. The concepts discussed here should help you understand the demographic and economic challenges that our country is encountering due to the "greying of America." These changes will directly affect the student in taxation and benefit issues of the future.

According to the US House, Select Committee on Aging (1979), noninstitutionalized elders had the following types of chronic illness:

Condition Percent Having It

Arthritis 44.3%

Heart Disease 27.4

Hypertension 39.0

Hearing Impairments 28.2

Vision Impairments 12.0

Arteriosclerosis 12.0

Diabetes 8.0

It should not be forgotten that about 5% of adults never marry. Research suggests that most of these individuals are engaged in satisfying roles and relationships and are not looking to add a spouse role. Additionally about 20% of older adults are childless, yet many become involved in non-traditional families or even "create families" comprised on unrelated people brought together by friendship, cohabitation, homosexual relationships, adoption, shared housing, foster care, and other arrangements.

The vast majority of adults who cannot live independently depend on family caregivers for support and assistance.

As many as 43% of those over 65 may need to enter a nursing home. The average patient's length of stay is 408 days, with:

26% staying over 12 months

22% staying 3 to 12 months

21% staying 1 to 3 months

31% staying a month or less

Nursing Home care represents the largest single health care expenditure for senior citizens, but is the area with the least insurance coverage. In 1981, for example, Medicaid paid approximately $13 billion for nursing home care, but patients still had to pay approximately $10 billion out of pocket! Furthermore, several studies indicate that almost two-thirds of private patients reach the "spend down" levels required by Medicaid within six months of entering a nursing home. In other words, assets accumulated over a lifetime are often wiped out in a relatively short period of time.

Many senior citizens carry supplemental insurance to fill the gaps in Medicare coverage. But nearly all of these policies limit eligibility for coverage to the types of care covered by Medicare. Thus, while skilled nursing care may be covered, intermediate and custodial care (longer that 60 days) are generally excluded - and these are likely to constitute the greatest expense.

It is in this new context that some companies have introduced a new type of insurance policy, often called Nursing Home Indemnity Insurance, designed to cover skilled, intermediate, custodial and, in some instances, home care. The new policies are not tied to the Medicare definitions of covered services. They are written in daily indemnity form, like hospital indemnity, and pay benefits from $20 to $100 per day. Benefits generally are available for from one to six years (95% of all nursing home stays are no longer than four years). They often are available to those between ages 55 and 80. This new type of coverage should be given careful consideration.

Senility is not a disease reserved specifically for the older population. One can be 40 years old and be senile. It is true that senility is seen most frequently among the elderly. Mild cognitive impairment affects about 14 percent of the elderly 65 and older. Approximately 5.6% of elderly men and 3% of elderly women have severe cognitive impairment. Even though these statistics seem high, the bottom line is that psychiatric problems are NOT constant across age groups. As a matter of fact, when NIMH (National Institute of Mental Health) conducted a study concerning seven psychiatric disorders, is was found that persons 65 and over had the lowest overall rate for all age groups for these particular psychiatric disorders.

When compared to the general population, persons 65 and over have the lowest overall rate of affective disorders, panic and obsessive/compulsive disorders, substance abuse and/or dependence, somatization disorders, anti-social personality disorders, schizophrenia, and phobias. However, these rates might be reflective because older persons use mental health facilities at half the rate of the general population.

Since Social Security pays into Medicare (which is handled by the Health Care Financing Administration) for each beneficiary who signs up, the "window" to sign up with Medicare is 3 months before age 65 through 4 months after. It does not matter if a person is actually taking Social Security or not. A penalty follows those who sign up for Medicare "late" due to the loss to that program of the premium that Social Security would have been paying to Medicare had the beneficiary signed up "on time."

Medicare provides only basic health insurance coverage. Fewer Doctors and other medical providers accept Medicare payments as full payment for services. Consider supplementing the coverage provided by Medicare with private health insurance.

Medicare divides up the country into regions and then studies the "average" cost of services rendered in that area. They are usually 2-3 years behind the actual cost at the time that they publish their rate tables. This leaves providers with less reimbursement for their services than they would normally charge.

