frail elderly, with project-
based assistance (housing tax credits, HOPE VI, Section 202,
811, and 515) than with tenant-based assistance (vouchers). In
addition, tax credits and other production programs can be used
as part of strategies to revitalize economically distressed
communities. In addition, vouchers may not always be a viable
option even for the non-frail elderly since 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. Nevertheless, advocates say that too
few tax credit units reach those who are most in need of help,
extremely low-income households those with incomes at or below
30 percent of the local area median income.
Another important question is how many of the new tax
credit units now being built are actually net additions to the
supply of affordable rental housing. An unknown but increasing
number of tax credits are currently being used to preserve
Section 8 projects that might otherwise be lost to low income
use. An increasing number of HOPE VI public housing projects
are also using LIHTCs a program that, thus far, has torn down
more units than it has built or renovated.
B. PRESERVATION OF AFFORDABLE RENTAL HOUSING
1. Introduction
It has been estimated that approximately 1.6 million units
of housing for low-income families are subsidized through
project-based Section 8 contracts. The elderly constitute
almost 60 percent of these units. Projects with these contracts
generally also have Federal mortgage insurance through FHA and/
or were financed with HUD-subsidized below-market interest rate
loans. These Section 8 projects, mostly constructed in the
1970's and 1980's, generally were under contract to remain
affordable to low-income families and individuals for 20 years
or more.
Over the past several years, Congress has faced two major
issues regarding these properties. First, many have fallen into
physical and/or financial disrepair, while at the same time
receiving inflated HUD subsidies and FHA mortgage insurance.
Landlord neglect, waste, fraud or abuse have been blamed for
the poor state of Section 8 projects in some cases. Many of
these properties are at risk of default or condemnation. Also,
if HUD were to renew these contracts under their current terms,
they would continue ``overpaying'' for these units. If the
buildings default or HUD doesn't renew the contracts, the units
are lost as affordable housing.
The second issue Congress faces is the loss of these
properties from the affordable housing stock due to opt-outs.
The projects typically had multi-year use restrictions that
required their owners to maintain them as affordable housing
and prevented them from raising rents to market levels. The
contracts for most of the 1.6 million project-based Section 8
units will expire over the next 10 years. If owners choose to
opt-out of the program at the end of their contract, rather
than to renew their contract, the rents for these units will
likely increase to market rates and will no longer be
affordable for low-income families. The National Housing Trust
estimates that approximately 324,000 units of housing that
currently target low income seniors almost exclusively are at
risk of opting out and becoming unaffordable. Although the
seniors living in these units would be provided with vouchers,
it may be difficult for them to use their vouchers in tight
rental markets and a limited supply of units with accessible
features for the disabled elderly.
2. Portfolio Re-Engineering Program
Title V of the VA-HUD Appropriations Act for fiscal year
1998 (P.L. 105-65) created the latest restructuring plan for
Section 8 contracts, called Mark-to-Market. The goal of Mark-
to-Market is to reduce the subsidy paid to these properties
while leaving them physically and financially viable as well as
affordable to low-income households. 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 where rents
are adjusted down to market level and, if necessary, a second
mortgage is provided to lower operating costs. If properties
are in an advanced state of deterioration where rehabilitation
would be too costly, the properties would be demolished or
sold. Tenants in projects that do not have renewed contracts
would be eligible for voucher assistance and would receive
reasonable moving expenses.
Mark-to-Market was scheduled to expire at the end of
FY2001. P.L. 107-116, signed into law on January 10, 2002,
extended the program through FY2006. As of June 2002, 2,159
projects have entered restructuring and 1,383 had reached
completion.
C. HOMEOWNERSHIP AND THE ELDERLY
While most of the attention on homeownership issues focuses
on young families, there are a significant number of
homeownership issues that are of interest to the elderly. (For
purposes of this discussion, ``elderly households'' can be
thought of as beginning at about age 55 the ``young elderly''
and increasing to the more senior elderly.) As house prices in
many areas have continued to outpace inflation, more of the
elderly have been asked and have felt obligated to help their
children or grandchildren accumulate funds necessary for the
purchase of a first home even when their own long-term
retirement needs may be inadequate. Thus, some of the elderly
have an interest in current and proposed government programs to
help young people buy a first home.
In addition, a debt-free home has been shown to be an
important part of retirement security. The elderly have a high
homeownership rate (Table X) and this gives those with
accumulated equity increased options for meeting their varied
financial needs. However, many elderly are or will be living on
fixed incomes, and there are difficult issues associated with
rising housing expenses. There are also issues having to do
with changing physical needs of elderly homeowners, such as the
inability to climb stairs, do yard work, or get by in the
suburbs without an automobile. While surveys continue to show
that most elderly homeowners wish to remain in their home as
they age, many are still interested in government programs that
help maintain strong housing markets and make it easy to sell
if and when they choose to do so, including the tax laws.
Increasing the Homewnership Rate.--There has been strong
political support since the mid-1990's by both Democratic and
Republican Administrations and many in Congress for efforts to
increase the homeownership rate of lower-income and minority
households. Homeownership is thought to give families a stake
in their neighborhood and a chance to accumulate wealth. The
Federal Reserve's 2001 Survey of Consumer Finances reports that
the median net worth of homeowners was nearly $172,000, while
that for renters was just below $5,000.
Increased enforcement of fair housing laws and the
Community Reinvestment Act have made mortgage credit more
available to lower-income and minority households than in
previous times, and falling mortgage rates have helped make
homeownership more affordable for under represented groups.
Table X shows there have been gains in all age groups over the
past 10 years. However, Table Y shows there is still a major
gap between the homeownership rate for blacks and Hispanics
(less than 50 percent) when compared with those of whites
(about 75 percent). Single person households and unmarried
households with children (largely female-headed households)
also have relatively low homeownership rates. In contrast, the
elderly have the highest rates of all groups, about 80 percent.
Table X. Homeownership Rates by Age: 1993 and 2003
(Percent)
------------------------------------------------------------------------
2nd
Age Groups 1993 Quarter
2003
------------------------------------------------------------------------
Under age 35........................................ 38.0 41.9
35 to 44............................................ 65.8 67.8
45 to 54............................................ 75.2 76.3
55 to 64............................................ 79.6 81.6
65 and older........................................ 77.3 80.2
------------------------------------------------------------------------
Source: U.S. Census Bureau.
Help for homebuyers is currently available from a number of
existing Federal programs, including the $1 billion a year
Mortgage Revenue Bond program, which lowers the mortgage rate
for certain moderate-income buyers and often provides
downpayment and closing cost help. The address, telephone
number, and web sites of most state Housing Finance Agencies
that administer this Federal program can be found at the
National Council of State Housing Agency's internet site
www.ncsha.org. The Federal Housing Administration (FHA) and the
Veterans Administration (VA) mortgage insurance programs
encourage private lenders to make loans to those who have
little money for a downpayment or who have blemished credit
records. An estimated 700,000 lower income and minority
households have been helped annually in recent years to buy a
first home under the basic FHA mortgage insurance program. The
FHA also 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. However, there is far
more demand for these homes than there is supply. As discussed
earlier in this chapter, HUD now has programs that allow some
households in the Section 8 rental assistance program to use
their monthly rental assistance payments to either accumulate a
downpayment for the purchase of a home or to use the monthly
rental payments to pay for mortgage payments on a home.
The Administration proposed several homeownership
initiatives in the 107th Congress to help lower-income and
minority homebuyers buy a home. The American Dream Downpayment
Act would have authorized $200 million a year to help about
40,000 families with downpayment and closing costs. Proposed as
a set-aside under the existing HOME block grant, families could
receive grants of up to $5,000 each. The approved FY2003 HUD
budget contained $75 million for this program. The popular
Habitat for Humanity program, where area residents and
potential buyers help build modest homes, received $4.2 million
in FY2003 as a set-aside within HUD's Community Development
Block Grant program.
The Administration also proposed in the 107th Congress to
create a single-family housing tax credit for developers who
build moderately prices homes for sale in lower income areas
census tracts with median incomes of 80 percent or less of the
area median income. Homebuyers could not have incomes above 80
percent of the local area median income. In many large cities,
there are thousands of dilapidated and boarded-up homes. While
there is reportedly a demand for affordable homes to purchase,
the economics do not support the rehabilitation and sale of
these often boarded-up units or the building of new units in
these areas if done on an individual basis. However, with the
proposed tax credit to builders, which could be as much as 50
percent of the qualifying cost of the unit, supporters of these
bills believe that multi-block community development efforts
could create homeownership opportunities for many moderate
income buyers and help turn around distressed neighborhoods.
There were also bills before the 107th Congress that would have
modified the existing Mortgage Revenue Bond program to make
more tax-exempt bond revenue available for this first-time
homebuyer program.
Table Y. Homeownership Rates, by Household Type, 1993 and 2003
(Percent)
------------------------------------------------------------------------
2nd
Household Type 1993 Quarter
2003
------------------------------------------------------------------------
Nationwide.......................................... 64.1 68.0
White (Non-Hispanic)................................ 70.2 75.2
Black (Non-Hispanic)................................ 42.0 47.3
Hispanic............................................ 39.4 46.2
Married Couples with Children....................... 73.7 79.3
Married Couples w/o Children........................ 82.9 87.0
Other Families with Children........................ 35.5 43.0
Other Families w/o Children......................... 63.9 66.6
Single Person Household............................. 47.1 52.1
------------------------------------------------------------------------
Source: U.S. Census Bureau.
Neither the housing tax credit nor the Mortgage Revenue
Bond proposals were adopted during the 107th Congress.
Mortgage Delinquencies and Foreclosures.--As efforts to
increase the homeownership rate of lower income households have
proceeded in recent years, many buyers have purchased homes
with very low downpayments and very little savings set aside to
carry them through economic setbacks. While most of these
buyers have benefited from their purchase, a significant
minority have had serious financial problems and some have lost
their homes in foreclosures. There were an estimated 400,000
foreclosures during 2002 and the FHA mortgage insurance program
had a near record 11.45 percent of its borrowers at least 30
days past due in the 4th quarter of 2002. Predatory lending,
which involves home mortgages, mortgage refinancing, home
equity loans, and home repair loans with unjustifiably high
interest rates and excessive fees, has hurt lower-income and
minority owners most, with the elderly frequently targeted.
These practices can strip away home equity that has been
accumulated over a lifetime. While there were anti-predatory
lending bills before the 107th Congress, none were adopted. HUD
funds a national network of counseling agencies that can
provide advice on those behind in their mortgage payments or
facing foreclosures, credit issues, discrimination in home
purchasing or mortgage loans, and predatory lending (1-800-569-
4287).
Financial Challenges and Options for Elderly Homeowners.--
Many elderly homeowners have benefited significantly from the
rise in house prices and have substantial equity in their
homes. (See the discussion on Home Equity Conversion programs
below.) About two-thirds of homeowners are mortgage-free by age
55 and nearly 78 percent of those age 65 and older own their
home free of debt (Table Z). But not all homeowners have done
as well as others. Owners in some cities and in less desirable
neighborhoods saw little if any increases in values. The
Federal Reserve's Survey of Consumer Finances reports of 1998
and 2001 found that the median value of the residences of non-
white or Hispanic families actually declined by a small amount
over this 3 year period, from $92,500 to $92,000, while homes
owned by white, non-Hispanics increased substantially, from
$108,800 to $130,000. Some owners have used their home equity
for educational purposes, home expansions and upgrades, and to
start small businesses. Others have lost home equity through
predatory lending and home repair scams, while still others
have exhausted the equity in their homes through over-use of
conventional home equity loans for vacations, boats, and other
consumption uses.
Even elderly homeowners whose home values have increased
significantly over the years can nevertheless have financial
worries. As Table Z shows, household incomes of the elderly
fall significantly for those age 55 and above, while many
expenses, such as for utilities, maintenance, repairs,
insurance, and other requirements can increase. See the section
below, Housing Cost Burdens of the Elderly.
Table Z. Income and Housing Expenditures, 2001
----------------------------------------------------------------------------------------------------------------
All Consumer Under Age
Item Units 55 55 and Over 65 and Over
----------------------------------------------------------------------------------------------------------------
Income Before Taxes................................... $47,507 $52,568 $37,185 $27,528
Average Value of Owned Home........................... $103,975 $91,989 $128,236 $129,037
Housing Tenure
Homeowners............................................ 66% 59% 80% 80%
with mortgage......................................... 40% 46% 27% 18%
no mortgage........................................... 26% 13% 53% 62%
Renters............................................... 34% 41% 20% 20%
Average Annual Housing Expenditures
Owned Dwelling........................................ $4,979 $5,461 $4,001 $3,258
Mortgage.............................................. $2,862 $3,523 $1,523 $849
Property Taxes........................................ $1,233 $1,161 $1,379 $1,343
Maintenance, Repairs, Insurance, etc.................. $884 $777 $1,099 $1,066
----------------------------------------------------------------------------------------------------------------
Source: 2001 Annual Consumer Expenditure Survey. Department of Labor. Bureau of Labor Statistics.
