Social Security & Medicare
Social Security and Medicare are important government programs that provide income and assistance to a great number of Americans. Social Security is a critical safety net that helps people avoid poverty due to retirement, disability, or the loss of a loved one. Medicare allows people access to healthcare that could otherwise be financially ruinous or nonexistent. These programs, while popular, present a significant financial challenge to the entire nation. This article reviews the basics of each program and then moves on to discuss the financial challenges posed by each program.
Keywords Healthcare; Medicare; Retirement; Social Security
During the Great Depression, from 1929 to 1933, the U.S. economy declined by 4 percent annually, and personal income dropped by 50 percent. In 1934, President Franklin D. Roosevelt appointed the Committee onEconomic Security to investigate solutions to the economic turmoil and promised "a New Deal for the American people." The committee concluded that people of the country needed some protection from the misfortune that could not be wholly eliminated from the world. On August 14, 1935, Congress responded and Roosevelt signed the Social Security Act (SSA), declaring that it was "a law that will take care of human needs and at the same time provide for the United States an economic structure of vastly greater soundness."
Initially, the SSA covered only workers in commerce and industry and only provided retirement benefits, scheduled to begin in 1942, for workers aged sixty-five and older. In 1939, Congress moved the start date to 1940 and extended benefits to dependants of retired workers and to survivors of deceased workers. In 1950, Congress expanded Social Security mandatory coverage to include self-employed persons and gave state and local governments and nonprofit organizations the option to cover their employees. In 1983, Congress extended mandatory coverage to federal civilian employees and nonprofit employees, and prohibited withdrawal of any state or local government that had previously elected to cover their employees. Initially, Social Security covered 56 percent of the workforce; today it covers 96 percent (Pratt, 2011).
Social Security is a form of social insurance that requires gainfully employed people to pay taxes that fund benefits for the retired, disabled, and their dependants. Social Security is generally described as "pay as you go," because the benefits paid to current beneficiaries are financed by taxes paid by current workers; taxes are not saved to repay benefits when a contributing employee retires. While Social Security is often thought of as a retirement program, only two- thirds of the beneficiaries are retirees. The program includes retirement benefits, disability benefits, dependant benefits, and survivor benefits. These benefits are designed to work together to provide employees and their families with income when their regular source is interrupted by retirement, death, or disability. All benefits are determined according to the salary or wages covered by Social Security. Workers pay premiums or "federal insurance contributions." Those contributions are matched by employers, and the system pays benefits that a worker has earned by paying premiums. About 161 million Americans pay Social Security taxes. Each employee and employer pays 6.2 percent each for a total of 14.4 percent of their gross wages up to a maximum taxable base of $106,800 in 2010. Self-employed persons pay the entire amount themselves (Pratt, 2011).
The payroll taxes are paid to the IRS and divided between two trust funds: the Federal Old-Age and Survivor Insurance Trust Fund (OASI Trust Fund) and Federal Disability Trust Fund (DI trust fund) (together the OASDI). The OASI Trust Fund is used to pay retirement, survivor's and dependant's benefits and receives approximately 85 cents of every dollar of Social Security tax received. The DI fund is used to pay disability benefits and receives approximately 15 cents of every Social Security tax dollar. Less than one percent of the taxes collected go to administrative costs. The trust funds are part of the Treasury and are governed by a board of directors, composed of the Secretaries of Treasury, Labor, Health and Human Services, the Commissioner of Social Security, and two public trustees who serve for four-year terms (Pratt, 2011).
The OSADI Trust Fund is a series of accounting entries made by the United States Treasury Department. Benefits paid to Social Security beneficiaries are paid by the Treasury and coded as expenditure in the government's budget, and later debited from the trust fund. When Social Security payroll taxes are paid, the Treasury records those taxes as income to the federal government and as a credit to the trust fund. If trust fund revenues exceed expenditures, those excess proceeds are used to buy non-marketable government securities. The Treasury credits the trust fund with an increase in assets and also pays interest on those securities. The interest credited to the trust fund further increases its assets. The interest paid on the trust fund has no effect on the overall budget and is simply an intra-governmental transfer; the trust fund assets are like IOUs signed by the federal government. While the trust fund balance is positive, the Treasury has the legal authority to pay Social Security benefits. If the trust fund balance is zero, the trust fund becomes "insolvent"; the Treasury may still pay benefits, but those benefits cannot exceed revenues flowing into the Treasury and credited to the trust fund accounts.
Medicare, established in 1965 by the Health Insurance for the Aged Act (officially Title XVIII, an amendment to the Social Security Act), is a popular part of the United States healthcare system that provides premium-free health insurance for the elderly and disabled, and covers nearly everyone over the age of sixty-five. Medicare includes four programs, Parts A, B, C, and D. Medicare Part A, hospital insurance (HI), provides basic protection against the costs of in-patient hospital, related post-hospital, plant health services, and hospice care. Medicare pays part of those medical expenses, the beneficiary is responsible for deductibles and copayments, and nursing home care is generally not covered. Medicare Part A is funded primarily by a payroll tax that functions similarly to the Social Security tax. Employers and employees each pay tax equal to 1.45 percent of wages for a combined tax rate of 2.9 percent. However, unlike the Social Security tax, the Medicare tax is payable on wages without a dollar limit. Generally, any person over age sixty-five eligible to receive Social Security old age benefits is also eligible for Medicare Part A; even if that person is not yet receiving Social Security, typically because they may still be working. In 2012, Part A covered about 50 million people; 42 million were aged and 8.5 million were disabled.
Medicare Part B is a voluntary Supplementary Medical Insurance (SMI) program that covers medical expenses outside of Part A; for example, physicians' services, outpatient hospital services, home health care, physical therapy, and medical equipment. Part B coverage is typically available to anyone who is eligible for Part A, but unlike Part A, Part B requires the payment of a monthly premium. The premiums paid by beneficiaries under Medicare Part B are designed to meet 25 percent of the program costs. The remaining 75 percent is paid by the federal government from general revenues (Pratt, 2011). Part B premiums in 2013 were approximately $105 per month, an increase of more than $16 from the 2006 rate.
Medicare Part C, formerly known as Medicare+Choice and renamed Medicare Advantage in 2000, is an optional program for Medicare beneficiaries enrolled in Medicare Part A and B. Medicare Advantage offers increased coverage for expenses not covered under A or B. Medicare Part D is a voluntary prescription drug program created by 2003 legislation that became effective in 2006. Enrollees pay a monthly premium and annual...
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