f14

f14

Have you ever thought about retirement? What kind of income you will need? How you will provide that? Or do you assume Social Security will be enough? -- it wont.

 If you are like me when I was in my 20's, 30's and even 40's I had not given it much thought. I did not take my retirement seriously until I was nearly 50 years of age and had to scramble to make sure I had enough to keep my standard of living when I retire. Like most boomers (cohorts born between 1946-1964) I never really thought I would get old. But here it is. I am nearing retirement and while I will be able to retire, I had to save more of my money and received less interest. I was not able to take advantage of compounding interest that makes your savings grow over many years.  Here is how Google describes it

" the interest you earn each year is added to your principal, so that the balance doesn't merely grow, it grows at an increasing rate - is one of the most useful concepts in finance".

There are three main sources of income when one retires often referred to as the "three-legged-stool. Social Security, retirement plans from employers, and what you save and investment. The book does a pretty good job of covering the basics of each of those legs but I want to highlight and clarify some of the issues.  I will start with the Social Security Story.

Financial Status of the Elderly: To understand the Social Security Story, it might be good to go back to chapter one lecture and review Modernization Theory.  If you recall, historically elders were the keepers of the assets and children relied on both  their parent's craft and assets to be passed down to them. In return, the elderly relied on the youth for their strength and as they became frail, old-age care.  Once industrialization occurred that dependence bond was broken.
Younger people could now earn income in factories and city jobs.

1. The Social Security Story

1. Life Before Social Security
    
   It is important to remember what life was like before Social Security

History : Here are two sites to help you understand the history of Social Security. Just skim them so you have some idea of how the program came to be. I like the second site more. If you don't have audio abilities, I have listed a link for alternative text file. 

1. This site covers the history

   
   Click Here to hear the history of Social Security. 
   http://www.ssa.gov/history/
   
   Alternate text file. - Just for fun,  you might want to read also because it is much more in depth.
   http://www.ssa.gov/history/briefhistory3.html

Extra Credit  3 points: Email me (don't post it or it will ruin it for everyone else) with the name of the first persons who received U.S. Social Security benefits ( the first regular benefits and the first payment). How much were they?  You need two names here so read the question carefully.  Be sure to put Psych 374 or gero302 extra credit in the subject line.

_______________________________________________________________________________________________________________________________________

We pick up the Social Security story at the stock market crash of 1929. The crash created a great economic depression. The results were massive unemployment, depressed stock prices, lost fortunes, bankrupt companies and deflated prices.

Local governments encountered staggering welfare burdens, because up to 60% of Americans were unemployed.

Many people were homeless, medical care was sparse and malnourishment and starvation were widely reported.

Receiving support from the working and middle class, President Roosevelt (1932), created a variety of programs that propelled the Federal Government, for the first time, into the social welfare arena. These programs provided economic relief, jobs, security, and food to Americans.

In 1935, he passed the Social Security Act, which was originally conceived as a measure to provide pensions to retired workers.  Social Security was later expanded to provide benefits to family members of disabled or dead workers .

This is a great video clip of Roosevelt signing Social Security into law. http://www.ssa.gov/history/mpeg/fdrbig.mpg (it requires a Media Player and takes a few minutes to load, so be patient. It's worth the wait. (19.7 meg)

 

Indexing of Social Security or How to Combat Inflation.

The financial status of the elderly improved with the advent of Social Security (1935) and later post World War II pension programs. Most historians agree it was the war, not Social Security, that got the U. S. out of the depression. Still, many credit Roosevelt's new programs.

America was experiencing a huge pent-up demand for products after WWII. The country had been at war, and families had not been growing. Production of new homes, cars, electric appliances and other goods that drive the American economy had been at a stand still. 

When the war ended, and the men came home, a baby boom (the baby boomers) occurred along with demand for the products that growing families need.

A strong economy created higher prices and, thus, the devaluation of Social Security benefits (remember, when inflation goes up, the value of money goes down because it costs more for the same goods). 