Physical Challenges for Aging Homeowners.--As the
population ages, there are likely to be calls for more focused
and better funded programs at HUD to assist the elderly. These
are likely to include efforts to help the elderly remain in
their homes by making physical improvements easier to obtain
and more affordable for those with limited incomes. These
include items such as flashing lights for doorbells and phones,
grab bars, hallway rails, and ramps, and the widening of
doorways for wheelchairs. There may be more efforts to help
lower income elderly homeowners convert a part of a large home
into an income-earning apartment, perhaps to be rented to
another elderly person. (Some communities already have such
programs--see discussion below.) But there are other more
profound challenges as the population ages. For example, many
of the frail elderly homeowners live in low-density suburban
areas with little if any public transportation. When these
elderly have to give up driving, many will find it difficult to
maintain their independence. Some housing advocates are calling
for Federal housing policy to be more closely integrated with
transportation policy and other social service needs of lower-
income and elderly households. For the fortunate elderly who
have accumulated considerable home equity, this wealth will
increase their options--such as down-sizing to more
maintenance-free retirement communities or to assisted-living
facilities.
Homeownership Tax Provisions.--The largest government
housing programs are for homeowners who use the tax deductions
allowed for mortgage interest and property tax paid. Upper-
middle and high 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
2003 to be $92.0 billion: $69.9 billion for the mortgage
interest deduction and $22.1 billion for the deduction of
property taxes. These provisions are of little or no value to
those in the bottom half of the income distribution because it
is more beneficial for these taxpayers to take the standard
deduction. Nearly 75 percent of taxpayers use the standard
deduction. The mortgage interest and property tax deductions
are also of little value to most elderly homeowners since most
own their home without a mortgage, and without mortgage
interest to deduct, it is usually better to take the standard
deduction.
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 (P.L. 105-34) made major
changes to the treatment of gains from the sale of a home,
replacing the rollover and the $125,000 exclusion. Now, a
taxpayer who is single can exclude up to $250,000 of gain from
the sale of a principal residence and up to $500,000 for joint
returns. There is no rollover of gains into another house
required and the new provision is not restricted to those over
age 55. The exclusion of gains 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. 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, many homeowners no
longer need to save a lifetime of financial documents on home
purchases, sales, and spending on home 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 made before age
59 and one-half do 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, are 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 or grandchild. This penalty-free withdrawal is
limited to $10,000 minus 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. As noted earlier, 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.
Home Equity Conversion
As noted in Table Z, 80 percent of the elderly (age 65 and
over) own their own homes, and 62 percent own their homes free
of any mortgage debt. These homes have an average value of
nearly $130,000. 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.
Three reverse mortgage products are available to consumers
in the U.S. at the present time, the Home Equity Conversion
Mortgage Program (HECM), the Home Keeper reverse mortgage, and
the Cash Account Plan. The HECM and Home Keeper products are
available in every state, while the Cash Account Plan is
offered in 24 states.
(A) THE HOME EQUITY CONVERSION MORTGAGE PROGRAM (HECM)
The Housing and Community Development Act of 1987 (P.L.
100-242) authorized the Home Equity Conversion Mortgage Program
(HECM) in the Department of Housing and Urban Development (HUD)
as a demonstration program. It was the first nationwide home
equity conversion program which offers the possibility of
lifetime occupancy to elderly homeowners. The borrowers (or
their spouses) must be elderly homeowners (at least 62 years of
age) who own and occupy their 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 its use for 1- to 4-
family residences if the owner occupies one of the units.
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.
Reverse mortgages made under HECM account for about 90
percent of the reverse mortgages made nationwide. About 79,000
loans have been endorsed under the program since its founding.
Lenders originated a record 18,097 HECM loans during FY2003, a
39 percent increase over the 13,049 loans closed in FY2002. The
Federal National Mortgage Association (Fannie Mae) has been
purchasing the home equity conversion mortgages originated
under the program.
(B) THE HOME KEEPER MORTGAGE
Since November 1996, Fannie Mae has also been using its own
reverse mortgage product the ``Home Keeper Mortgage.'' This is
the first conventional reverse mortgage that is available on a
nationwide basis.
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.
(C) THE CASH ACCOUNT PLAN
Financial Freedom Senior Funding Corp., of Irvine, CA,
offers the ``Cash Account Plan'' as a proprietary reverse
mortgage product. Financial Freedom is a subsidiary of Lehman
Brothers Bank, FSB. According to its web site, Financial
Freedom is the largest originator of reverse mortgages in the
United States. It originated $1 billion of home value in
reverse mortgages in 2002 and has made more than 30,000 reverse
mortgage loans totaling more than $5 billion in home value.
Financial Freedom is now the largest servicer of reverse
mortgages with a servicing portfolio of approximately 32,000
loans.
The Cash Account Plan is available to seniors 62 years or
older who own homes with a minimum value of $75,000. It
provides an open-end line of credit that is available for as
long as the borrower occupies the home. The senior can draw on
the line of credit in full or part at any time; the minimum
draw is $500. The unused portion of the line of credit grows by
5 percent annually. Eligible home types include owner-occupied
single-family detached, manufactured, condominium, Planned Unit
Development units, or 1- to 4-unit residences if one unit is
owner-occupied. Borrowers are required to have obtain
counseling from an independent counselor prior to obtaining the
loans.
A monthly servicing fee is automatically added to the loan,
except that no servicing fee is permitted in Illinois and
Maryland. The interest rate charged to the borrower is equal to
the current 6-month London Interbank Offered Rate (LIBOR) plus
5 percentage points. The rate is adjusted semi-annually, but
the interest rate may never rise more than 6 percentage points
above the initial rate.
The Cash Account Plan is available in two forms: the
Standard Option and the Zero Point Option. Under the Standard
Option, a borrower pays a loan origination fee that is equal to
2 percent on the first $500,000 of loan balance, 1.5 percent on
the next $500,000, and 1 percent on the balance in excess of $1
million. The borrower obtains an open-ended line of credit and
the minimum draw is $500.
Under the Zero Point Option, the borrower pays no loan
origination fee. Closing costs, including third party costs and
excluding state and local taxes, will not exceed $3,500. At
closing the borrower is required to take a draw on the line of
credit, and the minimum draw at closing is 75 percent of the
line of credit. Subsequent draws have a minimum of $500. Full
prepayment is permitted and there are no prepayment penalties,
but partial prepayment on the initial draw is not permitted for
the first 5 years.
The Cash Account Plan is currently available in 24 states:
Arizona, California, Colorado, Connecticut, Florida, Georgia,
Hawaii, Illinois, Indiana, Maryland, Massachusetts, Michigan,
Minnesota, Nevada, New Jersey, New York, Ohio, Oregon,
Pennsylvania, Utah, Vermont, Virginia, Washington, and Wyoming.
(D) 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.
(E) 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.
(F) RECENT PROBLEMS WITH REVERSE MORTGAGES
In the 1990's, Homefirst, a subsidiary of Transamerica
Corporation, offered a reverse mortgage plan in many parts of
the country. The so-called ``Lifetime'' plan had several
features: (1) interest would accrue on the loan; (2) the
homeowner was charged a ``contingent interest fee'' under which
Homefirst would earn a 50 percent share of the appreciation in
the value of the home; (3) the borrower had to pay a ``maturity
fee'' of 2 percent of the value of the property at the time the
loan is paid off; (4); the borrower would receive monthly loan
advances for a specified number of years, depending on the home
value and the age of the borrower; and (5) borrowers less than
93 years old had to purchase a deferred annuity which would
begin lifetime monthly annuity payments once the borrower
received the last loan advance. Metropolitan Life Insurance
Company provided the annuity. In 1999, Homefirst was purchased
by Financial Freedom Senior Funding Corporation, a subsidiary
of Lehman Brothers.
By the late 1990's, there were several complaints regarding
the reverse mortgages from Homefirst. An extreme example is
illustrated by the case of a New York woman. She took out a
reverse mortgage and received loan advances until she died
after receiving 32 monthly payments. When her home was sold a
few months later, Financial Freedom (Homefirst) demanded more
than $765,000 as repayment under the terms of the reverse
mortgage. The monthly payments she had received during the life
of the loan totaled about $58,000. There was a huge mismatch
between the benefits she received under the mortgage and the
amount that her heirs had to pay to Financial Freedom.
As a result of this case and similar (though maybe not as
dramatic) cases, a number of lawsuits were filed against
Transamerica HomeFirst, Inc., Transamerica Corporation,
Metropolitan Life Insurance Company, and Financial Freedom
Senior Funding Corporation. The cases have been combined before
a single judge in the Superior Court of California in San Mateo
County under Judicial Council Coordination Proceeding No. 4061.
The Action asserts a number of claims against the
defendants in connection with the marketing and making of
``Lifetime'' reverse mortgage loans nationally. In general, the
plaintiffs contend that they and all borrowers generally were
misled about the nature and effect of their loans' terms,
including the existence and amount of certain charges and fees,
and the risks inherent in the loans. More specifically, the
plaintiffs have alleged that three terms of the loans are
unfair or were improperly concealed or misrepresented: (1) a
``Contingent Interest'' fee which requires the borrower to pay
HomeFirst one-half of any appreciation in the value of the
property which occurs during the loan's term; (2) a ``Life
Annuity'' issued by Metropolitan Life, which borrowers
purchased from loan proceeds at the start of the loan; and (3)
a ``Maturity Fee'' of 2 percent of the appreciated value of the
property at the time the loan is paid off.
A proposed settlement has been reached under which a
settlement sum of $8 million would be paid. Transamerica
HomeFirst, Inc., Transamerica Corporation and Financial Freedom
Senior Funding Corporation, collectively, would pay $6,750,000;
and Metropolitan Life Insurance Company would separately pay
$1,250,000.
After expenses, about $5,280,000 would be available for
distribution to the 1,588 members of the class or their
estates. The defendant firms would deny all allegations that
they misled or defrauded elderly homeowners by persuading them
to sign up for predatory mortgages carrying excessive fees and
abusive terms.
An appeal has been filed in the case, and an appellate
hearing is scheduled in March 2004.
As noted above, the reverse mortgages currently offered by
Financial Freedom, under its Cash Account Plan, does not offer
the three objectionable terms noted in the suits. But the cases
do indicate the importance of financial counseling prior to
obtaining reverse mortgages.
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 the elderly. 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.
The Fair Housing Act provisions regarding familial status
do not apply with respect to ``housing for older persons,'' a
term that has three alternative definitions. ``Housing for
older persons'' is defined as housing that is (1) provided
under any state or Federal housing program for the elderly, (2)
``intended for and solely occupied by persons 62 years of age
or older,'' or (3) ``intended and operated for occupancy by
persons 55 years of age or older.''
Under the last category of housing for the elderly, there
are three additional requirements that must be met in order for
the housing to meet the statutory definition of housing for
older persons. First, at least 80 percent of the occupied units
must be occupied by at least one person who is 55 years of age
or older. Second, the housing facility or community must
publish and adhere to policies and procedures that demonstrate
that it is intended to be housing for the elderly. Third, the
housing facility must comply with HUD rules for the
verification of occupancy. Despite the complexity of these
requirements, an individual who believes in good faith that his
or her housing facility qualifies for the familial status
exemption will not be held liable for money damages, even if
the facility does not in fact qualify as housing for older
persons.
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
Statistics on the number of homeless people in the Nation
and their characteristics are difficult to obtain and largely
unavailable, although some studies are available. 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 1 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 1996, the National
Survey of Homeless Assistance Providers and Clients (NSHAPC)
was conducted. NSHAPC indicated that approximately 6 percent of
homeless services' clients are between 55 and 64 years old, and
another 2 percent are 65 years of age or older, although some
studies have estimated that as much as 19 percent of the
homeless population is elderly. Studies have shown, not
surprisingly, that older homeless persons are more likely to
suffer from a variety of health problems, including chronic
disease, functional disabilities, and high blood pressure, than
are other homeless persons.
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.
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 FY2002,
they were funded at roughly $1.6 billion; in FY2003 they were
funded at roughly $1.5 billion. In addition to the targeted
homeless programs, assistance is potentially available to
homeless people through non-targeted 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 in 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. For the Homeless Assistance Grants program,
Congress appropriated approximately $1.1 billion in both FY2002
and FY2003.
