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Benefits and Beyond, C. 12

Gov’t Sponsored and MandatedThomas E. Murphy

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A safety net for retirement and health

Mandated Health Care

2014

Fit?

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What is the life event? What is the benefit? How does one become a participant? How and when does one become eligible for

a benefit? How is the plan designed? How is it funded? What are some contemporary issues?

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Social Security . . .

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A defined benefit plan Funded by payroll taxes (6.2% from

employer and employee – and 1.45% for Medicare (FICA)

Cap on income that can be taxed ($106,800 in 2009).

Monies collected are not invested – a “PAYGO” system.

Up to February 2010, there was a surplus - taxes did cover benefits – no longer.

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Social Security . . .

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By 2042 (or earlier) the plan will be unable to pay benefits. Converting bonds will no longer be sufficient to cover obligations.

Problem: Baby boomers, declining current birth rate, fewer making contributions, and longevity.

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Social Security . . .

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Work in covered employment. At least 40 quarters Earn at least $870 per year.

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Social Security - Participation

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Based upon average life time earnings Earnings are indexed – Average Indexed

Monthly Earnings (AIME) These are then divided into three brackets

of earnings formed by applying “bend points.”

The third bracket is capped by the maximum earnings subject to the tax.

Each bracket is then multiplied by a different percentage and the three products are totaled to arrive at the Primary Insurance Amount.

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Social Security - Benefit

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PIA will be the sum of: (a) 90 percent of the first $744 of his/her average indexed monthly earnings, plus (b) 32 percent of the average indexed monthly earnings over $744 and through $4,483, plus (c) 15 percent of his/her average indexed monthly earnings over $4,483.

Up to maximum earnings subject to SSA tax ($106,800).

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Example of “Bend Points”

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(http://www.ssa.gov/OACT/ProgData/retirebenefit1.html)

Check this out and see how it works! Would changing the AIME represent an

opportunity to “reform” SSA benefits? How? See the steps in the calculation at pages

357-358 in the Text.

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Average Indexed Monthly Earnings

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The PIA is actuarially adjusted based upon when the participant chooses to retire.

The earliest retirement date is age 62. Originally, normal retirement was 65. This

has been extended for persons born after 1941.

For example, a person born in 1942, cannot retire at full benefits until he is 65 and 10 months. Extension goes up to age 67.

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Social Security . . . When?

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If one retires early under SSA, there is a lifetime actuarial reduction; (20% at 62 for those whose full age would be 65)

But also, if he earns income, his benefit will be reduced by $1.00 for every $2.00 earned above the income limit of $12,960.

All SSA benefits are adjusted after retirement with periodic COLAs.

If one chooses to delay benefit beyond normal age, benefit will be increased by as much as 8% for each year up to age 70.

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Social Security . . .Adjustments

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So, should you retire at age 62?

Life expectancy relevant?

See also Art Jones Vignette at pages 355 and 359

Multiply years between age 62 and age 66 times the actual benefit received.

How long will it take to make up this number if he had chosen a “full age retirement?”

What about offsets?

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Persons receiving full age retirement and earning above certain limits, must pay taxes on up to 85% of their SSA benefits.

There are no reductions in benefits attributable to wages after full age retirement is reached.

All amounts of early retirement are subject to ordinary income taxes

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Social Security . . .Adjustments

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What are criteria one should consider in taking early retirement?

Would it matter what age you took early retirement?

See pages 359-360.

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Can you come up with a “rule?”

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What are the advantages of deferring retirement under SSA?

What if Joe is born in 1942, and “Full Age” is 65 and 10 months. Joe delays until age 70 and 10 months? (fn. 16, 359)

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Query

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What if your father’s birth date places him in the age 67 Full Age Retirement bracket for SSA?

His sister is older and her Full Age Retirement is 65 years under SSA.

They both want to retire at age 62. Who will have the higher actuarial

reduction? Explain.

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Query:

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Survivor Children Spouse Disabled Excessive Fatigue

after an outing . . .

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Social Security . . . Other benefits

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The Social Security Crisis

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What factors would you use in calculating?

What’s your formula? Assumptions?

Opportunity costs? See footnote 7 at

page 357.

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Is SSA a Good Deal- Past and future?

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Replacement income percentage – higher for lower paid workers.

High dependency – 65% depend on SSA benefit for 50% of their retirement income.

Declining birth rates and the “Dependency Ratio” (ratio of younger than 18 and older than 65 to those between these ages)

In the U.S. it is 5:1. By 2030 it will be 3:1. In Japan by 2030, 1 worker supporting 2 retirees)

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Social Security - Issues

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So, the SSA system is no longer taking in more on a current basis than it is paying out. This was supposed to occur in 2018, but it just happened. SSA will not be able to pay benefits (only 75% of promised) by 2042.

Question: what can be done to fix this? Most developed countries have the same

SSA structure and are facing the same funding crisis.