There was a stark contrast between the affluent society of the working class (who had unions, pensions, and benefits and could buy the first suburban homes, TV's, and washing machines) and the income problems of older people. Again, there was rising poverty among the elderly.

Almost a quarter of the elderly were still in poverty, and that number was increasing rapidly as the economic  growth and earnings of the 1950’s continued. Inflation continued to devalue the amount that Social Security benefits paid to retirees.

How is Inflation Determined?
Historically inflation was determined by the cost of a market basket of goods (e.g. bread, milk, eggs, etc). When these costs go up for a consumer, inflation (cost of living) is said to have occurred. The government actually  purchases selected items to determine changes in the economy.  http://www.investopedia.com/university/inflation/inflation2.asp

Because the economy was strong, Congress began periodically revising Social Security benefits upward to compensate for inflation. NOTE: when the economy is strong the government collects more taxes and thus has more money to spend.  

Beginning in the 1970’s,  indexing or increasing Social Security payments to match the cost of living increases (the cost of a market basket of goods) was instituted without any increase in payroll taxes. These increases were called "Cost of Living Adjustments "or COLA’S.

As a result, between 1950 & 1991, the poverty rate among the elderly dropped from over 52% to just 11%.

Although never intended to be the sole source of retirement income, for more than 50% of the elderly, Social Security is their sole source of income.

Social Security Today

A. There are five Social Security Trust Funds

1. Old Age and Survivors Insurance (OASI) - this is the program that provides check to retirees
2. Disability Insurance
3. Hospital Insurance Trust Fund ( Medicare Part A)
4. Supplementary Medical Insurance ( Medicare Part B)
5. Drug Plans( Medicare part D)
   

We will discuss the Old Age and Survivors Benefits (OASI) portion here and discuss Medicare benefits later.

1. OASI

When you work, you pay taxes (FICA) into Social Security (based on your earnings), and when you retire or become disabled you and your family members collect monthly benefits (based on your contributions). Thus the higher your wages, the higher your benefits.

Your portion of the payroll tax is 7.65% of your gross earnings (if you are not self-employed). Your employer matches that amount for a total of 15.3% of your gross earnings being paid into the Social Security Trust Fund.  Of your 7.65%:

5.30% is used for retirement and survivors benefits

1.45% for Medicare (the medical insurance program of Social Security)

The Medicare program is in real trouble. Read this http://www.cdc.gov/nccdphp/aag/aag_aging.htm

.90%   for Disability Insurance 
Total 7.65%

This amount is matched by your employer (unless you are self-employed, then you pay both portions or, 15.3%) up to a maximum earnings in 2010 of $106,800. After you earn that amount you do not have to pay any more Social Security Tax for that year. 

Check out your handout  
Social Security – How You Earn Credits

 Trust Fund Outlook  

1. How Social Security is Funded

Since 1983, the Social Security Trust Fund  has operated on a "partially pre-funded" basis, meaning future benefits are anticipated and enough taxes are collected to partially fund future benefits.  For this reason the baby boomers paid a higher social security tax rate than their parents did. They are in effect paying for both their parents and their own retirement.

Historically, the trust fund was funded on a "pay as you go" basis. Taxes and benefits were adjusted so that there was no reserve accumulated. Under this system, the elderly were not supported by the payments they made into the fund, but by the current taxes paid by younger workers. This is essentially how Social Security was structured from the 1950-1970’s.

When the large number of baby boomers become eligible to receive benefits, there will be only two workers for every senior citizen collecting benefits, compared to a 15 to 1 ratio when the program first began (Do you remember what the dependency ratio is? If not, go back and look at Lesson Two).

The U.S. Government has foreseen the impending crisis and has taken some measures to compensate.

A Social Security savings account was created in 1983.

The creation of "pre-funding" allows the fund to have a surplus. Taxes collected are more than benefits paid out. Theoretically, the surplus is kept in reserve to fund the program when the workforce to benefit recipient ratio decreases.

This method of funding the Social Security system shifts some of the retirement burden from future workers to the large currently-working group itself.