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 FY2003 are as follows:
Health Care for Homeless Veterans--$46 million; Homeless
Providers Grants and Per Diem Program--$50 million; Domiciliary
Care for Homeless Veterans--$47 million; Compensated Work
Therapy/Therapeutic Residence Program--$8 million; Loan
Guaranty Transitional Housing for Homeless Veterans--$10
million; and HUD VA Supported Housing--$5 million.
G. HOUSING COST BURDENS OF THE ELDERLY
As noted above, while the incomes of many elderly fall
sharply, many of their housing expenses do not (Table Z). The
2003 annual report, The State of the Nation's Housing, by
Harvard's Joint Center of Housing Studies, found that ``A
staggering three in ten U.S. households have affordability
problems. Fully 14.3 million households are severely cost-
burdened (spending more than 50 percent of their incomes on
housing), and another 17.3 million are moderately cost-burdened
(spending 30-50 percent of their incomes on housing). Of the
21.4 million lowest-income households (in the bottom income
quintile), 9.1 million were age 65 and over. Of these 9.1
million, 2.1 million (23 percent) were moderately burdened and
nearly 3.7 million (40 percent) were severely burdened
lowest.'' Rising housing costs have become a serious financial
burden for many low- and moderate- income elderly because many
have relatively fixed incomes. Figures from the Department of
Labor's 2001 Consumer Expenditure Survey show that households
(renters and owners) headed by those age 65 and over spent
$9,354 or nearly 34 percent of their income on housing. This
category includes not only the cost of shelter itself, but
utilities and household operations, housekeeping supplies, and
household furnishings. For the ``shelter''only category, the
percentage spent falls to 17.5 percent.
The 2003 Harvard report found that for the first time ever,
more homeowners are cost-burdened than renters. As the value of
the homes of many elderly increase, local property taxes take
an increasingly larger percentage of their income. While the
percentage of income spent on mortgage interest drops sharply
for homeowners age 65 and over (since nearly 78 percent have
paid their mortgage in full), other housing costs remain high.
Even though household income falls significantly for those age
65 and over, $27,528 compared to the average household income
of $47,507 in 2001, the amount of property taxes paid by
homeowners age 65 and above is higher than that paid by the
average owner, $1,343 versus $1,233. With much lower incomes,
elderly homeowners spend a larger percentage of their income on
property taxes: 4.3 percent versus 3.1 percent for the average
household.
Government programs to improve ``economically distressed''
neighborhoods in cental cities and in some older suburban
areas, as well the gentrification of areas that have become
increasingly desirable, can cause concern among elderly owners
on fixed-incomes as the cost of living in these upgraded areas
increase. Some local governments have programs that limit or
defer property taxes for lower-income elderly owners (so-called
``circuit breaker'' provisions), but not all.
The National Low Income Housing Coalition, a housing
advocacy group for low income renters, puts out their annual
``Out of Reach'' survey that estimates the ``Housing Wage''
that a person working full time would have to earn to be able
to afford a basic two-bedroom apartment while paying no more
than 30 percent of income in rent. Their 2003 survey estimated
a national Housing Wage of $15.21 an hour or $31,637 a year.
They found that ``Renter households in 40 states--home to
almost 90 percent of all renter households in the Nation--face
a Housing Wage of more than twice the prevailing minimum
wage.'' They point out that many people working in the service
sector earn much less than is required to rent a basic
apartment, and as a result, many renter households pay much
more than 30 percent of their income for rent. They do not
break their data down by age but HUD's Annual Housing Survey
for 2001 shows there were about 4.3 million renter households
whose head was 65 years old or more. The National Low Income
Housing Coalition survey showed only about 23 percent of the
very-low income elderly households receive government housing
assistance--551,000 lived in public housing units and another
446,000 elderly households received a government rent subsidy.
A number of the low-income elderly with inadequate savings and
pensions, including Social Security payments, work at low-wage
service jobs to supplement their incomes.
State and local governments can use funds from the HUD's
HOME ($2 billion in fiscal year 2003) and Community Development
Block Grant ($4.9 billion in fiscal year 2003) programs to
assist the elderly in areas such as energy conservation and
home maintenance, but there are many competing demands on these
programs. HUD data for 2001 show that about 156,000 elderly
homeowners received a low-interest loan or grant to make major
repairs.
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 in the winter and heat stress in the
summer. Hypothermia, the potentially lethal lowering of body
temperature, is estimated to cause the deaths of nearly 25,000
elderly people each year. The Center for Environmental
Physiology in Washington, DC. reports that most of these deaths
occur after extended 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 aim to ease the energy cost burden for
low-income individuals: The Low-Income Home Energy Assistance
Program (LIHEAP) and the Weatherization Assistance Program
(WAP). Both LIHEAP and WAP give priority to elderly and
disabled citizens to assure that they 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 gap
between existing Federal resources allotted and the needs of
the population these programs were intended to serve. In
FY1983, 31 percent of the total households estimated to have
incomes at or below the Federal maximum income eligibility
standards (or just under half of the total households estimated
to have incomes at or below stricter state eligibility rules)
received heating assistance through LIHEAP. In FY2001 about 16
percent of federally eligible households and 22 percent of
state-eligible households received LIHEAP heating or winter
crisis assistance.
The LIHEAP Home Energy Notebook for FY2001 shows that in
FY2001 the average household had energy expenditures of $1,537
compared to$1,311 for low-income households (those at or below
150 percent of Federal poverty guidelines or 60 percent of
state median income, whichever is greater) and $1,301 for
LIHEAP recipient households. Although these data indicate that
both LIHEAP-recipient households and low-income households
spent less on energy than the average house did, these
expenditures represented a greater portion of their incomes
than for all households. In FY2001 LIHEAP-recipient households
expended more than 17 percent, and low-income households
expended 14 percent, of their total household income on energy
costs; in comparison all households expended 7 percent of total
income on energy expenditures in that same year.
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 arrearage and threats of
shut-offs increased to 4.3 million households in 2001.
An estimated 4.8 million households received LIHEAP heating
assistance, winter crisis aid, or both in FY2001 compared to
3.9 million in FY2000; in FY1983 about 6.8 million households
received LIHEAP assistance with heating costs. (These numbers
are HHS estimates of total unduplicated households served.) In
each of these years a much smaller number of additional (or the
same) households received summer cooling, summer crisis, or
weatherization assistance. Data from the March 2001 Current
Population Survey (CPS) indicates an estimated 37 percent of
LIHEAP-recipient households included at least one member who
was 60 years or older; the March 1983 CPS data indicated an
estimated 40 percent of LIHEAP-eligible households included a
member 60 years of age or older.
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 for low-
income households. These programs were administered by the
Office of Economic Opportunity and its now-defunct successor
agency, the Community Services Administration (CSA) on an
annual budget of approximately $200 million or less. However,
between 1979 and 1980 the price of home heating oil doubled. As
a result, Congress sharply expanded aid for energy by
appropriating $1.6 billion for energy assistance (P.L. 96-126).
Of this amount, $400 million went to CSA for the continuation
of its crisis-intervention programs; the Department of Health,
Education and Welfare (predecessor to HHS) received the
remaining $1.2 billion with instructions to spend $400 million
for a special one-time energy allowance to Supplemental
Security Income (SSI) recipients and $800 million for block
grants to States to provide supplemental energy allowances.
For the following fiscal year, as part of the crude oil
windfall profit tax legislation, Congress passed the Home
Energy Assistance Act of 1980 (P.L. 96-233); this act
established the Low Income Energy Assistance Program (LIEAP) on
a 1-year only basis. Administered solely by HHS it received a
$1.85 billion appropriation. For FY1982 Congress extended and
renamed this program the Low Income Home Energy Assistance
Program or LIHEAP (Title XXVI of the Omnibus Budget
Reconciliation Act of 1981 (OBRA, P.L. 97-35). LIHEAP has
subsequently been reauthorized and 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's authorization is
currently set to expire at the end of FY2004.
LIHEAP is one of the seven block grants originally
authorized by OBRA. It is administered by the Office of
Community Services within the Administration for Children and
Families at 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, Puerto Rico, numerous
Indian tribes and tribal organizations, and several U.S.
territories. State grantees (including the District of
Columbia) receive a percentage share of the annual Federal
regular funds appropriation; (grants to Indian tribes are taken
from their State's allocation and funds for Puerto Rico and
other territories are from a special set-aside of these regular
funds). The percentage share for each State has in most years
been set by a formula established in LIHEAP's predecessor
program for FY1981; that formula included some factors that
gave special weight to states with high heating costs as well
as greater numbers of low-income households. However, in 1984
Congress amended the LIHEAP statute to provide that in FY1986
and succeeding years, whenever Congress appropriates regular
funds above $1.975 billion, a different formula takes effect.
Under this different formula grants are to be allocated largely
on the basis of home energy expenditures (heating or cooling)
by low-income households. (A funding level that triggered this
different formula was last appropriated in FY1986.)
The annual Federal regular fund LIHEAP allotments may be
supplemented with contingency/emergency funds. These funds are
appropriated by Congress but may only be released at the
discretion of HHS and the President and to meet additional home
energy assistance needs resulting from a natural disaster or
other emergency. States may also use other sources to
supplement Federal LIHEAP funds as well. These include : 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; Federal dollars
carried over from the previous fiscal year (up to 10 percent of
state allotment); funds that are authorized to be transferred
from other Federal block grants; Federal payments for grantees
that successfully ``leverage'' non-Federal resources and;
competitive Federal grants for grantees that establish a
program to increase efficiency of energy usage among low-income
families and reduce their vulnerability to homelessness.
Financial assistance is provided to eligible households,
directly or through vendors. Some States also make payments in
other ways, such as through vouchers or direct payments to
landlords. These funds may be used to help meet home heating
and cooling costs, assist with an energy-related crisis,
provide low-cost weatherization (limited to 15 percent of
allotment or up to 25 percent if grantee receives a Federal
waiver) or to offer other services that reduce the need for
energy assistance (limited to 5 percent of the allotment).
Flexibility is allowed in the use of the grants but states
are required to target their assistance to households with the
lowest incomes that pay a high proportion of their income for
home energy. Federal rules also require that homeowners and
renters be treated equitably and that a maximum of 10 percent
of the grant may be used for administrative costs. Finally,
States establish their own benefit structures and eligibility
rules within broad Federal guidelines. The maximum Federal
income eligibility level for a household is 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 grantees, but not below 110 percent
of the Federal poverty level. Automatic eligibility may also 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.
The LIHEAP statute does place certain other 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. 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.
PROGRAM DATA
The LIHEAP Report to Congress for FY2001, indicates (based
on State-reported data) that in FY2001 4.4 million households
received regular heating cost assistance and 1.4 million
received winter/year-round crisis aid. In addition, cooling aid
was provided to an estimated 250,000 households, summer crisis
aid to 87,000 households, and weatherization assistance to
97,000. These data do not reflect an unduplicated count of
households, but rather are a State-reported count of households
that received each category of assistance.
This same report shows that the average heating/winter
crisis assistance benefit in FY2001 was $364, although this
amount varied significantly between States. This combined
benefit represented a 34 percent increase from the average
FY2000 benefit of $271. This increase, however, only partially
offset the rise in average home heating expenditures for LIHEAP
recipient households. Between FY2000 and FY2001 these home
heating expenditures increased nationally by about 45 percent;
FY2001 LIHEAP heating benefits offset 68 percent of costs
compared to 73 percent for FY2000. The average cooling benefit
for FY2001 was $219 and the average FY2001 summer crisis
benefit was $188. The percentage of federally eligible
households assisted with LIHEAP heating/winter crisis aid was
estimated at 16 percent for FY2001 compared to 13 percent of
federally eligible households in FY2000.
The LIHEAP Home Energy Notebook for FY2001 includes the
following data:
Colder FY2001 weather helped lift average residential
energy expenditures for all households to $1,537 in
that year compared to $1,293 in FY2000;
LIHEAP recipient households increased their average
residential energy expenditures by 21 percent, from
$1,077 in FY2000 to $1,301 in FY2001;
The most recent survey data on the kinds of home
heating fuel used is from 1997. These data shows that
natural gas is the most commonly used heating fuel for
all households (52.7 percent), as well as for low-
income households (49.2 percent), and for LIHEAP
recipient households (51.3 percent). Use of electricity
as a main heating source has increased for LIHEAP
recipient households and reached 29.4 percent, compared
to 29.2 percent for all households. Fuel oil is the
main heating source for 8.6 percent of LIHEAP recipient
households, compared to 9.3 percent for all households.
Finally 2.3 percent of LIHEAP households used kerosene
as a heating fuel compared to just 1.0 percent of all
households.
