NATIONAL REPORT FOR THE UNITED STATES by Frank J. Burianek and Robert J. Myers* This National Report for the United States of America deals with two major subjects -- Outline of National Retirement and Sickness Benefits and Current Consulting Issues. As a background, information is first presented about exchange rates, inflation rates, and average wages. EXCEANGE UTE At the beginning of July 1989, the exchange rate was u.k.~ 1 equals approximately U.S. $1.55. During the 1980s, considerable fluctuation in this rate occurred, varying from a low of U.S. $1.09 in 1985 to a high of U.S. $2.45 in 1980. INFLATION RATE Inflation, as measured by changes in the Consumer Price Index for All Urban Consumers, was at a relatively steady, low level following 1982 -- about 3-4% per year. This followed double-digit inflation in 1980-81 (13.6% and 10.3%, respectively). However, in the first half of 1989, inflation "heated up" and was running at an annualized rate of about 6%. AVERAGE WAGE A number of different concepts are applicable to "average wage". Possibly the most appropriate one is that used in connection with the so-called indexing wage under the national pension program (Old-Age, Survivors, and Disability Insurance), to be described later. This indexing wage is utilized for the annual adjustments of various elements of the program, such as the maximum taxable earnings base and the exempt amounts under the retirement earnings test. *Mr. Burianek prepared the section on Current Consulting Issues.
The average indexing wage is, in essence, the average wage of all persons who are in covered employment in the first quarter of the year, annualized. Because the indexing wage is based on the earnings in a 3-month period, even though the person is not fully employed then, it is somewhat lower than a fulltime weekly wage, annualized, would be. The average indexing wage for 1988 is estimated at $19,375, an increase of 5.1% over the 1987 figure of $18,427. OUTLINE OF NATIOW RETmmmr AND SICKNESS BENEFITS The national system of retirement (including survivor and disability) benefits is provided by the Old-Age, Survivors, and Disability Insurance program under the Social Security Act of 1935. The federal Medicare program covers the risk of medical costs for persons aged 65 and over and for disabled OASDI beneficiaries who have been on the roll for at least 2 years. In addition to OASDI and Medi- care, social insurance systems cover such other risks as unemployment, work- connected injuries and diseases, and temporary disability cash benefits. Several social assistance programs (based on needs tests) are available for the aged, the disaubled, and children -- providing both cash payments and reimbursement of medical-care costs. I. National Retirement Benefits The OASDI program now covers practically all of the workers in the country (both employees and self-employed persons) -- including, indirectly, railroad workers, who have a separate retirement system. The only major exceptions from coverage are permanent federal employees hired before 1984, employees of state and local governments for whom coverage has not been elected by their employer (about 30% of such employees), and employees with relatively minimal wages (e.g., domestic workers who have wages of less than $50 in a calendar quarter).
Eligibility for benefits depends upon meeting requirements as to having earned certain numbers of so-called Quarters of Coverage. Such QC are determined from the individual's annual earnings (in 1989, one QC was given for each $500 of earnings, up to a maximum of four QC for the year). In general, persons who have 40 QC are insured for all retirement and survivor benefits, with lesser requirements for those who die before age 62. Eligibility for disability benefits has a similar requirement as to QC, plus the additional requirement of having 20 QC in the last 5 years (with a somewhat lower requirement for persons disabled before age 31). Retirement benefits are payable at the full, or basic, rate (to be discussed later) at the so-called Normal Retirement Age. The NRA currently is age 65 (and has always been so in the past), but beginning in 2003 it will slowly increase until becoming age 67 for those reaching that age in 2027. Retirement benefit at reduced rate is available as early as age 62; the reduction at age 62 is 20% when the NRA is 65, and eventually will be 30%, when the NRA is 67 (with graded-in reductions for retirement between age 62 and the NU). Persons who retire after the NRA (and up to age 70) receive an increase in their basic benefit, termed the Delayed Retirement Credit. The DRC is at an annual rate of 3% for persons who attained the NRA in 1982-89 (prekously, 1%) and is 31% for those who attain the NRA in 1990-91, gradually rising to 8% for those who attain the NRA in 2009 and thereafter. It may be noted that the 8% DRC is close to the actuarial equivalent, so that retirees after the NRA receive about the same benefit value as if they had retired at the NRA. Disability benefits are payable at the same basic rate as for persons retiring at the NRA. To be eligible, the individual must be totally and permanently disabled (and have been so disabled for at least 5 months). total and permanent disability is meant inability to engage in any gainful By