Get out your DBP tool box!

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Social Security Issues

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Think like an actuary!

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What impact will it have on the SSA deficit?

Should general tax revenue be considered as a source?

Impact of failure. Policy issues?

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Note: calculate impact of each!

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Increase payroll taxes or remove caps What would it take? Reduce benefits by further extending

retirement age. What would it take and with what result?

This would result in additional actuarial reductions for early retirement.

Change how the AIME is calculated Means testing

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SSA Reform . . .

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How would changing “bend points” reduce the costs?

What about changing or limiting annual COLA increases?

Should we look at entire pension landscape to make a determination as to the optimal reform choice?

See discussion at pages 363- 365, and 366 - 368.

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Query:

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Invest fund assets in capital markets (Problem?)

Personal accounts (Chile, Sweden, Bush) Change to a nominal account where the

participant directs investments and receives an annuity at retirement.

Government guaranteed floor benefit? Re-evaluate SSA to be a supplemental

benefit as originally intended.

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SSA Reform . . . Or . . .

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Bush Reform: Could A receive more?

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http://www.heritage.org/Research/Reports/2005/04/The-Bush-Plan-To-Reform-Social-Security-Case-Studies-from-the-Heritage-PRA-Calculator/

A must earn more than 3% (annually) on his PIA.

How does this help the SSA financial crisis? Check out: www.socialsecurity.org (Cato

Institute) or: http://www.socialsecurity.org/catoplan/

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Check these out:

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Couple took their SSA contributions and invested in capital markets between 1965 to 2009 (retirement).

Account: $900,000 Earning: 6.75% Include market

drop year.

Earnings for SSA, would have been 1.5% to 0% had they stayed in System.

This is a gap of 75%. Capital markets are

used to grow most pension funds. (See: WSJ, Shipman, 10/27/10 p A17)

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Private Accounts

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Gov’t. Health Care - Medicare

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Employer sponsored retiree health care is disappearing as a benefit.

This covered ages 55-65, and then a Medicare supplement.

Persons with Medicare are expected to pay over $250,000 in out-of-pocket costs for their health care.

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Note – some policy issues

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Health care for those over 65 – an entitlement program

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Persons who are participants in the Social Security retirement system are “covered.”

A person who qualifies for a SS retirement benefit – including age 62 early retirement --is eligible to claim benefits when he or she reaches age 65, regardless of his full age retirement.

Go to Vera Vignette at page 369

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Medicare – coverage and eligibility

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A basic indemnity plan.

Most of same cost sharing features – deductibles, co-pays, premiums. (fn. 53, 371)

Financed by Medicare payroll tax.

Part A – covers hospital care and there is no premium.

Part B – covers doctor care with “means adjusted” premium.

Part C – is supplemental health insurance that can be purchased by participant.

And Part D is “drug plan.”

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Medicare – plan design

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Part D is the prescription drug plan – a “stand alone” financed by Medicare, participant premiums and co-pays. Medicare does not administer the plan although it does set standards. (See: Terranova at page 373 and Max at page 374.)

Medicare Advantage Plans - a TPA assumes all of the responsibilities under A,B,C, and D. The premium is paid to Medicare and is shared with the TPA. Include PPOs, HMOs.

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Medicare – plan design

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Medicare – Part D coverage gap

Participant Must Pay 100%Of his own costs Until . . . . (Note: this will change with H.C. Reform Law)

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The plan is approaching bankruptcy in 2019.

The Dartmouth Study – inappropriate care Health Reform law is designed to take $550

billion out of budget. (Eliminate fraud and abuse and lower provider reimbursements)

Some providers are declining to take Medicare patients.

There is real threat of rationing.

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Medicare – Some Issues

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Increase taxes (need 122% increase)

Reduce benefits (need 51%)

Reduce reimbursements to providers

Prospective payment system

Introduce value based market reform which will increase quality and reduce costs.

Pay for bundled services.

Extend it to everyone or to early retirees whose employers do not provide health care.

Risk adjusted reimbursements

Gov’t uses leverage to reduce reimbursements and also Rx prices.

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Medicare Reform . . Ideas!

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Will these changes cause “cost shifting?”

What about “rationing?”

How could this be avoided?

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Query:

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What are they?

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Mandated Benefits

AffordableHealth Care Act of

2010

HIPAA

COBRA

FMLA

USERRA

See my Blog!

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What are the life events?

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Is wife’s employer covered by COBRA? If so, John must notify ex-wife’s employer

within 60 days of his intent. He would be entitled to 36 months of

continued coverage. He must pay 102% of full premium. Unless he is unemployed, in which case he

must pay 35%.

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COBRA – the statutory framework

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Query? COBRA after PPACA?

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Query: What is future of HIPAA?

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Iraq and Afghanistan . . .

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My Army reserve unit is called up!

Job protection - Let’s get back to work.

What happens to my full time job?

Will I be able to return to employment?