Average home heating expenditures for LIHEAP
recipient households were estimated to be $535 for
FY2001.
In FY2001 average home heating expenditures
represented a higher percentage of annual income for
LIHEAP-recipient households (17.2 percent) and low-
income households (14.0 percent) than for all
households (7.0 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;
In FY2001 among all households that cooled the
average home cooling expenditure was $131, and for
LIHEAP recipients that cooled it was $108;
In FY2001 cooling expenditures represented a higher
percentage of average annual income for LIHEAP
recipient households that cooled (1.4 percent) than for
low-income households that cooled (1.1 percent) or all
households that cooled (0.5 percent).
FUNDING
There has been a 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 a program low of $900 million in fiscal
year 1996. The annual regular LIHEAP appropriation for FY2001
through FY2003 has moved between $1.4 billion and $1.8 billion.
However, regular LIHEAP funds have in every year since FY1994
been supplemented with separately appropriated emergency/
contingency funding. Contingency funds appropriated by Congress
are not always released and may be available for one or more
years. In FY2001 states had access to more than $823 million in
contingency funds. (Some of these funds were appropriated and/
or released in FY2000 but remained available and were obligated
by States in FY2001.) Accounting for these contingency dollars,
total Federal LIHEAP funds reached an all-time high in FY2001
at $2.2 billion. Contingency funds released in FY2002 and
FY2003 were significantly under this amount. Total FY2002
funding declined to $1.8 billion and in FY2003 was $2.0
billion.
Contingency LIHEAP funds have been utilized in recent years
for both cold and hot weather emergencies. In FY2000 and FY2001
most contingency fund releases were allocated to all States for
assistance to low-income households that faced significant
increases in heating oil, natural gas, and propane prices due
to cold weather. However, some contingency funds in FY2000 and
all of the FY2002 contingency funds were released for cooling
purposes to assist selected States that experienced extreme
heat.
2. The Department of Energy (DOE) Weatherization Assistance Program
According to DOE, the term ``weatherize'' initially meant
emergency and temporary measures such as caulking and weather-
stripping of windows and doors and low-cost measures such as
covering windows with plastic sheets. As the program evolved,
it has gradually come to embrace a broader range of more
permanent, cost-effective energy efficiency measures that may
apply to the building envelope (e.g. insulation and windows),
heating and cooling systems, electrical system, and
electricity-consuming appliances.
Federal efforts to weatherize the homes of low-income
persons began on an ad hoc, emergency basis after the 1973 Arab
Oil Embargo. In 1975, a formal program was established at the
Community Services Administration (CSA), a once-independent
Federal agency that is now defunct. Title IV of the Energy
Conservation and Production Act (P.L. 94-385), enacted in 1976,
directed the Federal Energy Administration (FEA) to conduct a
weatherization program. In October 1977, the newly formed
Department of Energy (DOE) assumed responsibility for
weatherization and all other FEA programs. In 1977 and 1978,
DOE administered this weatherization grant program in a way
that paralleled and supplemented the CSA program; DOE provided
money for the purchase of equipment and materials and CSA
arranged for labor. In 1979, DOE became the sole Federal agency
responsible for operating a low-income weatherization
assistance program. This program is currently administered by
DOE's Office of Energy Efficiency and Renewable Energy (EERE).
The Weatherization Assistance Program's (WAP's) goals are
to decrease national energy use and to reduce the impact of
high fuel costs on low-income households, particularly those of
elderly and disabled persons. Also, the program seeks to
increase employment opportunities through the installation and
manufacturing of low-cost weatherization equipment and
materials. The 1990 legislation that reauthorized the program
also extended it to permit and encourage the use of innovative
energy-saving technologies to achieve its goals.
The Weatherization Assistance Program distributes Federal
funding to States by formula. Each State, in turn, has
discretion to distribute its share of funding to local
government weatherization agencies. There are 51 State grantees
(each State and the District of Columbia), and about 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. Each State may raise its income eligibility level to 150
percent of the poverty level to conform with the LIHEAP income
ceiling. States may not, however, set the income eligibility
level 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 weatherization
assistance. Priority is given to households with an elderly
individual, aged 60 and older, or with a disabled person. In
2000, DOE issued a rule that amended the priorities for the
Weatherization program. ``Households with a high energy
burden'' and ``high residential energy users'' were added as
new categories for priority service.
Federal regulations (10 CFR 440) 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 use.
Funds made available to the States are, in turn, allocated to
nonprofit agencies to purchase and install energy conserving
equipment and materials, such as insulation, and to make
energy-related repairs. Federal law allows a maximum average
expenditure of $2,614 per household in program year 2003,
unless a state-of-the-art energy audit shows that additional
work on heating systems or cooling equipment would be cost-
effective.
PROGRAM DATA
Since its inception through FY2003, the DOE Weatherization
Program has served more than 5.2 million homes. In
approximately 33 percent of the homes weatherized, at least one
resident was 60 years of age or older. An estimated 105,000
homes were weatherized in fiscal year 2002 and the target is
123,000 in fiscal year 2003.
In 1993, DOE's Oak Ridge National Laboratory issued a
report entitled National Impacts of the Weatherization
Assistance Program in Single Family and Small Multifamily
Dwellings. The report used data from the 1989 program year
(April 1, 1989, through March 31, 1990) in which 198,000
single-family and small multifamily buildings and 20,000 units
in large multifamily buildings were weatherized. A
representative sample of nearly 15,000 dwellings was used in
the study. The report indicated that the Weatherization Program
saved money, reduced energy use, and made weatherized homes a
safer place to live.
The report had six key findings. First, the report
estimated that the Weatherization Program saved $1.09 in energy
costs for every $1 spent. Second, the average energy savings
per dwelling was $1,690, while it cost $1,550 to weatherize the
average home, including overhead. Third, the program was most
effective in the cold weather states of the Northeast and upper
Midwest, which may be due to DOE's early emphasis on heating
needs rather than cooling needs. States with cold climates
produced the greatest energy savings. For natural gas
consumption, first-year savings yielded a 25 percent reduction
in gas used for space heating and a 14 percent reduction in
total electricity use.
Fourth, weatherization reduced the average low-income
recipient's energy bill by $116, which was about 18 percent of
the $640 average total bill for home heating.
Fifth, energy savings from weatherization reduced U.S.
carbon emissions by nearly one million metric tons. Savings
were the most dramatic in single-family, detached houses in
cold climates.
Sixth, the average low-income household in the North was
particularly hard hit by home energy costs, spending 17 percent
of its income on energy. Elsewhere across the country, low-
income households typically spent 12 percent of their income on
energy, compared to only 3 percent for households with higher
levels of income.
In 1997, DOE's Oak Ridge National Laboratory issued a
report entitled Progress Report of the National Weatherization
Assistance Program. This report was a ``metaevaluation''
analysis of 17 separate evaluations of state-level
implementation of the Weatherization Program in program year
1996. Compared to the above-noted findings for program year
1989, this report found that implementation of many
recommendations in the 1993 national evaluation had produced 80
percent higher average energy savings per dwelling in 1996.
These savings include a 23.4 percent reduction in natural gas
consumption for all end uses.
According to DOE, the Weatherization Assistance Program
conducts periodic metaevaluations of program performance based
on State-level program evaluations and generates national
benefit/cost ratios based on the metaevaluation results. The
most recent metaevaluation results were made available to
program management for review in October 2002.
FUNDING
Since 1990, the DOE Weatherization Program has operated
without a formal authorization of appropriations. Nevertheless,
Congress has continued to appropriate funds to support the
Program's activities. This includes $135.0 million in FY2000;
$152.7 million in FY2001; $230.0 million in FY2002; $223.5
million in FY2003; and $228.5 million in FY2004.
CHAPTER 14
Older Americans Act of 1965
Historical Development
Congress created the Older Americans Act in 1965 in
response to concern by policymakers about a lack of community
social services for older persons. The original legislation
established authority for grants to states for community
planning and social services, research and development
projects, and personnel training in the field of aging. The law
also established the Administration on Aging (AoA) within the
then-Department of Health. Education and Welfare (DHEW) to
administer the newly created grant programs and to serve as the
Federal focal point on matters concerning older persons.
Although older persons may receive services under many
other Federal programs, today the Act is considered to be the
major vehicle for the organization and delivery of social and
nutrition services to this group. It authorizes a wide array of
service programs through a nationwide network of 57 state
agencies on aging and more than 655 area agencies on aging,
supports the sole Federal job creation program benefiting low-
income older workers, and funds training, research, and
demonstration activities in the field of aging.
Prior to the creation of the Act in 1965, older persons
were eligible for limited social services through some Federal
programs. However, with the recognition that older persons were
becoming an increasing proportion of the population and that
their needs were not being formally addressed through existing
programs, many groups began advocating on their behalf. Their
actions led President Truman to initiate the first National
Conference on Aging in 1950. Conferees called for government
and voluntary agencies to accept greater responsibility for the
problems and welfare of older persons. Further interest in the
field of aging led President Eisenhower to create the Federal
Council on Aging in1956 to coordinate the activities of the
various units of the Federal Government related to aging.
The beginning of a major thrust toward legislation along
the lines of the later-enacted Older Americans Act was made at
the 1961 White House Conference on Aging. The Conferees called
for a Federal coordinating agency in the field of aging to be
set up on a statutory basis, with adequate funding for
coordinating Federal efforts in aging, as well as a Federal
program of grants for community services specifically for the
elderly.\1\
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\1\ U.S. Department of Health Education and Welfare, Special Staff
on Aging, The National and Its Older People, Report of the White House
Conference on Aging, Jan. 9-12, 1961, Washington, Apr. 1961.
---------------------------------------------------------------------------
In response to the White House Conference on Aging
recommendations, Representative John Fogarty of Rhode Island
and Senator Pat McNamara of Michigan introduced legislation in
1962 to establish an independent U.S. Committee on Aging to cut
across the responsibilities of many departments and agencies,
and a program of grants for social services, research, and
training that would benefit older persons. Because there were
objections by the Administration to the creation of an
independent Federal agency on aging, the legislation was not
enacted. Legislation introduced the following year by
Representative Fogarty and Senator McNamara modified the 1962
proposal by creating within DHEW, the Administration in Aging
which was to be under the direction of a Commissioner for Aging
and appointed by the President with the approval of the Senate.
However, the 1963 proposal was not enacted.
The Act as introduced in 1965 basically paralleled the 1963
proposal. Sponsors emphasized how it would provide resources
necessary for public and private social service providers to
meet the social service needs of the elderly. The Act received
wide bipartisan support and was signed into law by President
Johnson on July 14, 1965. In addition to creating AoA, the Act
authorized grants to states for community planning and services
programs, as well as for research, demonstration, and training
projects in the field of aging. In his remarks upon signing the
bill, the President indicated that the legislation would
provide ``an orderly, intelligent, and constructive program to
help us meet the new dimensions of responsibilities which lie
ahead in the remaining years of this century. Under this
program every state and every community can now move toward a
coordinated program of services and opportunities for our older
citizens.'' \2\
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\2\ Public Papers of the Presidents of the United States, Lyndon B.
Johnson, Book II, Washington, 1965, p. 744.
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Major Amendments to the Act
The Act has been amended 14 times since the original
legislation was enacted. The first amendments to the Act in
1967 extended authorization for the state grant program and for
research, demonstration, and training programs created in 1965.
In 1969, Congress added authority for a program of areawide
model projects to test new and varied approaches to meet the
social service needs of the elderly. The 1969 amendments also
authorized the foster grandparent and retired senior volunteer
programs to provide part-time volunteer opportunities for the
elderly. (Authority for volunteer programs was subsequently
repealed and these programs were reauthorized under the
Domestic Volunteer Service Act of 1973.)
Major amendments to the Act occurred in 1972 with the
creation of the national nutrition program for the elderly, and
in 1973, with the establishment of substate area agencies on
aging. The 1973 amendments represented a major change because
for the first time Federal law authorized the creation of local
agencies whose purpose is to plan and coordinate services for
older persons and to act as advocates for programs on their
behalf. These amendments also created legislative authority for
the community service employment program for older Americans
which had previously operated as a demonstration initiative
under the Economic Opportunity Act. In 1975, Congress extended
the Older Americans Act through 1978 and specified certain
services to receive funding priority under the state and area
agency on aging program.
The 1978 amendments represented a major structural change
to the Act when the separate grant programs for social
services, nutrition services, and multipurpose senior center
facilities were consolidated into one program under the
authority of state and area agencies on aging. The intent of
these amendments was to improve coordination among the various
service programs under the Act. Among other changes were
requirements for establishing state long-term care ombudsman
programs and a new Title VI authorizing grants to Indian tribal
organizations for social and nutrition services to older
Indians.