Medicare also defines what are "allowable charges" for "medical services" after the deductibles are applied. Medicare's definition of "medical" includes only conditions in which a patient can be "rehabilitated;" thus illnesses such as Alzhiemers Disease are often NOT covered under the Medicare definition. Most insurance coverages that are added to Medicare ALSO use the Medicare definitions. This leaves no coverage from Medicare or from private insurance for many conditions.

In the mid '80s and attempt to keep escalating medical costs down created a new system: Diagnosis Related Groups (DRGs). Taking data on average hospital costs for each of many given conditions, the DRGs now specify how much ("predetermined payment") Medicare will pay your hospital for treatment of your condition when admitted.

It does not matter how long you actually stay, the hospital is paid this predetermined amount specified by the DRGs. Only one condition can be applied for per stay, so sometimes, people are being released one day and re-admitted the next under a different medical condition to allow the DRGs to keep paying. However, most patients are being "pushed out quicker and sicker."

Most Medicare supplemental policies are designed to pay all or some of Medicare's deductible and co-payments. In determining the medical services covered, remember that these policies tend to follow the same guidelines as Medicare. Medicare pays only for services deemed to be medically necessary, at rates that they set yearly. This means that most people Medicare end up paying (including deductibles) an average of 35% of the total medical bill.

Changes made in 1984 altered the retirement benefits for those in Federal employment. Workers hired after the changes have "Federal Employees Retirement System" (FERS), which incorporates Social Security coverage and Thrift Savings Plan (similar to a "401(k) plan" that corporations often use).

Those hired before 1984 were given the option to move over to the FERS under special transition rules (the move worked best if the worker planned another 10 years with the Government and contributed at least 6% of their salary into the Thrift Savings Plan). The pre-1984 plan was "Civil Service Retirement System" (CSRS). Both are mentioned in more detail in the special appendix.

For those who kept CSRS, a new mandatory payroll deduction into Social Security also came into being to "buy into" medicare (which is administrated by Social Security).

Newly hired Federal Workers, as well as many others who had previously been able to "opt out" of Social Security, now must pay into that system.

Changes have also occurred in pay-out provisions of Civil Service. The government has put pressure on new retirees through pay-out options to cover spouses who may survive the retiree.

Employees have had employer-sponsored plans of many types, with provisions of these plans varying, leaving the new retiree often confused over what he will get and how it will be taxed.

Some names used on these plans include 401(k) or CODA, SEP (sometimes called a SEP-IRA), Profit Sharing, Thrift Savings Plan, Salary Reduction Plan, ESOP and PAYSOP, Defined Benefit Plans, TSA/TSCA, Keogh or HR 10, and Money Purchase.

TRA '86 simplified the various tax codes to have these plans better coordinate and more closely resemble one another. It is no longer "highly advantageous" to have as many plans as possible to allow sheltering of as many dollars as possible (since adding a dollar to one plan now generally subtracts from that which you might have added to another). There are contribution limits to each.

A $9,240 ('94) contribution limit per person per year is in effect for the 401(k), and it must coordinate with any other employee voluntary deductions. 403 (b) has a $9,500 limit. Defined-contribution limit is $30,000 and the ceiling on Pension Plan benefits is $118,000 ('94).

Even the deductibility of an IRA is limited.

There are two basic types of plans:

--"Qualified" - or "pre-tax" plans (which you haven't paid taxes on yet).

--"Non-Qualified" or "voluntary", "thrift", "post-tax" plans (which you have paid taxes on your portion of the principal, but not on the earnings nor any "matching" by your employer)

The "Qualified" type and the tax-deferred earnings and employer matching of the "non-Qualified" type may be "rolled-over" to an IRA when you cease employment in many cases. This gives you investment choice, rather than leaving that choice with your employer.

The "non-qualified" money has already been taxed. It may be removed as principle without having taxes due. Of course, it cannot be (nor would you want to) "rolled over" into an IRA.