Other steps (besides increasing the age of full retirement and pre-funding the program) that were taken to keep the fund solvent include the creation of a penalty for earnings over an allowed amount when receiving benefits. Recipients were taxed

$1.00 for each $2. earned if under age 65

$1.00 for each $3. earned if 65-69

After age 70, there was no penalty

This penalty tax was repealed by President Clinton in hopes of keeping workers in the workforce longer and to assist them in earning extra cash after retirement. It was anticipated that this would save the Government money, because retirees would be more self-sufficient and not dependent on other Government programs, and they would continue to pay employment taxes, adding to the social security fund.

2. So Why Is The Program In Trouble?

Originally it was believed that pre-funding the system would keep Social Security solvent for the next 75 years, but the predictions were not accurate.

Government borrowing resulting from large budget deficits outside of Social Security  undermines this goal. Social Security funds have been used to meet the Federal deficit . Also, the current economic situation (high unemployment rate) has forced many people to retire earlier than expected.

 An article that appeared in the San Francisco Examiner 6/97 entitled "Don’t Blame the Elderly" explains the Regan Years and his "Star Wars"  spending.  Regan ran huge Federal deficits as spending on Star Wars expanded. Congress was upset at the growing national debt, and Regan needed to convince Congress that he was not overspending.  Each year's deficits were creating a huge Federal Debt.

The Social Security Trust Fund (that's the lock box Vice President Gore talked about) historically was a trust fund and separate from the US treasury. Regan  combined this trust fund with general revenue fund to make it look like the U.S. Treasury was actually taking in more money than it was.

To put this into perspective, assume you take your child's piggy bank and add it to your weekly income. The family has more money to spend, but each month as you borrow and spend your child's allowance, you are running up a debt with your child. By spending more than you have each month, you create a shortage. These monthly shortages create a family debt.

The Government has borrowed so much of the Trust Fund that each of us would have to be taxed in order to repay it. Some of the money President Bush returned to Americans in his tax plan in 2001 was money many say was owed to the Social Security Trust Fund. 

Using an analogy again, let's assume you owe your child $2,500 from borrowing out of his piggy bank each month. One month you find that you did not spend as much money as you usually do and you earned a bit more income than usual. Should you repay your child's piggy bank? Or spend the extra cash? Some say Bush spent the piggy bank money.

Here is a good site to help with balance the media's portrayal of the system ;http://www.ssa.gov/oact/progdata/fundFAQ.html

3. The Outlook for Social Security  Depends on the Growth of the Economy.

When the economy grows, workers earn more money, pay more taxes, making more funds available to fund current retirees. But, economists claim that the Social Security  program will go bankrupt by the year 2029.

"According to CNN http://money.cnn.com/2005/02/02/retirement/reality_check_stofu/ SS will not actually go bust as we are being told. By 2042, using projections from the Social Security trustees, or by 2033 if we follow the Congressional Budget Office, the system will be unable to pay in Full their current projections. The numbers actually reveal the system will be able to pay 75%-80% of their future projection.

According to one State representative, the whole program is still the most successful program the government has ever established. With only minor adjustments in the next 37 years, the system will remain intact.  http://www.ncpssm.org/Portals/0/NCPDocs/truth_booklet_2012.pdf

"If the current projections do hold and nothing is changed, the loss to someone 63 in 2042 would be about 27% cut from today's current numbers ( not taking into account inflation). If that person lived to 100, he/she would have a 33% cut to his/her benefits. This is according to the 2014 Trustee report." http://www.ssa.gov/oact/trsum/

 

Since 1960, the number of people 65 and over has increased by 100% in comparison with a 45% growth rate for the population in general.

The Trustee report does not support  the looming prediction that Social security will be gone. Instead they note a drop in the program followed by sustainability.

Social Security helped reduce poverty by indexing Social Security to the rate of inflation which improved the elderly financial status even more. Today, nearly 50% over the age of 65 would still be in poverty if not for Social Security.