The 1981 amendments made modifications to give state and
area agencies on aging more flexibility in the administration
of their service programs. These amendments also emphasized the
transition of participants to private sector employment under
the community service employment program. In 1984, Congress
enacted a number of provisions, including adding
responsibilities for AoA; adding provisions designed to target
services on low-income minority older persons; giving more
flexibility to states regarding service funds allocations; and
giving priority to the needs of Alzheimer's victims and their
families.
The 1987 amendments expanded certain service components of
the state and area agency program to address the special needs
of certain populations. Congress authorized six additional
distinct authorizations of appropriations for services: in-home
services for the frail elderly; long-term care ombudsman
services; assistance for special needs: health education and
promotion services; services to prevent abuse, neglect and
exploitation of older individuals; and outreach activities for
persons who may be eligible for benefits under the supplemental
security income (SSI), Medicaid and food stamp programs. Among
other changes were provisions designed to give special
attention to the needs of older Native Americans and persons
with disabilities, emphasize targeting of services to those
most in need, elevate the status of AoA within the Department
of Health and Human Services (DHHS), and liberalize eligibility
of community service employment participants for other Federal
programs.
The 1992 amendments restructured some of the Act's
programs. A new Title VII, Vulnerable Elder Rights Protection
Activities, was created to consolidate and expand certain
programs that focus on protection of the rights of older
persons. Title VII incorporated separate authorizations of
appropriations for the long-term care ombudsman program;
program for the prevention of elder abuse, neglect, and
exploitation; elder rights and legal assistance development
program; and outreach, counseling, and assistance for insurance
and public benefit programs. In addition, provisions were
included to strengthen requirements related to targeting of
Title III services on special population groups. Other
amendments authorized programs for assistance to caregivers of
the frail elderly; clarified the role of Title III agencies in
working with the for-profit sector; and required improvements
in AoA data collection.
The latest amendments were enacted in 2000 after 6 years of
congressional debate on reauthorization. P.L. 106-501 extended
the Act's programs through FY2005. These amendments authorized
the National Family Caregiver Support Program under Title III;
required the Secretary of the Department of Labor (DoL) to
establish performance measures for the senior community service
employment program; allowed states to impose cost-sharing for
certain Title III services older persons receive while
retaining authority for voluntary contributions by older
persons toward the costs of services; expanded a state's
authority to transfer funds between these programs; 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; and consolidated
a number of previously separately authorized programs. In
addition, the amendments require the President to convene a
White House Conference on Aging by December 31, 2005.
The following provides a brief description of the Act
titles.
Title I. Declaration of Objectives
Title I of the Act sets out broad social policy objectives
oriented toward improving the lives of all older Americans,
including adequate income in retirement, the best possible
physical and mental health, opportunity for employment, and
comprehensive long-term care services, among other things.
Title II. Administration on Aging
Title II establishes AoA as the chief Federal agency
advocate for older persons and sets out the responsibilities of
AoA and the Assistant Secretary for Aging. The Assistant
Secretary is appointed by the President with the advice and
consent of the Senate. Title II requires that AoA establish the
National Eldercare Locator Service to provide nationwide
information through a toll-free telephone number to identify
community resources for older persons. It also requires AoA to
establish the National Long-Term Care Ombudsman Resource
Center, the National Center on Elder Abuse, the National Aging
Information Center, and the Pension Counseling and Information
Program.
Title III. Grants for State 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, older persons. It accounts for 69 percent of
total OAA funds in FY2004 ($1.243 billion out of $1.8 billion).
The program, which supports 56 state agencies on aging, 655
area agencies on aging, and more than 29,000 service providers,
authorizes six separate service programs. States receive
separate allotments of funds for supportive services and
centers, family caregiver support, congregate and home-
delivered nutrition services, nutrition incentive services
grants, and disease prevention and health promotion 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/health
promotion services 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 the family caregiver program is
allotted to states based on each state's relative share of the
total population of persons aged 70 years and over. Nutrition
services grants are allotted to states based on a formula that
takes into account the number of meals served by the nutrition
projects programs the prior year.
Supportive Services.--The supportive services and senior
centers program provides funds to states for a wide array of
social services, as well as the activities of approximately
11,000 senior centers. Supportive services allow older persons
to reside in their homes and communities and remain as
independent as possible. In FY2002, the program served 7.5
million older persons who received a range of services
including transportation, home care, adult day care,
information and assistance, and legal assistance. Of all
persons served, 28 percent had income below the poverty level,
and over 20 percent were minority older persons. The most
frequently provided services are transportation, information
and assistance, home care services, and adult day care. In
FY2002, the program provided 37 million one-way trips and 2.7
million assisted trips; 20 million hours of personal care,
homemaker, and chore services; and more than 10 million hours
of adult day care services.
Nutrition Services.--The Title III nutrition program is the
Act's largest program; funded at $714 million in FY2004, it
represents 40 percent of the Act's total funding and 57 percent
of Title III funds. Data for FY2000 show that of the 250
million meals served, 57 percent were provided to frail older
persons at home, and 43 percent were provided in congregate
settings, such as senior centers and schools.
Meals provided must comply with the Dietary Guidelines for
Americans published by the Secretary of DHHS and the Secretary
of Agriculture. Projects must provide meals that meet certain
dietary requirements based on the number of meals served by the
project each day. That is, projects that serve one meal per day
must provide to each participant a minimum of one-third of the
daily recommended dietary allowances as established by the Food
and Nutrition Board of the National Research Council, National
Academy of Sciences. Projects that serve two meals per day must
provide a minimum of two-thirds of the dietary allowances, and
projects that serve three meals per day must provide 100
percent of the dietary allowances.
Persons who are 60 years of age or older, and their spouses
of any age, may participate in the nutrition program. The law
also allows the following groups to receive meals: persons
under 60 years with disabilities who reside in housing
facilities occupied primarily by the elderly where congregate
meals are served; persons with disabilities who reside at home
with, and accompany, older individuals; and volunteers who
provide services during the meal hours.
Congregate and home-delivered nutrition services providers
are required to offer older persons at least one meal per day
five or more days per week. The law provides an exception in
rural areas if the 5-day weekly frequency is not feasible and a
lesser frequency has been approved by the state agency on
aging. Congregate nutrition providers are required to provide
at least one ``hot or other appropriate meal'' per day; home-
delivered nutrition providers are to provide at least ``one
hot, cold, frozen, dried, canned, or supplemental foods,'' meal
per day.
Data from a national evaluation of the nutrition program
completed in 1997 show that, compared to the total elderly
population, nutrition program participants were older and more
likely to be poor, to live alone, and to be members of minority
groups. Roughly half of all meal recipients were low-income and
27 percent were minorities. They were 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 additional other
funding on average, $1.70 for congregate meals, and $3.35 for
home-delivered meals.\3\
---------------------------------------------------------------------------
\3\ U.S. Department of Health and Human Services. Office of the
Assistant Secretary for Aging. Serving Elders at Risk: The Older
Americans Act Nutrition Programs. National Evaluation of the Elderly
Nutrition Program, 1993-1995, June 1996.
---------------------------------------------------------------------------
National Family Caregiver Support Program.--The National
Family Caregiver Support Program was added to Title III by the
2000 amendments (P.L. 106-501). 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.
Caregivers eligible to receive services may receive
information and assistance, and individual counseling, access
to support groups, and caregiver training. Services that tend
to be more individualized, such as 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 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 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.
According to AoA, in FY2002, states and territories
conducted outreach efforts to provide information about
caregiver programs to about 4 million persons; provided access
assistance to 440,000 caregivers; and conducted counseling and
training services for about 180,000 caregivers. The program
also supported respite care services for over 76,000 caregivers
and provided a variety of supplemental services such as home
care and adult day care to over 56,000 caregivers.
Title IV. Training, Research, and Discretionary Projects and Programs
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.
Over the years Title IV has supported a wide range of research
and demonstration projects, including those related to income,
health, housing retirement, long-term care, as well as projects
on career preparation and continuing education for personnel in
the field of aging.
In recent years, AoA has funded a number of national
efforts that support the work of state and area agencies on
aging, including the National Long-Term Care Ombudsman Resource
Center, the National Center on Elder Abuse, and other National
Resource Centers that focus on legal assistance, retirement
needs of minority populations and the vulnerable elderly. Other
recent projects have included the development of Naturally
Occurring Retirement Communities (NORCs) that assist older
persons to age in place by providing them with home and
community services in their own residential areas, and
intergenerational opportunities that link older volunteers with
children with disabilities whose support system is fragile.
Title V. Community Service Employment for Older Americans
The community service employment program for Older
Americans has as its purpose to promote useful part-time
opportunities in community service activities for unemployed
low-income persons who are 55 years or older and who have poor
employment prospects. The program is the only existing job
creation program for adults since the elimination of public
service employment under the Comprehensive Employment and
Training Act (CETA).\4\ Modeled after a pilot program called
Operation Mainstream, it was first funded in 1965. Operation
Mainstream was designed to employ poor, chronically unemployed
adults and operated primarily in rural areas. In 1967,
administrative responsibility for Operation Mainstream was
transferred from the Office of Economic Opportunity to the
Department of Labor (DOL), but funding authority continued
under the Economic Opportunity Act. In 1973, the program was
given a statutory basis under Title IX of the Older American
Comprehensive Services Amendments of 1973. The 1975 amendments
to the Older Americans Act incorporated the program as Title IX
of the Act, and the 1978 amendments redesignated the program as
Title V. The program continues to be administered by DoL.
---------------------------------------------------------------------------
\4\ The Rehabilitation Act authorizes a community service
employment program for persons with disabilities. It has never been
funded.
---------------------------------------------------------------------------
In FY2004, the community service employment program
represents about 24 percent of total OAA funds ($438.7 million
out of $1.8 billion). The program not only provides
opportunities for part-time employment and income for older
persons, but also contributes to the general welfare of
communities by providing a source of labor for various
community service activities. Enrollees work part-time in a
variety of community service activities. The program supports
61,500 jobs and services about 92,300 persons in FY2003 (for
the program year, July 1, 2003-June 30, 2004). The cost per job
slot in FY2003 is $7,153.
Enrollee Benefits.--Enrollees are paid no less than 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 (52 weeks at 25 hours a week), including
orientation and training. Participants work an average of 20-25
hours per week.
In addition to wages, enrollees receive physical
examinations, personal and job-related counseling, and
transportation for employment purposes, under certain
circumstances. Participants also may receive on-the-job
training. DOL regulations indicate that training should be
oriented toward upgrading job skills in preparation for
community service as well as unsubsidized employment. Enrollees
are paid at the established rate of pay when participating in
training.
Participant Eligibility.--Persons eligible to participate
in the program are those who are 55 years of age or older
(priority must be given to persons 60 years and older),
unemployed, and who have poor employment prospects. Persons'
income must not exceed 125 percent of the DHHS poverty level
guidelines.
When determining eligibility for Title V benefits, non-cash
income such as food stamps and compensation received in the
form of food or housing, unemployment benefits, and welfare
payments, are not counted as income. Wages received under Title
V are counted when determining eligibility for certain income-
tested programs, such as the supplemental security income (SSI)
program. However, Title V wages are exempted in determining
eligibility and level of benefits for the food stamp program
and for Federal housing programs. Enrollee wages are subject to
Federal, state, and local taxes, and participants contribute to
social security.
Placement of Enrollees into Unsubsidized Employment.--The
20002 amendments to the Act emphasized the role of the program
regarding placement of enrollees into unsubsidized private
employment in a number of ways. First, the law was changed to
state 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
increased the amount of funds to be set aside by the Secretary
of DoL from the total appropriation for projects that place
participants in unsubsidized employment. Third, the law
codifies a DoL regulation regarding placement of enrollees into
unsubsidized employment: the Secretary must establish 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.
Distribution of Funds to National Organizations and
States.--Funds under the program are distributed to states and
to national organizations according to a set of requirements
that include a 2000 hold harmless amount (funds are distributed
to state agencies and national organizations at their FY2000
level of activities) and state relative population aged 55 and
over and relative per capita income.
In 2002, DoL initiated a competitive grant award process
for distribution of funds to national organizations. The
process was effective with the release of funds for FY2003 (to
be used during program year 2003-2004 July 1, 2003-June 30,
2004). Prior to that time, funds allocated for national
organizations had been awarded to 10 public or non-profit
private organizations and the US. Forest Service in the
Department of Agriculture. The initiation of the competitive
grant process resulted in distribution of funds to 13
organizations; some organizations that received funds prior to
the competitive process either received some reduction in funds
or did not receive funds after competition.
