Social Security / Medicare Handbook for Federal Employees and Retirees: All-New 4th Edition

By FEDweek

Until now, there has never been a comprehensive, easy-to-understand handbook for federal employees and retirees that fully explains not only Social Security and Medicare but also how they dovetail (and, in some cases, conflict) with the federal government's retirement and health insurance programs. 
 


Social Security and Medicare are easily the two most misunderstood benefits that federal employees, postal workers and retirees have, but it's vital that you understand just what types of benefits you're accumulating, what level of benefits and when you stand to receive them, what provisions might reduce or even eliminate them, and how they interact with your other benefits-in sum, how to best position yourselves to get the most out of these two key programs.

Federal employees and retirees have a large stake in the outcome, even though they have separate retirement and health insurance programs. Those programs are intertwined with both Social Security and Medicare. Social Security functions in a very different way than does the civil service retirement program, with many traps lying in wait for the unwary.

Also, the Medicare prescription drug benefit also raises new questions for federal employees and retirees regarding whether they should keep coverage under both programs in retirement - as most have traditionally done - or whether they should instead place all their eggs in the Medicare basket, saving on the cost of maintaining FEHB coverage.

• Language: English
• Publisher: BookBaby
• Release date: Dec 12, 2013
• ISBN: 9781483516134

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Introduction

Social Security and Medicare are under pressure as the aging of the population has increased the number of people who rely on them—or will rely on them soon. Both programs face substantial financing problems that have put in question whether they will be able to continue delivering the benefits that they have promised. Both could be in for substantial changes in the time ahead.

Federal employees and retirees have a large stake in the outcome, even though they have separate retirement and health insurance programs in addition to Social Security and Medicare.

Social Security coverage is one of the three legs of the Federal Employees Retirement System, along with a civil service benefit significantly lower than the Civil Service Retirement System benefit and the Thrift Savings Plan. Social Security also is a main element of the hybrid CSRS-Offset retirement system. Even employees under pure CSRS may stand to get benefits from Social Security, either through spousal coverage or through their own earnings before, after, and in some cases during, a CSRS career.

Social Security functions in a very different way than does the civil service retirement program, with many traps lying in wait for the unwary.

Meanwhile, mid-term projections regarding the program’s finances are dire, and the long-term projections are even worse, leaving the system in need of financial shoring up just at the point when the demand on it will increase. Reforming Social Security raises fundamental issues regarding how benefits are structured, including required contribution rates and the ages at which benefits can begin, as well as how benefits are adjusted for inflation and taxed. The political debate over these issues likely will be long and bruising, but hard choices cannot be put off indefinitely; the program already is paying out more in benefits than it is taking in through payroll taxes.

Similarly, all federal employees pay into Medicare as part of their basic payroll withholding and for that they will become eligible for Medicare benefits, usually at age 65. In most cases, Medicare takes over as the primary payer of health insurance benefits, with the Federal Employees Health Benefits program—if they keep FEHB coverage in retirement, as most do—playing a supplemental role. This essentially transfers people from a program they have come to know well over the years into one that is foreign to them. Medicare covers different conditions, with different cost sharing arrangements, than FEHB plans, and presents enrollees with a range of different options that must be sorted through.

Medicare meanwhile faces a similar financial situation as does Social Security—even more pressing, some argue—and the same demographic bulge demanding benefits. Proposed changes range from essentially nipping at the edges to a thorough overhaul, if only for those enrolling after a future date.

With Social Security and Medicare playing so important a role in their financial futures, federal employees and retirees must understand just what types of benefits they are accumulating, what level of benefits they might stand to receive, what provisions might reduce their benefits, how those benefits interact with their other benefits, and what may change—in sum, how to best position themselves now and in the future.

Social Security and Medicare for Federal Employees & Retirees

OVERVIEW

Although there is a common perception that Medicare is part of the Social Security program or vice-versa, this is not the case. They are different programs run by different agencies—the Social Security Administration and the Centers for Medicare and Medicaid Services—and have very different eligibility rules and benefits. Social Security is a retirement and disability benefits program. Medicare is a health insurance program for people 65 or older and many people with disabilities.

Part of the confusion stems from the lumping together of the Social Security and Medicare payroll deductions in paychecks of employees covered by Social Security. However, distinctions must be made even there—the Social Security 6.2 percent deduction comes only from a fixed amount of salary (in 2010, the first $113,700) while there is no limit on the 1.45 percent Medicare deduction.

Part of the confusion also stems from the fact that you can get information about Medicare at Social Security offices. However, this is just a service SSA provides; actual decisions on enrollment, payment of Medicare benefits and so on are made by CMS.

You also should take care to not confuse Medicare and Medicaid. Medicaid is a health care program for people with low income and limited assets. It is usually run by state welfare or social service agencies. Some people qualify for one or the other or both, although federal employees and retirees typically do not qualify for Medicaid because of their incomes.