When an employer provides a defined benefit plan it means the retirement income to be received is guaranteed as to the amount. Each year the actuaries of the employer calculate the dollars needing to be set aside to guarantee the promised benefit.

These types of plans are very common among management of large companies and are "qualified" (pre-tax) money.

Stock options and deferred compensation packages are usually negotiated along with these type of plans.

By far more common today are defined contribution plans, which do NOT have a retirement income guarantee, only a yearly formula for the employer's contribution. Notice that there is a formula, not necessarily a guarantee of a contribution.

One of the most popular contribution plan is the "Profit Sharing plan." If any employer declares a profit in a given year, then the formula for the contribution is triggered (usually from 0-15% of "compensation"), and that amount is credited to the employee's account subject to restrictions like a vesting schedule.

The vesting schedule is designed to reward worker's longevity with the company. Recent tax law changes have made it difficult for a company to have a vesting schedule longer than seven years.

Pension credits may no longer be stopped for most employees who continue working after January 1, 1988, and who are over the age of 65. Workers over the age of 60 can no longer be excluded from a pension plan based only age.

Subject to IRS participation guidelines, employers may offer voluntary-contribution plans to the employee.

In some plans, like the TSA or 401(k) plans, the employee's contribution is pre-tax ("qualified) money. The employer may or may not "match" or contribute funds in voluntary plans. If they do, however, the employer's portion is "pre-tax" money.

Due to the nature of voluntary plans, with the employee contributing, his part is "fully vested" at all times. He has the right, usually, to "roll" this money out upon leaving the employment (even if not yet retirement age).

Usually the employee also has the right to make the investment decision, within the options arranged by the employer, concerning the employee-contributed funds.

No matter what the plan used, the ultimate goal is to remove funds for retirement income. It has already been mentioned that some people "roll out" the assets to gain further control.

Many people, however, do not "roll" their retirement money (indeed, Government workers usually can not). Instead the company "annuitizes" the money to provide a life-time guaranteed income. There maybe cost-of-living features built in.

Once the "annuitization" choice has been made, it may NOT be changed. You should review the choice you originally made to find out what may happen upon your death to any funds which may remain.

"Annuity" choices usually include:

-"Joint Life" The pay-out begins upon retirement of the worker at a stated monthly rate. If his spouse is alive at his death, the pay-out continues for the balance of the spouse's life. No benefits are left when both are deceased.

The amount that is paid to the survivor is usually not the full amount the worker received. Typically the monthly check will be 50% or 75% of the former amount received.

-"Life Only" The pay-out is slightly larger per month than that of "Joint Life" above. However, upon the demise of the worker, no further payments are made.

-"Life with refund" The payout is similar to that of "Life only", but if the worker did not receive the full principal (the amount in his account upon his retirement) over the years of his life, the balance is paid to his named beneficiary.

-"Life with a period certain" The pay-out here is similar to "Joint Life", but the beneficiary need not be a spouse. In this case, a period of time is chosen (5, 10, 15 or 20 years). If the worker dies within that chosen time frame, the full monthly payment goes to the named beneficiary until the time has expired (counting from the 1st check the worker received). Payments continue to the worker no matter how long he lives, but ceases upon his death if he outlived the period chosen.

SSI

Although not only specific to retirees, the Supplemental Security Income (SSI) program was designed in 1974 to be a cash assistance program for the needy aged, blind and disabled. More than half of the current recipients are not aged, but disabled persons. The Social Security Administration estimates that 30-35% of the aged eligible for the SSI do not participate in the program.

As a "means tested" program, the eligibility of persons to be awarded Supplemental Security Income is based on the "poverty line." The poverty line is a fixed dollar amount of income; if a household makes less than this amount, it is deemed "poor." The official 1987 "poverty level" was less than $6,000 annual income. While only 12% of older adults fell below the poverty line in 1990, the percentage of minority groups living in poverty is greater.