How long can I be on activated duty or deployment before I lose my job rights.

What job do I get when I return?

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To minimize the employment disadvantages of a person who must be absent from his civilian employment to serve his or her country in uniformed services.

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USERRA Uniformed Services Employment

Employment and Re-employment Rights Act of 1994

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Applies to active duty, training, and disaster assistance.

Uniformed services include all military branches as well as National Guard and Public Health Service

Insures re-employment rights, non-discrimination, and benefit continuation

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USERRA

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Maximum cumulative period of absence is 5 years, but there are numerous exceptions for this: involuntary extensions of duty, continued service while at sea, war, and critical missions.

No protection if dishonorable or less than honorable discharge.

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USERRA

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Must report back to work within specific time limits: 1 to 30 days, 1 day; 31 to 180 days, 14 days after completion; service more than 181 days, 90 days after completion.

Returning late subjects employee to employer’s rules on absence.

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USERRA

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Employer must promptly re-employ. Upon return to work, the “escalator

principle” may be applicable if employee is qualified. (seniority = passage of time)

Employer must reasonably “accommodate” those returning with disabilities.

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USERRA

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Pension rights are treated as “seniority” and no “breaks in service,” for vesting credit and benefit accrual.

DCP’s treated differently. Why? Vacation: does it accrue during absence? What about health benefits?

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USERRA

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Health care continuation if normal premiums are paid; provided leave is 30 or less days.

If longer, then COBRA applies. No waiting period for coverage upon return. Only “Just cause” termination permitted up

to one year after return from service.

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USERRA

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USERRA

What would you do? The family is covered.

Armed forces makes health care plan available to dependents of reservist.

Some employers are more generous than the law requires, especially with benefits.

What are the risks here?

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Joe, a National Guardsman, is called to active duty in Iraq. He has been employed as an apprentice electrician. His employer offers an HDHCP with an HSA and a Defined Benefit Pension Plan. He returns from active duty after one year. He has a wife and 2 children

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USERRA HYPO

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When does he have to return to work?

What are his reemployment rights?

How will his benefits be treated?

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Issues for Joe?Hey Joe!

Get home!

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I really don’t feel good today.

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FMLA The Family and Medical Leave Act of 1993

When? Pay, coverage, limits

To provide time off from work without the risk of losing one’s job when: the employee is seriously ill, is a new parent, a member of his immediate family is seriously ill, or due to military deployment of family (see below)

There is no requirement for pay. The employee must have worked for at least one year. Employer must have 50 employees

The total leave cannot exceed 12 weeks in one year..

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Now FMLA applies to eligible employee to take care of close family member who was injured while serving in the military. The term is 26 weeks.

Also, when there is short notice of deployment and exigent circumstances arise, the eligible employee whose spouse, child, or parent is deployed may take up to 12 weeks leave to these related obligations.

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FMLA – new (2008) changes

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12 weeks for “qualifying exigency” arising because employee’s spouse, child, or parent has been called to active duty.

Does not apply to family of military members in regular armed forces.

Includes: 1) short-notice deployment (limited to seven calendar days from date notified of deployment); 2) military events and related activities; 3) childcare and school activities; 4) financial and legal arrangements; 5) counseling; 6) rest and recuperation (limited to five days of FMLA leave); 7) post-deployment activities; and 8) additional activities (must be agreed to by both employer and employee).

Read the fine

print!

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What is “serious health condition?” Hospital, incapacity, chronic condition, continuing treatments, or condition lasting three or more days, and certain minimum doctor visits are required.

Applies to immediate family care. Can be required to use vacation or other

paid leave. Intermittent care is OK, but not for parental

leave.

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FMLA

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Employer can verify illness of employee but only agent can check illness of dependent.)

Paid Leave (partial day sick leave, vacations)

Bonuses/Perfect Attendance can be denied even if leave was FMLA

Right to Request Recertification every 30 days

Fitness-For-Duty Certification – the employee must be advised in advance of this requirement.

Light Duty Not FMLA Leave!

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Read the fine print

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FMLA

Some exceptions Now let’s practice . . .

Employer can refuse to reinstate highly paid “key” employees if prolonged leave will seriously disrupt operations.

Are “No-fault“ attendance policies dead?”

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Employer has “no fault” attendance policy allowing discipline of employee who misses more than 15 days over a 6 month period. Employer is not concerned about the reasons for the absence. The policy was enacted due to serious attendance problems that significantly increased the cost of operations.

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FMLA - HYPO

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Joe has been absent the following days: 3 in September due to the “flu.” Then he missed 10 days in October due to “Shingles.” In November he missed 7 days due to a sprained ankle sustained while playing basketball with his family.

What are the issues here and how would you resolve them?

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FMLA HYPO

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Coverage? Is Joe protected? Has he violated policy? Does policy comply with FMLA? What will be likely outcome if he is

discharged?

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FMLA HYPO

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Legislating Work-Life Balance