Most people think of Social Security as a retirement program. Although it’s true that most beneficiaries receive retirement benefits, many others get Social Security because they are:

•   disabled;

•   a spouse or a dependent of someone who gets Social Security; or

•   a widow, widower or child of someone who has died.

Medicare provides hospital insurance called Part A that helps pay for inpatient hospital care and certain followup services, and medical insurance called Part B that helps pay for doctors’ services, outpatient hospital care, and other medical services. There are alternate plan designs called Part C, and a voluntary prescription drug benefit called Part D.

A brief overview of the benefits:

Part A—Most people get hospital insurance when they turn 65. You qualify for it automatically if you’re eligible for Social Security benefits. Or you may qualify on a spouse’s (including divorced spouse’s) record. Others qualify because they are government employees not covered by Social Security who paid the Medicare part of the Social Security tax—a category that includes Civil Service Retirement System participants.

In addition, if you’ve been getting Social Security disability benefits for 24 months, you’ll qualify for hospital insurance.

Also, people who have permanent kidney failure that requires maintenance dialysis or a kidney replacement qualify for hospital insurance if they are insured or if they are the spouse or child of an insured worker.

Almost everybody qualifies for hospital insurance through one of the above methods. But if you don’t and if you’re 65 or older, you can buy Part A just like you can buy other health insurance policies.

Part A helps pay for:

•   inpatient hospital care;

•   skilled nursing facility care;

•   home health care; and

•   hospice care.

Part B—Almost anyone who is eligible for hospital insurance (Part A) can sign up for medical insurance (Part B). Unlike Part A, which was paid for by your taxes while you worked and is free when you’re eligible for it, Part B is an optional program that, in 2013, costs $104.90 per month for most people if you choose to enroll (more for higher-income retirees). Almost everybody signs up for this part of Medicare.

Part B helps pay for:

•   doctors’ services;

•   outpatient hospital services;

•   home health visits;

•   diagnostic X-ray, laboratory and other tests;

•   necessary ambulance services; and

•   other medical services and supplies.

Part C—Medicare Advantage plans are offered by private companies approved by Medicare. They provide Part A and Part B benefits but can charge different amounts for certain services and have different plan structures including lower rates for using certain providers. They may offer extra coverage and prescription drug coverage for an extra cost.

Part D—Medicare offers a voluntary prescription drug benefit, with an average monthly premium of about $30 and a complex deductible arrangement. Those costs are over and above Part B premiums and other out-of-pocket costs.

Assuming that you are able to carry your FEHB coverage into retirement when you approach age 65 and will become eligible for Medicare, you’ll have two decisions to make. First, will you need the same level of FEHB coverage? The answer to that question isn’t an easy one because it depends on such things as the cost and benefits of the plan you will be in at that time and the extent to which it overlaps with Medicare Part A. You’ll have to research your FEHB plan’s coverage terms to decide your course. Bear in mind that what others are deciding, even people who seem to be in roughly your same life situation, is not necessarily best for you.

Second, should you enroll in Medicare Part B (medical insurance)? If you are enrolled in a fee-for-service plan, you may want to seriously consider enrolling in Part B. That way, nearly all of your medical expenses will be covered. If you are enrolled in a health maintenance organization, it also might be a good idea. There are two reasons for this. One, if you expect to use non-plan providers, Medicare Part B will help cover those costs. Two, if you later move to a fee-for-service plan, and want to enroll in Part B, your premiums will be 10 percent higher for each 12 months that you could have been under that coverage but weren’t.

The combined cost is another consideration. Unless you are a postal worker, you’ll pay the same FEHB premiums you did as an employee. However, because the Postal Service pays a greater percentage of the premiums for its employees than for its retirees, the premium costs for retired postal workers will be higher. They’ll pay the same amount as other federal employees and retirees.

Similarly, along with the increasing importance of Social Security in federal employment benefits comes the need for more people to make choices in that program that have no parallels in civil service retirement. For example, a federal annuity, whether CSRS or the civil service portion of the FERS benefit, doesn’t start until the person hits a certain age and years of service combination and retires. There’s no question about when it begins: it begins at retirement. And once an annuity is started, it isn’t stopped, reduced or suspended except under very limited circumstances mainly involving rehired annuitants or disability retirees who are restored to earnings capacity. The benefit is not affected by other employment, for example by employment in the private sector after leaving the government.

Contrast that to Social Security, which has a very different benefits formula and a very different way of paying them. It provides for a full benefit at what is called full or normal retirement age—currently 66, eventually phasing up to 67. However, individuals can begin drawing benefits as early as age 62, with a reduction, or as late as age 70, with a bonus. In other words, the individual chooses when to begin drawing benefits, a decision not necessarily linked to his or her working or retired status.

Social Security also has an earnings test, which reduces benefits for those who continue to have employment earnings after they begin drawing benefits, through their full retirement age. That creates a strong disincentive to draw Social Security before that age, for those working even part-time after age 62 up to full retirement age.

Those are just some of the decisions that both programs present to federal employees and retirees, decisions that should be based only on a strong understanding of how the programs work and how they interrelate, and with an eye on their future.