activity by reason of a medically determinable impairment that can be expected to continue for at least 12 months (or to result in prior death). Auxiliary benefits for eligible spouses and children are available for both retirement and disability beneficiaries. If the spouse is at least at the NRA upon initial claim or has in care a child under age 16 (or a child of any age if disabled before age 221, an additional benefit of 50% of the basic rate is available. A similar benefit is provided for each eligible child. including also children age 16-17, or age 18 if in high school. A spouse between age 62 and the NRA who does not have an eligible child can receive reduced benefits (a 25% reduction at age 62 when the NRA is 65, and a 30% reduction ultimately, when the NRA becomes 67). A family maximum benefit is applicable; it is generally 150% of the basic benefit for disabled beneficiaries and from 150% to 188% for retirement beneficiaries. Thus, full-rate auxiliary benefits are payable only when there is only one such beneficiary. Survivor benefits are provided in the event of the death of either an active worker or a retiree. Widow's benefits are payable at age 60 (or as early as age 50 in the event of disability) if the deceased person was fully insured. The benefit is the same as the retirement benefit if first claimed at the NRA or older. while it is 71.5% at ages 60 or under (and proportionately determined for ages between 60 and the NRA). When a fully or currently insured person dies leaving an eligible child, benefits are payable to the child(re.d) and the widowed parent, in the same manner as is done for retired workers. The benefit rate is 75% of the basic benefit, and the same maximum family benefit applies as for retirement cases. In all instances, individuals can receive no more than the amount of the highest monthly benefit for which they are eligible. For instance, if a woman has a retirement benefit based on her own earnings and a widow's benefit from her husband's earnings, then in essence, only the larger of the two benefits may be received.
The basic, or full-rate, retirement or disability benefit is determined from the average earnings of the insured worker. The average is figured over the potential working career -- which, in the future, will be considered to be 35 years for retirement cases (and less for disability cases and for deaths before age 62). The past earnings are indexed so as to be expressed more nearly in terms of the current wage level at the time of eligibility for benefits, and the highest required number of years is selected. The benefit formula is heavily weighted so as to give larger benefits to lower-paid persons than to higher-paid ones. Furthermore, up to 50% of the benefits are subject to income tax for individuals with moderately high total income. Payment of benefits is subject to a retirement earnings test, except for persons aged 70 and over, and except for disability beneficiaries (who, if they have earnings of a substantial amount, are likely to be no longer considered as disabled). An annual exempt amount is applicable, such that earnings of the prescribed amount or less do not prevent receipt of benefits, but earnings in excess thereof reduce benefits by $1 for each $2 of earnings (beginning in 1990, $1 for each $3 of earnings for those at the NRA and above, up to age 70). The annual exempt amount in 1989 was $8,880 for persons aged 65-69, and $6,480 for persons under age 65. Certain offsets are made in the cases of persons who are receiving other governmental disability benefits and of persons who are receiving a pension based on employment not covered by OASDI. The OASDI system is financed largely by payroll taxes (contributions). Some financing is also derived from the interest earnings on the accumulated assets and from the transfer of the income taxes on benefits. The contributions are paid into two trust funds -- one for retirement and survivor benefits
and the other' for disability benefits. Disbursed from the trust funds are benefit payments and administrative expenses, with any assets remaining being invested in U. S. Government debt obligations bearing equitable market interest rates. The payroll taxes are levied on earnings up to a maximum annual amount (which was $48,000 in 1989 and is automatically adjusted thereafter according to changes in the general wage level). The OASDI tax rate scheduled for 1990 and after is 12.4%, which is shared equally by the employer and the employee, and is paid in full by the self-employed (who, however, can obtain certain income tax deductions therefor). In addition, a parallel tax of 2.9% applies for financing the Hospital Insurance system under the Medicare program (to be discussed later). Although the law specifies that the tax rates mentioned are applicable for all future years, it is likely that, at some time or other, changes will be made. Current estimates for HI indicate that the prescribed tax rate will be adequate only for about the next 10 years. Similarly, current estimates for OASDI indicate that the prescribed tax rate will be far more than adequate for the next two decades (thus producing mammoth fund build-ups), but will not be adequate to finance outgo some four or five decades hence and thereafter. 11. Sickness Benefits The Medicare program (sickness benefits) provides benefits for medicalcare costs for persons aged 65 and over and for persons who have been disabled for at least 21 years (i.e.. on the OASDI benefit rolls for 2 years), on a social insurance basis. The program has three divisions -- Hospital Insurance, Supplementary Medical Insurance, and Catastrophic Drug Insurance.