The following table shows the distribution of funds for
program year 2003-2004.
Title V of the Older Americans Act: FY2003 Funding to National
Organizations and State Sponsors
------------------------------------------------------------------------
FY2003
Sponsor amount Percent of
(millions)* total
------------------------------------------------------------------------
AARP Foundation Programs...................... $75.0 17.0
Asociacion Nacional Pro Personas Mayores...... 7.8 1.8
Easter Seals, Inc............................. 16.2 3.7
Experience Works\1\........................... 86.2 19.5
National ABLE Network......................... 5.5 1.2
National Asian Pacific Center on Aging........ 6.1 1.4
National Caucus and Center on the Black Aged 15.3 3.5
inc..........................................
National Council on the Aging................. 21.9 5.0
National Indian Council on Aging.............. 6.2 1.4
Senior Services America, Inc.\2\.............. 50.1 11.3
SER-Jobs for Progress National, Inc........... 26.3 5.9
U.S. Department of Agriculture Forest Service. 20.5 4.6
Mature Services, Inc.......................... 5.5 1.2
-------------------------
National organization sponsors, total... $342.6 77.5%
State agencies, total,.................. $99.7\3\ 22.5%
Total................................... $442.3\4\ 100.0%
------------------------------------------------------------------------
*Funds are for FY2003 and are used from July 1, 2003-June 30, 2004.
\1\ Formerly Green Thumb, Inc.
\2\ Funds for this organization were previously administered by the
National Council of Senior Citizens.
\3\ This amount includes funds allocated to the territories.
\4\ Includes funds for Section 502(e) experimental projects to assist in
transitioning enrollees into unsubsidized positions.
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. To be eligible for funding, a tribal organization
must represent at least 50 Native American elders age 60 or
older.
In FY2003, grants were awarded to 241 organizations
representing 300 Indian tribal organizations and two
organizations serving native Hawaiian elders. The 2000
amendments (P.L. 106-501) added a new part to Title VI
authorizing caregiver support services to Native American
elders. Most frequently provided services under the program are
transportation, home-delivered and congregate nutrition
services, and a wide range of home care services.
Title VII. Vulnerable Elder Rights Protection Activities
Title VII authorizes four separate vulnerable elder rights
protection activities; these are the long-term care ombudsman
program; the elder abuse, neglect and exploitation prevention
program; legal assistance development; and the Native American
elder rights program.
Funding for ombudsman and elder abuse prevention 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
service providers, or volunteer organizations.
Most Title VII funding is directed at the long-term care
ombudsman program. Of $19.4 million appropriated for FY2004,
almost three-quarters is for ombudsman activities. The purpose
of the program 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.
The ombudsman program leverages funds from a number of
sources, other than the Older Americans Act.\5\ In FY2001
(latest data available), more than $60 million supported this
program from all sources combined (Federal and non-Federal).
About 55 percent of total program effort came from Older
Americans Act and other Federal sources; the remainder came
from state and other non-Federal sources.
---------------------------------------------------------------------------
\5\ States receive funds under a separate allotment of funds for
ombudsman activities under Title VII; in addition they may use Title
III funds to support these activities.
---------------------------------------------------------------------------
In FY2001, there were 596 local and regional ombudsman
programs with 1,029 staff (full-time equivalents). The program
relies heavily on volunteers to carry out ombudsman
responsibilities--about 14,000 volunteers assisted paid staff
in FY2001. In FY2001, AoA data show that state and local
ombudsman programs investigated more than 264,0000 complaints
by individuals in all residential settings. Most complaints
relate to resident care, resident rights, and quality of life
issues.
Legislative Activities in 107th Congress
Other than appropriations legislation, no major legislative
amendments to the Act have occurred since the Act's
reauthorization in 2000. The Act is scheduled to be reviewed
for reauthorization by the 109th Congress.
The following table presents appropriations history for the
Act's programs from FY1998 through FY2004. Total funding in
FY2004 is $1.798 billion, a slight increase over the FY2003
level.
In FY2003, Congress transferred administrative authority
for the nutrition services incentive grant program from the
U.S. Department of Agriculture, where it had been since its
inception, to AoA. The program retains a separate authorization
of appropriation under Title III and funds are allocated to
states based on their share of total meals served the prior
year. In addition, for FY2004, Congress appropriated $2 million
to support planning for the White House Conference on Aging
which is to be convened by the President by December 2005.
Older Americans Act, Alzheimer's Demonstration Programs, and White House Conference on Aging, FY1998-FY2004
($ in millions)
--------------------------------------------------------------------------------------------------------------------------------------------------------
OAA programs and Alzheimer's demonstration grants FY1998 FY1999 FY2000 FY2001 FY2002 FY2003 FY2004
--------------------------------------------------------------------------------------------------------------------------------------------------------
TITLE II: Administration on Aging............................ $14.795 $15.395 $16.461 $17.232 $20.501 $20.233 $30.618
Program Administration....................................... (14.795) (15.395) (16.461) (17.232) (18.122) (17.869) (17.324)
Aging Network Support Activities............................. ........... ........... ........... ........... (2.379)\1\ (2.364)\1\ (13.294)\2\
TITLE III: Grants for State and Community Programs on Aging.. 961.798 952.339 987.617 1,151.285 1,230.293 1,240.891 1,243.059
Supportive services and centers.............................. 309.500 300.192 310.082 325.082 357.000 355.673 353.889
Family caregivers............................................ ........... ........... ........... 125.000 136.000\3\ 149.025\3\ 152.738\3\
Disease prevention/health promotion.......................... 16.123 16.123 16.123 21.123 21.123 21.919 21.970
Nutrition services........................................... 626.412 626.261 661.412 680.080 716.170 714.274 714.462
Congregate meals............................................. (374.412) (374.261) (374.336) (378.412) (390.000) (384.592) (386.353)
Home-delivered meals......................................... (112.000) (112.000) (146.970) (152.000) (176.500) (180.985) (179.917)
Nutrition services incentive program......................... (140.000) (140.000) (140.000) (149.668)\4 (149.670)\4 (148.697)\5 (148.192)
\ \ \
In-home services for the frail elderly....................... 9.763 9.763 none \6\ \6\ \6\ \6\
TITLE IV: Training, Research, and Discretionary Projects and 10.000 18.000 31.162 37.678 38.280 40.258 33.509\7\
Programs....................................................
TITLE V: Community Service Employment........................ 440.200 440.200 440.200 440.200 445.100 442.306 438.650
TITLE VI: Grants to Native Americans......................... 18.457 18.457 18.457 23.457 31.229 33.704 32.717
Supportive and nutrition services............................ ........... ........... ........... ........... (25.729) (27.495) (26.453)
Native American caregivers,.................................. ........... ........... ........... ........... (5.500) (6.209) (6.318)
TITLE VII: Vulnerable Elder Rights Protection Activities..... none\8\ 12.181 13.181\9\ 14.181\9\ 17.681\9\ 18.559 19.444
Long-term care ombudsman program............................. none (7.449) \9\ \9\ \9\ \9\ (14.276)
Elder abuse prevention....................................... none (4.732) \9\ \9\ \9\ \9\ (5.168)
Legal assistance............................................. none none none none none none none
Native Americans elder rights program........................ none none none none none none none
Total--Older Americans Act Programs.......................... $1,445.250 $1,456.569 $1,507.078 $1,684.033 $1,783.084 $1,771.057 $1,798.051
Alzheimer's Demonstration Grants\10\......................... $5.970 $5.970 $5.970 $8.962 $11.500 $13.412 $11.883
White House Conf. on Aging................................... none none none none none none $2.814\11\
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\Includes $1.2 million for the Eldercare Locator and $1.2 million for Pension Counseling and Information Program.
\2\Includes funds for activities previously funded under Title IV: Senior Medicare Patrols; National Long-Term Care Ombudsman Resource Center; and
National Center on Elder Abuse. Also includes funds for the Eldercare Locater and Pension Counseling and Information Program.
\3\Funding for Native American family caregiving is shown in Title VI.
\4\Congress originally appropriated $150 million, then rescinded $332,000 (.22 percent) pursuant to Section 1(a)(4) of P.L. 106-544.
\5\Congress transferred the program, previously funded by USDA, to AoA in FY2003.
\6\Not authorized.
\7\See footnote b. Funds shown are reduced from FY2003 level due to transfer of some funds to Title II.
\8\Funding for ombudsman and elder abuse prevention activities was included in Title III.
\9\ Separate amounts not specified.
\10\The FY1999 Omnibus Consolidated Appropriations Act (P.L. 105-277/H.R. 4328) transferred the administration of the program from the Health Resources
and Services Administration to AoA. The program is authorized under Section 398 of the Public Health Service Act.
\11\P.L. 100-75 requires the President to convene the conference no later than Dec. 31, 2005.
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 has been
superceded by appropriations bills for each of fiscal years
2001-2003, maintaining the transfer authority at the 10 percent
level. Legislation proposing to permanently maintain the 10
percent transfer level has been introduced in the 108th
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 2001 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 2001 fifty State survey also found that in FY2001, the
total resources spent by the CSBG network in 49 States were
about $9.3 billion. Of that total, almost 65 percent came from
Federal programs other than CSBG; approximately 13 percent came
from the States; 6 percent came from local sources; 11 percent
came from private sources, including the value of volunteer
time; and 6 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 (17 percent),
linkages between and among programs (18 percent), nutrition
programs (8 percent), education (10 percent), employment
programs (11 percent), income management programs (5 percent),
housing initiatives (9 percent), self-sufficiency (15 percent),
health (4 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) was 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. In its survey of CSBG performance outcomes for FY2001,
the National Association for State Community Services Programs
reported that all 50 States and 935 CAAs were actively engaged
in ROMA implementation.
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 2003, HHS released the annual report on SSBG
expenditures and recipients for 2001. This report is based on
information submitted by the States to HHS. According to that
report, 37 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 8 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 2001, approximately 659,754
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 2001 were protective services for children 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 at which 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
earlier levels of $2.38 billion and $2.8 billion has been
introduced in the 107th and 108th Congresses, respectively, but
has not been approved. Likewise, a bill proposing to
permanently maintain the transfer authority from TANF to SSBG
at 10 percent has passed the House in the 108th Congress, but
has not yet been acted upon in the Senate.
(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
all 50 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 2001 CSBG
grant outcomes, discussed above, provides some interesting
clues. 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 10.9 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
17.8 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 17.2 percent
of CSBG expenditures in fiscal year 2001; 8 percent of CSBG
clients in FY2001 were older than 70, and another 9 percent
were between 55 and 70 years old. CAAs served over one million
retired families and individuals in FY2001.
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. The appropriated amounts for FY2002 and FY2003
mirrored the ceiling level, at $1.7 billion in both years.
(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 2003, appropriations were as follows: $645.8
million for the CSBG; $27 million for community economic
development; $5.5 million for job opportunities for low-income
individuals (JOLI); $7.2 million for rural community
facilities; $16.9 million for national youth sports; $7.3
million for community food and nutrition and $24.8 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 might have a need for formal education
extending beyond the informal, experiential environment. This
possible 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
economic or 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 by the Department of Education 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 Department of Education will
conduct a similar 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 suggest a cause for
concern over the current condition of adult education and
literacy. According to the Statistical Abstract of the U.S.,
2002, 175 million American adults were 25 years old and over in
2000; of these, 15.8 percent (28 million) never graduated from
high school (Statistical Abstract of the U.S., 2000, Table
210). The portion of non-graduates increases among older
population groups. In contrast to the 15.8 percent average, the
percent of persons 55 to 64 years old who did not graduate from
high school was 18.3 percent, the rate was 26.4 percent for
those 65 to 74, and 35.4 percent for those 75 years old and
over. 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 educational skills of adult individuals.
2. Federal Programs
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 Department of
Education makes grants to assist states and localities provide
adult education and family literacy programs. Approximately 3
million adults participate in these programs on an annual
basis. The FY2001 appropriation for AEFLA programs was $561
million, representing a substantial increase above the FY2000
amount of $470 million. The AEFLA appropriation increased again
for FY2002 to $591 million. States and localities spend
significantly more on the same programs; the amount was nearly
$1.1 billion in FY1999, the most recent year published for
these data.
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; or 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.
In the latest year for which detailed state enrollment data
are available from all states (the 1999-2000 program year), 2.9
million adults participated in federally supported adult
education and literacy programs. Of this total, 1.1 million
participated in adult basic education programs, 1.1 million in
English-as-a-second-language programs, and 0.7 million in adult
secondary education activities. The Department of Education has
estimated that as many as 90 million adults, based on the 1992
NALS survey, do not have the ``reading, language,
computational, or English skills'' needed either for self-
sufficiency or for the present or future global information
economy.\1\
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\1\ Source: http://www.ed.gov/about/offices/list/ovae/pi/AdultEd/
aefacts.html (visited December 15, 2003).