The Supplemental Security Income program discourages older persons from living in another person's household or from having relatives move in with them. If living arrangements are shared with relatives, the older person's income is reduced by one-third, the assumption being that these arrangements constitute receipt of support and maintenance "in-kind." This policy discriminates against the minority elderly who have customs, traditions, and expectations of living with their families or within extended kinship systems, and/or who may need to live with others due to economic necessity.

In 1995, the maximum allowable assets were $2,000 for an individual and $3,000 for a couple. When no other income is available, the maximum that SSI will pay alone in 1995 is $687 per month for a couple and $458 for an individual who is not married.

Quoted from RETIREMENT COUNSELING: A PRACTICAL GUIDE FOR ACTION, by Riker and Myers in their chapter on the Economic Status of Older Americans:

"The high cost of living and inflation topped the list of the most serious problems facing older persons. In addition, lack of money, lack of retirement income, general financial problems, and not having enough money to live on are concerns of people over age 65."

"A majority of white persons, 52% are 'getting by with a little extra, or buying pretty much anything they want with their present incomes, whereas, large majorities of blacks (80%), and Hispanics (71%) are just scraping by, or are in real financial difficulty'."

"Median income levels decline consistently with age. Studies of retirement cash flow show sharp drops as a function of age, with persons over 80 receiving the lowest incomes. Many older persons receive lower incomes based upon pensions paid during times when salaries were much lower."

"Quinlan noted that 38% of men living alone are poor or nearly poor now and projected this rate will decline to 6% by the year 2020. In contrast, the proportion of older women who are poor or nearly poor will drop only from 45% to 38% in the next thirty years."

Although most retirees stay in the same city after retirement, they may change housing options. Fixing up a current residence to accommodate age-change needs is the most frequent option. (About 7 of every 10 older head of households own their home.) This might include placing hand rails in bathrooms and changing bedrooms to main-level access.

Some retirees, especially in the early years of retirement, turn to travel trailers, RVs, and other mobile residence life-styles. This may be done on a group scale as "caravans" create support in traveling.

Multiple-residency options also exist, with retirees having more than one of "their own places" or living at times with relatives (usually children). "Grandma Apartments" are a frequently chosen option. The apartment can be free-standing or adjoining with the children's home with a private or common entrance.

Public housing units for older persons, with subsidized rental costs, are found in most cities, even in smaller towns.

A newer option has, in some cases, drawn strong criticism. The idea is fine: to buy into a retirement community with a large lump sum. The "community" then provides housing which can vary with time from individual apartments to single room nursing home care. The problem has been that some of these communities have gone bankrupt.

In addition, retirees enjoy using their accumulated assets - particularly through travel:

-They spend 80% of all pleasure travel dollars in the U.S.

-They travel more often, longer distances, and for longer periods of time than younger travelers

-There are many discounts and programs available for retirees to facilitate their travels.

-People with special needs can be accommodated.

Many retirees find an enrichment in life through taking care of pets. Pet clubs and Nature clubs are an organized way of not only interacting with nature but also with others who share similar interests. Some retirees also find indoor plant life and gardening to be stimulating and fulfilling.

Recent Government Response to the Aged (unlike the mid 60's):

1. The government response to the aged is that the elderly must fend for themselves. If they cannot care for themselves then the family must step in. If the family cannot care for the elderly, then private volunteer organizations should take care of the elderly. If such organizations cannot care for the elderly then private industry must care for them, and finally, if no one else can care for the elderly, then and only then, will the government step in.

2. Only those with the "greatest economic and social needs" should be taken care of under government programs.

3. The frail elderly, those over the age of 75, are the target population that programs will be geared to in the future.

According to AARP, some retirees are finding the company - paid medical insurance premiums not being paid. The companies may be going bankrupt or otherwise refusing to pay the costs. "Three quarters of all current workers covered by employer health programs have been promised that their health benefits will continue when they retire," says Barbara Colman in "Defusing the benefit Crisis- Debute focuses on retiree's coverage" AARP News Bulletin, April 1988, Vol.XXIX, No.4.