HI provides benefits for inpatient hospital care, skilled nursing facility care (for medical treatment and rehabilitation. but not for custodial pur- poses), hospice care (for the terminally ill), and home health services (on an intermittent basis, but not homemaker services). To be eligible for those benefits, the individual must also be eligible for monthly OASDI benefits (although not necessarily in receipt thereof, as when substantially employed). The inpatient hospital benefits are available for all days in a calendar year, and the complete costs of hospitalization are covered after a single deductible ($560 in 1989) has been paid. The skilled nursing facility benefits are available for 150 days in a calendar year, with all costs being covered after the beneficiary has paid daily coinsurance for 8 days (at a rate of $25.50 in 1989). The full costs for hospice care are covered except for small coinsurance in connection with prescription drugs. The costs of home health services are met completely by the program. SMI covers primarily the cost of physician services and certain related itens. (such as tests, use of outpatient hospital facilities, therapy services, and ambulance services). The program determines the charges that it will recognize for various types of services and, in general, pays 80% of such charges, after the individual has paid an annual deductible of $75. If the charges for services exceed what Medicare recognizes, the individual must pay the difference unless the physician agrees to waive it. Beginning in 1990, a catastrophic cap ($1,370 then) applies -- so that, with respect to recognized charges, out-of-pocket expenses of participants will not exceed such amount (i.e., the 20% coinsurance will no longer be payable, and the program then pays 100% of recognized charges).
CDI, which is first fully effective in 1991, provides coverage with respect to prescription drugs and insulin. When the recognized charges for such drugs exceed an annual deductible ($boo in 1991), the program pays a certain proportion of the excess (50% in 1991, increasing to 80% in 1993 and after). The financing of the Medicare program is very complex -- and even confusing. Just as in the case of OASDI, the receipts and expenditures of the three divisions are handled through separate trust funds. HI is largely financed by a payroll tax on active workers (as described previously), but it also receives a portion of a so-called Supplemental Premium. The latter, in reality, is a surtax on the income tax of persons who are eligible for HI (such surtax rate being 15% in 1989 and 25% in 1990, rising slowly thereafter), with a maximum annual premium being applicable ($800 in 1989, rising slowly thereafter). SMI is financed primarily by a flat dollar premium, payable by those who elect to participate in the program ( almost all of thos eligible elect to do so) and by matching payments from the General Fund of the Treasury. The monthly premium in 1989 was $31.90 for the participants and $83.70 for the General Fund. In addition. SMI receives a portion of the Supplemental Premium. CDI is financed by a small flat monthly premium from the participants (all SMI participants must take CDI coverage) and by a portion of the Supplemental Premium. The material on the Medicare program was prepared in late July 1989. At that time, legislation was pending (and seemed very likely to be enacted) that would significantly modify the catastrophic benefit provisions and their financing.
CURRENT CONSULTING ISSUES Compliance with the provisions of the Tax Reform Act of 1986 was the major employee benefit consulting theme in the United States in 1989. Many of the regulations implementing the provisions of the law generated significant negative comments from not only consulting actuaries but also plan sponsors. In particular, there was no more divisive issue than the new requirements with respect to the nondiscrimination and qualification standards for health and welfare plans under Section 89. Section 89 Under Section 89, almost every health, accident and group term life insurance plan will be subject to two types of rules: 1. Nondiscrimination requirements, to determine whether the plan disproportionately benefits highly compensated employees, and 2. Oual ification requirements, to set minimum standards for establishing and communicating plans. Some of the requirements have applied to U.S. retirement plans for many years, but Section 89 extends the concepts just as broadly to health and life insurance plans for the first time. When the law was passed, employers immediately became concerned that the Section 89 nondiscrimination rules would be too difficult and costly to administer. The Technical and Miscellaneous Revenue Act of 1988 included several provisions to change Section 89 - some to simplify the procedures and some to clarify how the rules work. However, the situation only got worse. Congress at last began to react to the widespread employer dissatisfaction with the requirements of Section 89 and bills have been introduced in both the House and Senate to significantly change the law. The Treasury has announced that the date for Section 89 compliance would be delayed until October 1. It seems certain that the complex nondiscrimination requirements of Section 89 will be simplified (it is highly unlikely for politics?, reasons that the requirements will be repealed). A "design based approach to nondiscrimination testing is the most likely substitute for the current rules. New Retirement Plan Reauirements Many U.S. retirement plans covering salaried employees define an individual's benefit as a percentage of pay minus a percentage of benefits under the Social Security Act (a so-called offset benefit formula). In this way private plan benefits are coordinated or "integrated" with public benefits and contributions. The Tax Reform Act significantly changed the rules for integration. The IRS issued proposed regulations in 1988 implementing these provisions