Poverty Rates
What income level is considered poverty?
A single adult, in 2014 at the poverty level earns just a little over $11.600.00 per year. That  is about $966.per month . Could you live on that amount?  http://aspe.hhs.gov/poverty/14poverty.cfm

The poverty rate today is as follows:

We do know that the number of elderly poor is increasing as their retirement investments, pensions and social security payments decrease their monthly income. Many seniors relied on the value of their homes for retirement income or to finance their long-term-care needs. Because of falling housing prices and the inability to get loans for new buyers that resource is no longer available. This means many elderly are "stuck" in homes they can neither live in alone or sell. 

 Listen to an interview with Michael Hurd, director of the Center for the Study of Aging at the RAND Corporation. (MP3: 15 minutes) http://www.prb.org/journalists/webcasts/2010/recessionolderamericans.aspx

 Women- Financial Demographic

Older women typically lead lives much different than older men. They spend their lives caring for children and family and provide 75% of all caregiving in the United States. 

Women are more likely to have worked part-time or have gaps in their work histories. When they do work outside the home, historically they have not been as likely to be covered by an employer-sponsored pension.

Women make up three-fourths of all older Americans living in poverty. They are twice as likely as older men to be poor, yet their life expectancy is greater than that of men. 

Women suffer from discrimination in the workplace, especially in midlife and older. Women still earn about 70% of what men do. Women traditionally get low pay, inadequate or nonexistence benefits and few opportunities for advancement. Thus, they are far more likely to need public benefits as they age. 

Even though there are government programs that can provide cash benefits as well as assistance in paying for food, housing, health care and home energy costs, each year thousands of eligible women do not apply. Application processes and eligibility requirements can be complicated and confusing.

Do You Remember what it is called to be an older, minority woman?
This is referred to as triple jeopardy. The group with the highest risk of poverty. Here's why

1. In old age people live on fixed incomes with no chance to supplement it.

2. Women, because they live longer also often outlive their income, and, when they were of working age, their incomes were less than their male counterparts (women still make just $.70 to every $1.00 a man earns). This means less available for retirement savings.

3.Minority women have a poor work history in low-paying jobs, interruptions for caregiving and probably no pensions savings or retirement plan.

Based on data from current Population Reports, "Poverty in the United States: 2002."p60-229, Issued Sept 2003. U.S. Bureau of the Census
Here is a great link for more info http://www.aoa.gov/prof/Statistics/profile/2003/2003profile.pdf

 

IISecond Leg of the "Three-legged Retirement Stool"

Types of Retirement Plans from Employers

Defined Benefit
In your grandparents day most companies sponsored defined benefit retirement plans. That meant that each year they worked for a company they were guaranteed a set amount of retirement income.  Typically under these plans an employee did not have to fork out any of their own money (unless the plan included a matching funds program- for every dollar the employee invests the employer matches it).  According to CNN "Because defined benefit plans are more costly for employers than defined contribution plans,( explained below)  most of them have - you guessed it - scaled back dramatically or eliminated these plans altogether in recent years. If you still have a defined benefit plan at your company, consider yourself lucky".

Defined Contribution Plan/Investments

This type of retirement plan the employee invests their own money  like a 401(k) or a 403(b) called so because of the section in the in the Internal Revenue Tax Code that describes them.  There are a number of different codes that qualify for defined contribution plans. Different tax codes are used for corporations, non profits, schools,  IRA's, ROTH IRA's etc. You probably have heard some of these terms. If not just know they are different ways to save money for retirement by deferring or eliminating income tax). 

Their interest income is invested back into the plan until retirement (keeping more money in for that compounding interest). Their purpose is to allow people  to save more money for retirement by deferring the income tax until it is drawn out during retirement.  It is thought that this would be a way to make up the differences in what is needed during retirement and what Social Security pays (remember social security replaces just 43% of ones pre retirement income).

Most of these funds are invested in the stock market  by the funds manager as bonds, mutual funds or company stock (actually there are more than 100 different ways to invest) but most involve the stock market.

When one retires the interest income from these plans is drawn off to provide income. If the stock market is doing well and interest rates are high the plan provides more income.