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The Workforce Investment Act of 1998 (P.L. 105-220),
including the AEFLA under Title II, was enacted by the 105th
Congress. Since the AEFLA is authorized through FY2003, the
107th Congress left reauthorization of the AEFLA for the 108th
Congress to consider. Regarding appropriations, the 107th
Congress enacted on one annual appropriations for FY2002 for
the AEFLA by means of P.L. 107-116, the Departments of Labor,
Health and Human Services, and Education, and Related Agencies
Appropriations, 2002 (signed into law by the President on
January 10, 2002). The FY2002 AEFLA appropriation was $591
million. The FY2002 appropriation continued 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 FY2002 reserve, of
$70 million, was used to 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. THE 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 FY2001, approximately 480,000 volunteers served in 766
projects.\1\ 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 75 percent ,
and those 85 and older accounted for 10 percent. Women made up
75 percent of the volunteers. For FY2002 $54.9 million was
appropriated.
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\1\ Corporation for National and Community Service. National
Overview 2001 Retired and Senior Volunteer Program. See: [http://
www.seniorcorps.org/research/overview--rsvp01.html].
---------------------------------------------------------------------------
(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 $2.65 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.
In FY2001, approximately 30,200 individuals served as
foster grandparents.\2\ Fifty-five percent were white, 39
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 10 percent
of the volunteers. Persons under the age of 65 accounted for 14
percent of the volunteers, those between 65 and 84 accounted
for 81 percent, and those 85 and older accounted for 5 percent.
Women made up 91 percent of the volunteers. For FY2002, $106.7
million was appropriated.
---------------------------------------------------------------------------
\2\ Corporation for National and Community Service. National
Overview 2001 Foster Grandparent Program. See: http://
www.seniorcorps.org/research/overview--fgpp01.html].
---------------------------------------------------------------------------
Of the over 275,000 children served by the foster
grandparents in FY2001, 39 percent were 5 years of age or
under, 46 percent were between 6 and 12 years of age, and 15
percent were 13 and older. Of the children served, 63 percent
had one of five special needs. The special needs areas were
learning disabilities (26 percent), significantly medically
impaired (13 percent), developmentally delayed/disabled (11
percent), emotionally impaired/autistic (7 percent), and
abused/neglected (7 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 FY2001, the number of individuals who served as senior
companions was approximatley 15,500.\3\ Fifty-eight percent
were white, 35 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 64 percent of the volunteers, those between 75
and 84 accounted for 31 percent, and those 85 and older
accounted for 5 percent. Women made up 85 percent of the
volunteers. For FY2002 $44.4 million was appropriated.
---------------------------------------------------------------------------
\3\ Corporation for National and Community Service. National
Overview 2001 Senior Companion Program. See: [http://
www.seniorcorps.org/research/overview--scp01.html].
---------------------------------------------------------------------------
Of the more than 61,000 adults served by the senior
companions in FY2001, 12 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. Generally,
volunteers receive a living allowance, 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 FY2001, 59.5 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 2000-2001, 4,447 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 2000-2001,
approximately 48 percent were 18 through 25 years of age; 10
percent of the participants were 55 and older. For FY2002,
$85.3 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. Section 5310 provided $90
million in fiscal year 2003.
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 annually in the period 1979-1991, to an average of
around $120 million annually for 1992-1998, to an average of
almost $210 million annually for 1999-2003.
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. In FY2002, states
transferred $4.2 million of Section 5307 funds to the Section
5311 program. State and local governments also have the choice
of using some of the Federal highway funds for rural transit.
In fiscal year 2002, $58.2 million of flexible highway funds
was transferred to Section 5311 projects.
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; in 1998, the
Council was renamed the Coordinating Council on Access and
Mobility. The Council is charged with coordinating related
programs at the Federal level and promoting coordination at the
State and local levels.
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 surface transportation programs in
1991 (the Intermodal Surface Transportation Efficiency Act of
1991 [ISTEA]; P.L. 102-240) provided a number of important
changes for the elderly and disabled. Key provisions of ISTEA
(which renamed UMTA 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 FTA, the Transportation Research Board (TRB),
and the American Public Transit Association (APTA). To date,
TCRP has resulted in the publication of over 250 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.
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 over the
levels provided in ISTEA, 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 $90
million in FY2003; for Section 5311, appropriations have risen
from $120 million in FY1997 to $237 million in FY2003. 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 funded
through the supportive services and centers program. 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.
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 19.1 million older drivers
(70 years and above) in 2001. These drivers constitute about 10
percent of all drivers. In 2002 there were 57,803 drivers
involved in fatal crashes of which 8.1 percent were age 70 or
older, and there were 26,549 drivers killed in crashes, of
which 11.8 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 75 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
The fatal crash rate for licensed drivers
declines as licensed drivers get older, until reaching
the 70 and older age group, where the rate rises
sharply (though the rate for age 70 and older drivers
is still lower than the rate for licensed drivers under
age 45).
It does not follow, however, that because a higher
percentage of elderly die in traffic accidents, that the
elderly actually cause a greater number of such accidents. Some
statistics suggest that the elderly, as a group, are safe
drivers. They have the fewest accidents per 100,000 licensed
drivers, the lowest rate of alcohol involvement, and the
highest level of restraint (i.e. seatbelt) use among various
age groups. According to DOT's Traffic Safety Facts 2002 Older
Population, ``Older drivers involved in fatal crashes had the
lowest proportion of intoxication with blood alcohol
concentrations (BAC) of 0.08 grams per deciliter (g/dl) or
greater of all adult drivers. . . In two-vehicle fatal crashes
involving an older and a younger driver, the vehicle driven by
the older person was more than twice as likely to be the one
that was struck.'' 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.
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 few years 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 the 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 2002, LSC funded 170 local programs. Together
they served every county in the nation, as well as the U.S.
territories. These local programs provide legal assistance to
individuals based on locally determined priorities that meet
local community conditions and needs. Local programs hire
staff, contract with local attorneys, and develop pro bono
programs for the direct delivery of legal assistance to
eligible clients.
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 2002 (P.L.
107-77), 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 nonFederal
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. In
the Velazquez ruling, the Supreme Court stated that LSC-funded
attorneys can challenge welfare reform laws but only if it is
part of the client's case for individual benefits. After the
Supreme Court issued its decision, the LSC announced that it
would no longer enforce the specific provision addressed by the
Supreme Court, and in May 2002, the LSC formally eliminated it
from the welfare regulations.
Grantees also are required to maintain timekeeping records
and account for any nonFederal funds received. The
appropriations law contains extensive audit provisions. The
Corporation is prohibited from receiving nonFederal 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 many 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 FY2001, a very small
amount (0.6 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, numerous 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 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.
During 2002, legal services attorneys closed 976,519 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 FY2002, Congress
appropriated $329.3 million to the LSC. Although efforts to
reduce funding for the LSC that began in 1996 have now begun to
reverse, there is no doubt that older persons still find it
very 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 1 attorney for every 10,000 poor persons. In contrast,
there are approximately 28 lawyers for every 10,000 persons
above the Federal poverty line. Moreover, the United States
currently funds less for legal services than its counterparts
in most of the other Western developed nations. For example,
the annual per capita government expenditure for civil legal
assistance is $2.25 in the United States compared to $32 in
England.
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 indicate 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 number
of grantees receiving LSC funding decreased from 325 in 1995 to
262 in 1998, to 207 in 2001, to 170 in 2002. The reduction in
local programs is due to both cutbacks in funding and a LSC-
initiated reconfiguration of the LSC program in which States
were urged to merge, reorganize, and consolidate local programs
into a more efficient regional and statewide delivery system of
legal services to the poor.)
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.'' In April 2003, 8 new Board
members appointed by President Bush were sworn into office, and
3 existing Board members appointed by President Clinton in 1993
continue to serve on the Board.
(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.
From their perspective, 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.
On February 28, 2002, the House Judiciary Subcommittee on
Commercial and Administrative Law held an oversight hearing on
the Legal Services Corporation. The hearing covered a number of
issues, including the following: Has an effective system of
competition been implemented by the LSC, and how is this system
working? Have Legal Services Corporation grantees been
maintaining program integrity as required by regulations? What
types of changes have been made by Legal Services Corporation
grantees to clean up the case-overcounting problem? What Is the
Impact of the Supreme Court's decision last term in the case of
Legal Services Corporation vs. Velazquez and the related
follow-up case of Dobbins vs. Legal Services Corporation.
Bob Barr, House Judiciary Subcommittee chairman at the time
of the 2002 hearing, commented that since its inception, the
Legal Services Corporation has been plagued with problems and
controversy. He stated:
``Over two decades, Congress has listened to complaints
about Legal Service lawyers who were not serving the needs of
the poor but rather were using taxpayer money to fund liberal
political and ideological causes. In response to these
complaints, in 1996 Congress passed a series of reforms and
restrictions regulating the Corporation and the work of its
grantees. Now, almost 6 years later, since those reforms were
passed, it is time for Congress to consider seriously the
question of whether these restrictions have been effectively
implemented, whether there has been full and complete
compliance by the grantees within the legal restrictions, and,
moreover, what role the Board of Directors has played in all of
this. As we meet today, Congress continues to hear complaints
about the true mission of Legal Services lawyers and how the
reforms are being violated or circumvented.''
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 some believed went 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 little detail from the Corporation
about its proposed use of the funding request, despite 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 included $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 was
reduced to $329.3 million.
The language accompanying President Bush's FY2002 budget
affirmed 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 requested the
current level funding of $329.3 million for the LSC. The
proposal included all restrictions on LSC-funded activities
that were currently in effect.
The Bush Administration's FY2002 request for LSC ($329.3
million) was the same as the amount that was obligated for the
program for FY2001. For FY2002, the House Appropriations
Committee recommended a total of $329.3 million for LSC. This
amount was the same as the FY2001 appropriation (after
accounting for the 0.22 percent governmentwide rescission) and
President Bush's FY2002 budget request for the program. The
House Committee's recommendation also included existing
provisions restricting the activities of LSC grantees. In
carrying out LSC's vision of an effective and efficient
statewide system of delivering legal services to the poor,
grantees have been merging and reconfiguring their legal
services programs to better use the Federal dollars allocated
to them. The House Committee report (H.Rept. 107-139) indicated
concern about the LSC overruling, without appeal, certain
configurations implemented by grantees via the state planning
process. The House Committee report directed LSC to review the
state planning process and the concerns raised and report back
to the Committee by September 4, 2001, with a proposal
(including input from the stakeholders) that outlined the
reconfiguration standards and the process for states to appeal
LSC's decisions. On July 18, 2001, the House passed H.R. 2500,
which included $329.3 million for the LSC. For FY2002, the
Senate Appropriations Committee also recommended $329.3 million
for LSC and included existing program prohibitions. On
September 13, 2001, the Senate passed H.R. 2500, which included
$329.3 million for LSC.
The Conference Committee report on H.R. 2500 included
$329.3 million for LSC for FY2002. This was identical to the
FY2001 appropriation for LSC (after the rescission) and the
Bush Administration's FY2002 budget request for LSC. The
Conference Committee report's recommendation for LSC included
$310 million for basic field programs, $12.4 million for
management and administration, $4.4 million for client self-
help and information technology, and $2.5 million for the
inspector general. The Conference Committee report also
included existing provisions restricting the activities of LSC
grantees. The Conference report (H.Rept. 107-278) was passed by
the House on November 14, 2001, and by the Senate on November
15, 2001. H.R. 2500 was signed into law (P.L. 107-77) by
President Bush on November 28, 2001.
Current LSC funding still remains below the Corporation's
highest level of $400 million in FY1994 and FY1995.
(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 significant 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. According to the LSC,
a substantial amount of these funds, $133 million in 2002, 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. (On March 26, 2003, the Supreme Court
upheld the constitutionality of the IOLTA program by a narrow
5-4 decision. In Brown v. Washington Legal Foundation, the
Supreme Court ruled that although the IOLTA program does
involve a taking of private property interest in escrow
accounts that was owned by the depositors for a legitimate
public use, there is no violation of the Just Compensation
Clause of the Constitution because the owner did not have a
pecuniary loss.)