Social Security and Medicare Hospital Insurance Taxable Earnings Bases Since the Beginning of the Programs

THE FUTURE OF SOCIAL SECURITY AND MEDICARE

Both the Social Security and Medicare programs are surrounded by political and financial pressures. In part, this is because of their sheer size and scope. Together, the programs provide benefits to two-fifths of the American population and account for about a third of federal spending. As the population ages, the share of covered persons and the costs of the programs will continue to grow rapidly.

As one report for Congress put it bluntly, in the absence of congressional action, the Medicare program will be unsustainable in the long run. Similar grim official assessments have been made of Social Security. On the current pace, the two programs are on track to overwhelm the country’s ability to address other priorities.

The problem is one of simple demographics that has been known for a long time: the post-World War II baby boom generation is moving into retirement, and life expectancy also is increasing. People who survive to age 65 can expect to live an average of nearly 20 more years—those hitting that age in 1940, in contrast, had a life expectancy of only 14 more years—and the life expectancy of those who survive to age 85 is about seven years. The result, simply, is an older society. Projections are that by 2030, approximately 71.5 million Americans will be 65 and older, representing nearly 20 percent of the population.

At the same time, there are fewer workers paying into the systems versus retirees drawing out from them. In 1950, there were seven people of working age—20 to 64—for every person 65 or older. That ratio is currently below five to one and will fall below three to one by 2030. That’s people of working age, not people actually working and paying into the systems. Those figures are even lower: about 2.9 workers per person age 65 or more today, falling to 2.0 over the next 20 years.

In dollar terms, in 2012 Social Security outlays were $768 billion, the federal share of Medicare outlays $466 billion. Projections show that in the next decade, Social Security will grow at an annual average of 5.8 percent, Medicare at 6.2 percent.

Looking at the numbers as a percentage of the overall economy presents a similar picture. For example, between 1970 and 2013, federal spending for Medicare rose from 0.7 percent of gross domestic product to 3.7 percent, and over about 25 years is projected to exceed 7 percent of GDP. Spending on Social Security is projected to climb steadily from the current 5 percent of GDP to about 6.4 percent in 20 years.

Already, Social Security since 2010 has been paying out more than it takes in on an annual basis from payroll taxes. If the government crediting of interest to itself in the Social Security trust fund is taken into account, income continues to exceed outlays, but even that will be true only until about 2021. And the trust fund itself exists not as a huge pile of cash in a vault somewhere but rather in the form of credits on the books in the Treasury Department, which ultimately will have to be paid in the same way the Treasury covers other spending—through taxes and/or borrowing.

Meanwhile, projections show that the trust fund—the value of payroll taxes plus credited interest that exceeded the benefits paid out over the last 30 years since the last major Social Security reform—will be exhausted in about 20 years. Exactly when depends on various assumptions about payment rates, population and other factors, but there is a consensus that the day is coming.

At that point—unless something is done to prevent it—there are two main scenarios for what will happen. In one, outlays will be restricted to only the benefits that SSA will have the legal authority to pay under current law—that is, benefits will be reduced by a percentage that varies each year so that the program’s outlays equal its income. It’s estimated that benefits would have to be 16 percent lower than today’s levels in the first few years, and 19-24 percent lower in years after that.

Cutting benefits on that scale would bring real hardship to large numbers of Americans. Federal employees enjoy the benefits of defined benefit retirement systems, but only about a third of American workers in total have such plans. The number of such plans continues to fall and some of the remaining plans no longer admit new participants. That means more people are becoming more dependent on Social Security for their retirement security.

Social Security benefits account for the largest income source for those age 65 and older, making up nearly two-fifths of their total income. In all, nine-tenths of people in that age group receive income from Social Security. That compares with about half who receive income from assets, a third who received income from pensions or annuities and a fifth who receive income from earnings.

In the other scenario, outlays would be made for the full benefits as calculated under current law, regardless of the amounts available in the trust fund, with the difference being made up from tax revenue other than the payroll taxes that traditionally fund the program.

Similarly, Medicare is experiencing not only a growing covered population but also steady growth in spending per enrollee. The number of people on Medicare is projected to rise from 52 million in 2013 to 78 million in 2030. Meanwhile, Medicare enrollees are getting more expensive all the time, due largely to increasing prices of health care services, increasing volume and utilization of services, and new technologies.

Medicare Part A (hospital insurance) expenditures started exceeding income from payroll taxes in 2008 and its trust fund—which similarly exists as an obligation on the Treasury’s books—was projected at the time to have no remaining assets by 2017. Changes made by the 2010 health insurance reform law extended that solvency, but only until 2024. At that time its income is projected to be able to pay only 87 percent of promised benefits. That would leave the same types of tough choices regarding Social Security if its fund is exhausted.

The other parts of Medicare operate under a separate trust fund that doesn’t face insolvency because it already simply draws on general revenues and borrowing by the Treasury to pay for costs above its revenues from premiums and other charges to enrollees. Medicare payroll taxes—even after elimination of the former cap on those taxes—do