If however the stock market crashes or is in a downturn when one retires the return on their investments is smaller thus reducing the retirement income.  The problem arises when a retiree ,relying on the income, suffers a market crash (reducing the interest the fund produces).  Many seniors lose needed income to survive.  Often they will need to   "dip" into the principle of those accounts to make up the differences between what interest is paying and what they need to live on.

"The growth of your money - and the size of your annual pension - is directly linked to stock market performance" http://www.thisismoney.co.uk/money/news/article-2022807/How-stock-market-crash-affects-pension-investments-job.html

III The third Leg of the Retirement Stool

Savings

In addition to the money you invest in tax deferred savings sponsored by employers most people need personal savings and assets. The largest of these savings is usually the family home.  It is not unusual for a senior to sell the family home when they need a higher level of care (say assisted living or a nursing home).

Other savings such as annuities, or stock investments can also help produce income when one retires.

In another class I teach we actually calculate our own retirement, we won't do that here. But there are many on line calculators available. Here is one from Charles Schwab.http://www.schwab.com/public/workplace/tools_and_resources/tools_and_calculators

V. Medicare

1. Medicare is that part of the Social Security Program that provides for health care. Most employers today do not provide health care for their retirees and Medicare will not pay all the of the cost. As noted before most seniors need to purchase a supplemental policy to cover the amounts not covered by Medicare.  One major hospitalization (such as a heart attack or stoke) could cost more than $100,000. Under current Medicare rules a senior would be responsible for more than $20,000 of that bill.
   

2. Eligibility for Medicare

One is automatically enrolled in part "A" if at age 65-67 you are also eligible for Social Security .

However, one must pay a monthly premium for Part B coverage. There is also the option of turning it down (unless you also enroll in a Health Maintenance Organization (HMO) discussed later).

One can also be eligible if he/she receives Social Security  disability, and, under certain conditions, your spouse, divorced spouse, or widow may be eligible when they turn 65-67 (based on their spouse’s work record).

If someone is not eligible under these rules he/she may be able to get Medicare by paying a monthly premium.

Under this rule, you can enroll in part "A" even if you did not earn work credits. You must be a legal citizen of the U.S. for a least five years before applying.

3. 3. What is Covered by Medicare? - It is important to realize that MediCare does not pay for nursing home care beyond a 21 day stay after a hospitalization. Many people believe their MediCare will cover long-term nursing home costs. It does not.

For each benefit period you pay:

Skilled Nursing Facility Coinsurance

4. Medical Insurance or Part B

Part B is purchased much like private insurance. If you want Part B, you must enroll in Part A.

Low income Medicare Beneficiaries can receive help with monthly premiums through a means-test program called Qualified Medicare Beneficiary (QMB).

The QMB  program is run by the Health Care Financing Administration and by the State Health and Human Services Depart.

Medical (Part B) insurance helps pay for doctor’s services, and many medical service and supplies that are not covered by Part A. (e.g. X -rays, ambulance services, outpatient hospital care).

Part B generally pays 80% of approved charges. The senior pays the other 20%

5.  What Medicare Does not Cover

6. Medicare Options /Managed Care Plans or HMO’s Medicare Part C

G. Medigap Insurance

Traditional "fee-for-service" Medicare coverage (Part A and Part B) provides basic health care coverage. As you have seen, it does not pay all medical expenses, and it does not pay for most long-term care.

Many people choose an insurance policy to fill in the gaps . This is often called Medi-gap.

It is difficult to summarize Medi-gap insurance. The Health Care Financing Admin. publishes a booklet with information on supplementing Medicare coverage. It’s called Guide To Health Insurance For People With Medicare (publication #HCFA02110) and is available from any Social Security office or by writing to:

Medicare Publications, Health Care Financing Admin

7500 Security Blvd.

Baltimore, Maryland 21244-1850

VI. Estate Planning ( for California Residents)

1. What is Estate Planning?
   

Return to: Orientation: Class Home Page     American River College: Home Page   
              E-Mail:       Instructor                Gerontology Program    Home Page