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
(also known as the Commission on Law and Aging) was established
by the ABA in 1979. The mission of the Commission is to
strengthen and secure the legal rights, dignity, autonomy,
quality of life, and quality of care of elders. It carries out
this mission through research, policy development, technical
assistance, advocacy, education, and training. The Commission
consists of a 15-member interdisciplinary body of experts in
aging and law, including lawyers, judges, health and social
services professionals, academics, and advocates. With its
professional staff, the Commission examines a wide range of
law-related issues, including: legal services to older persons;
health and long-term care; housing needs; professional ethical
issues; Social Security, Medicare, Medicaid, and other public
benefit programs; planning for incapacity; guardianship; elder
abuse; health care decisionmaking; pain management and end-of-
life care; dispute resolution; and court-related needs of older
persons with disabilities.
The Commission receives funding from a variety of sources.
These include grants and contracts from the U.S. Department of
Justice; U.S. Department of Health and Human Services,
Administration on Aging; Robert Wood Johnson Foundation;
Borchard Foundation; and the Alzheimer's Association.
Approximately one-third of the Commission's funding comes from
the ABA's Fund for Justice and Education, in part, from the
Marie Walsh Sharpe Endowment.
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
Commission also publishes a quarterly newsletter, called
BIFOCAL, which aims to generate legal resources for older
persons through the joint efforts of public and private bar
groups and the aging network. In addition, since 1976, the ABA
Young Lawyers Division has had a Committee on the Delivery of
Legal Services to the Elderly.
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. Moreover, in 1998, the
American Bar Association published a comprehensive document
entitled the ``National Handbook on Laws and Programs Affecting
Senior Citizens.''
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.
The American Bar Association has indicated that 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 the mid-
1990's, public perceptions about crime appear to be out of line
with government statistics. According to an October 23, 2003
Gallup poll, 60 percent of those polled believed that crime is
worse now than a year ago.\1\ An October 2002 poll showed that
90 percent of Americans 65 and older believe that crime is an
important issue.\2\ Additionally, research done by the American
Association for Retired Persons (AARP) indicated that ``one-
third of persons age 50 and older avoid going out at night
because they are concerned about crime.'' \3\
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\1\ The Gallup Organization, ``Pessimism About Crime Is Up, Despite
Declining Crime Rate,'' October 23, 2003.
\2\ The Washington Post/Kaiser Family Foundation/Harvard
University, ``A Generational Look at the Public: Politics and Policy,''
October 2002.
\3\ For further information see: AARP, The Policy Book: AARP Public
Policies 2001. Chapter 13, p. 19.
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The Federal Bureau of Investigation (FBI) 2002 Uniform
Crime Report (UCR) figures, however, suggest that the fears of
many of these Americans may be exaggerated. Five- and 10-year
trend data from the 2002 (UCR) showed that in 2002 the Crime
Index \4\ was 4.9 percent lower than the estimate from 1998 and
16.0 percent below the 1993 estimate. The 2000 findings of the
Bureau of Justice Statistics' National Crime Victimization
Survey (NCVS) showed a decline in the violent crime rate by 15
percent and the property crime rate by 10 percent. In August
2000, the Bureau of Justice Statistics released a report,
Criminal Victimization 1999, Changes 1998-99 with Trends 1993-
99. According to the report, ``in 1999, the rate of violent
crime victimization of persons ages 65 or older was 4 per
1,000'' and in 2000 the rate was 3.7 per 1,000. In addition to
the continued decline in the crime rate, statistics show that
the elderly, in comparison to younger Americans, are less
likely to experience a violent crime.\5\
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\4\ The FBI's Uniform Crime Report's Crime Index is composed of
selected offenses used to gauge fluctuations in the volume and rate of
crime reported to law enforcement. The Crime Index includes the
following offenses: Part I crimes, which includes violent crimes
(murder, nonnegligent manslaughter, forcible rape, robbery, and
aggravated assault) and three property crimes (burglary, larceny-theft,
and motor vehicle theft). See the U.S. Department of Justice, Federal
Bureaus of Investigation, ``Crime in the United States 2001 & Crime in
the United States 2002.''
\5\ According to the Bureau of Justice Statistics, Victim
Characteristics:
In 2000 persons age 12 to 24 sustained violents 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.bjs/cvict--
v.htm].
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While these data appear to provide encouraging news,
special problems may arise when an older person falls victim to
crime. The impact of crime on the lives of older adults may be
greater than on other groups due to 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.
2. Legislative Response
There were several hearings held in the 107th Congress on
elder victimization. The Senate Special Committee on Aging held
a hearing that focused on crimes committed against the
elderly.\6\ The Senate also held a hearing on financial
exploitation of seniors.\7\
---------------------------------------------------------------------------
\6\ U.S. Congress. Senate Special Committee on Aging.
\7\ U.S. Congress. Senate Special Committee on Aging. Identity
Theft: The Nation's Fastest Growing Crime Wave Hits Seniors. 107th
Cong., 2nd Sess., July 18, 2002; and U.S. Congress. Senate Special
Committee on Aging. Financial Predators and the Elderly. 107th Cong.,
2nd Sess., May 20, 2002.
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Several pieces of legislation were introduced in the 107th
Congress, however, none of them were enacted into law. The
Elder Justice Act (S. 2933) would have established an Office of
Elder Justice in the Department of Justice.\8\ The act would
have created a director position that would have reported to
the Attorney General and would have been charged with
developing a program for elder justice. It would have also
created a senior counsel position that would have been
responsible for coordinating elder justice activities among the
Office of Elder Justice and other relevant offices within DOJ.
The bill was referred to the Senate Committee on Finance and no
further action was taken.
---------------------------------------------------------------------------
\8\ The same piece of legislation, The Elder Justice Act, has been
reintroduced in the 108th Congress (H.R. 2490).
---------------------------------------------------------------------------
The Seniors Safety Act of 2002 (S. 2240), among other
things, would have required the U.S. Sentencing Commission to
review and amend, if appropriate, the sentencing guidelines to
include the age of the victim as one of the criteria for
determining whether a sentencing enhancement is appropriate.
The bill was referred to the Senate Judiciary Committee and no
further action was taken.
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 ``ceberg'' 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
found that two-thirds of abusers were adult children or
spouses.
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.\9\ 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.
---------------------------------------------------------------------------
\9\ For further information see: [http://research.aarp.org/econ/
beyond--50--econ.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.'' \10\ 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.'' \11\ In one case, the FBI reported a fraudulent
telemarketing scam wherein nearly 80 percent of the calls were
directed to older consumers.\12\
---------------------------------------------------------------------------
\10\ See: [http://aarp.org/fraud/1fraud.htm].
\11\ See: [http://www.ojp.usdoj.gov/ovc/assist/nvaa2000/academy/N-
14-ELD.htm].
\12\ See:[http://www.aarp.org/fraud/1fraud.htm].
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Efforts have been in place to combat elderly victimization
since the late 1980's. 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.\13\ The Federal
Government provides some funding for TRIAD programs through the
Bureau of Justice Assistance and the Office of Victims of
Crime.
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\13\ For additional information on TRIAD programs, visit AARP's
website at [http://www.aarp.org].
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Ironically, as older Americans increase in number 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,
accessibility to older victims by con artists 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.
2. Legislative Response
In 2002, the Senate Special Committee on Aging held
hearings on identity theft and financial exploitation among the
elderly; and in 2001 the House Judiciary Committee held a
hearing on crime against the elderly.\14\ Additionally, several
pieces of legislation were introduced in the 107th Congress
that would have increased penalties for fraud. The Seniors
Safety Act of 2002 (S. 2240), among other things, would have
amended the Federal criminal code to increase penalties for
fraud that resulted in serious injury or death and would have
set penalties for individuals found guilty of fraud in
association with retirement arrangements. The bill also would
have directed the Federal Trade Commission to establish
procedures regarding telemarketing fraud. Another bill
introduced in the 107th Congress, the Telemarketing Victims
Protection Act (H.R. 232), would also have directed the Federal
Trade Commission to establish procedures regarding
telemarketing fraud. Both bills were referred to the relevant
committees and no further action was taken.
---------------------------------------------------------------------------
\14\ U.S. Congress. Senate Special Committee on Aging. Identity
Theft: The Nation's Fastest Growing Crime Wave Hits Seniors. 107th
Cong., 2nd Sess., July 18, 2002; U.S. Congress. Senate Special
Committee on Aging. Financial Predators and the Elderly. 107th Cong.,
2nd Sess., May 20, 2002; and U.S. Congress. House Judiciary Committee.
Crime Against the Elderly. 107th Cong., 1st Sess., July 11, 2001.
---------------------------------------------------------------------------
Although not focused exclusively on the elderly, the
Identity Theft Penalty Enhancement Act of 2002 (S. 2541), among
other things, would have required a sentence of imprisonment
for individuals who falsely use, transfer or possess another
person's identity in the course of committing a felony. The
bill was favorably reported out of the Senate Judiciary
Committee on November 14, 2002.
SUPPLEMENTAL MATERIAL
List of Hearings and Forums Held in 2001 and 2002
The Senate Special Committee on Aging, convened 27
hearings, 9 field hearings, and 1 forum during the 107th
Congress.
HEARINGS
March 29, 2001--Healthy Aging in Rural America
April 19, 2001--Modernization of Social Security and Medicare
April 26, 2001--Assisted Living in the 21st Century: Examining
Its Role in the Continuum of Care
May 3, 2001--Technology and Prescription Drug Safety
May 17, 2001--Family Caregiving and the Older American Act:
Caring for the Caregiver
June 14, 2001--Saving our Seniors: Preventing Elder Abuse,
Neglect, and Exploitation
June 28, 2001--Long-Term Care: Who Will Care For The Aging Baby
Boomers?
July 18, 2001--Long-Term Care: States Grapple With Increasing
Demands and Costs
July 26, 2001--Medicare Enforcement Actions: The Federal
Government's Anti-Fraud Efforts
September 10, 2001--Swindlers, Hucksters and Snake Oil
Salesman: Hype and Hope Marketing Anti-Aging Products
to Seniors
September 24, 2001--Long-Term Care After Olmstead: Aging and
Disability Groups Seek Common Ground
December 10, 2001--Straight Shooting on Social Security: The
Trade-offs of Reform
February 6, 2002--Women and Aging: Bearing the Burden of Long-
Term Care
February 27, 2002--Patients in Peril: Critical Shortages in
Geriatric Care
March 4, 2002--Safeguarding Our Seniors: Protecting the Elderly
From Physical and Sexual Abuse in Nursing Homes
March 14, 2002--The Economic Downturn and Its Impact on
Seniors: Stretching Limited Dollars in Medicaid,
Health, and Senior Services
March 21, 2002--Broken and Unsustainable: The Cost Crisis of
Long-Term Care for Baby Boomers
April 10, 2002--Offering Retirement Security To The Federal
Family: A New Long-Term Care Initiative
April 16, 2002--Assisted Living Reexamined: Developing Policy
and Practices to Ensure Quality Care
May 20, 2002--Schemer, Scammers, and Sweetheart Deals:
Financial Predators of the Elderly
May 23, 2002--Settling for Silver in the Golden Years: The
Special Challenges of Women in Retirement Planning and
Security
June 20, 2002--Long-Term Care Financing: Blueprints for Reform
July 9, 2002--Buyer Beware: Public Health Concerns of
Counterfeit Medicine
July 18, 2002--Identity Theft: The Nation's Fastest Growing
Crime Wave Hits Seniors
September 4, 2002--The Image of Aging in Media and Marketing
September 19, 2002--Disease Management and Coordinating Care:
What Role Can They Plan in Improving the Quality of
Life for Medicare's Most Vulnerable?
September 26, 2002--Faces of Aging: Personal Struggles to
Confront the Long-Term Care Crisis
FIELD HEARINGS
May 30, 2001--The Vaccine Vacuum: What Can Be Done To Protect
Seniors?, Portland, OR
August 9, 2001--Our Greatest Generation: Continuing A Lifetime
of Service, Indianapolis, IN
August 27, 2001--The High Cost of Prescription Drugs, Jefferson
City, MO
February 11, 2002--Emergency Preparedness For the Elderly and
Disabled, New York, NY
July 2, 2002--High-Tech Medicine: Reaching Out To Seniors
Through Technology, Pocatello, ID
August 8, 2002--Retirement Security and Corporate
Responsibility, Indianapolis, IN
August 15, 2002--Healthy Aging and Nutrition: The Science of
Living Longer, Baton Rouge, LA
August 15, 2002--Expanding And Improving Medicare: Prescription
Drugs: An Oregon Perspective, Beaverton, OR
August 23, 2002--Planning For Retirement Promoting Security and
Dignity of American Retirement, Boise, ID
FORUMS
May 29, 2001, May 30, 2001, May 31, 2001, and June 1, 2001--The
National Family Caregiver Support Program Its Impact on
Idaho