[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
                           WASHINGTON : DC

For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512-1800  
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001



                       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

                              ----------                              

                               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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \1\ Howard N. Fullerton, Jr. and Mitra Toossi, Labor Force 
Projections to 2010: Steady Growth and Changing Composition, Monthly 
Labor Review, Nov. 2001.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

   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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------

          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.
---------------------------------------------------------------------------

                 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.
---------------------------------------------------------------------------

              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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

                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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------

                       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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------

                  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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------

           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.
---------------------------------------------------------------------------
    \22\ Mercer, p. 43.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \2\ Public Papers of the Presidents of the United States, Lyndon B. 
Johnson, Book II, Washington, 1965, p. 744.
---------------------------------------------------------------------------

                      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\
---------------------------------------------------------------------------
    \1\ Source: http://www.ed.gov/about/offices/list/ovae/pi/AdultEd/
aefacts.html (visited December 15, 2003).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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].
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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].
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \13\ For additional information on TRIAD programs, visit AARP's 
website at [http://www.aarp.org].
---------------------------------------------------------------------------
    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

                                  