She continues: "Most employers finance the benefits on a pay-as-you-go basis out of current revenues. They don't maintain reserves, and no law requires them to provide advance funding."

Retirement planning determines if your income sources will be able to create an adequate stream of income throughout your retirement years. It is one thing to retire, it is another to "stay retired" with a reasonable standard of living. Properly understood, the planning and control of your assets and income sources to create and maintain a chosen life style is a PROCESS as alive and flexible as your determination allows it to be.

The first step is to gain control of money---in your understanding of what it must accomplish for you.

In general, the retirement income that is received by retired persons (beyond family help) comes from three basic sources:

Savings/Investments --Employer programs --Government

Most individuals will receive benefits from one or more sources. Typically the more sources, the more life satisfying retirement or "golden years" can be. The opposite is also true--the fewer the sources, the less security and the less the opportunities. In later sections, specifics will be given about social security and other programs.

According to AARP's Action for Independent Maturity, the "average" couple living in a city on a "moderate" living standard spend their money (after taxes) on:

35% housing 26% food

9% transportation 9% clothing & personal care

8% medical care 7% "other" family expenses

6% gifts and contributions

In order to better time large purchases, here is the "life expectancy" of consumer items:

18 years Vacuum Cleaner (Upright)

17 years Wood furniture

15 years Refrigerator, freezer, stove

15 years Soft-water unit

12 years Upholstered furniture

11 years Washing Machine, TV

8-9 years Water heater

8 years Air conditioner

7 years RugsRetirement is NOT an Option for All

Of the government programs which supply an income, the most widely relied upon is social security. Starting in 1935, Social Security (or FICA) required an employee contribution of 1/2% on the first $3,000 of earnings.

Today (1995), the employee's contribution is 7.65% on the first $61,200 in earnings. The employer, of course, also pays an equal amount for the employee into the system. (Self-employed people pay 15.3%). In 1991 an expansion of the Medicare Tax portion of the FICA withheld from employees and employers started. In the past the 1.45% of the withholding for the Medicare portion stopped at the same level as did the rest of the FICA, but now it continues on the entire wage base (unlimited).

Although the system is ordinarily a "pass through" conveyance (the money collected from today's workers is passed to beneficiaries as it is received) the current balance in the OASDI trust funds shows that it also is "partially funded." This is especially in anticipation of the large baby boom generation who will begin to retire around the year 2010.

Since it's inception, many changes have altered Social Security, with not the least being in 1965 with Medicare.

--A phase-in increase in the age at which full retirement benefits will be payable. The current age is 65; by 2027 it will be 67. 1958 66 years 8 months

--You can earn up to 4 credits per year. In 1994, you earned one credit for each $620 of income in a quarter but earning $2,480 anytime in '94 will result in four quarters of coverage.Audit your Account (before retirement)

Since your records may not agree with the Social Security Administration's records, it is wise to "audit" your account about every two years. If a mistake has been made, it may only be corrected if it goes back less than 3 years, 3 months, and 15 days. After that time, it is unalterable for any reason. You may "audit" your account by filling out form OAR-7004 "Request for statement of Earnings" that can be obtained at any district office of the Social Security Administration. You may also call the Social Security Administration's phone: 1-800-SSA-1213.

Some types of tax do not differentiate between who pays the tax: these are "regressive." Take an example: One person has $8 million in assets and earns well over $150,000 each year. When he goes to the grocery store, he pays the same tax rate on his food bill that you do. Even if he eats more expensive food and buys three times more food than you do, as a percentage of his total income, this tax is small compared to the percentage of your income that goes to tax when you pay for your groceries. So regressive or flat rate taxes are equal taxes, but do not place equal burden on the populace--they are not "equitable."

Progressive taxes are adjusted for the person's income (like "means testing"). This type of tax was the most common type of income tax in the past as they are considered "equitable" taxes. The original idea came from Europe, that those "well born" had a duty to those less fortunate. At our country's Centennial the tax battle cry, however, was "equality" as the bulk of the middle class was convinced that the rich were avoiding their fair share of taxes through loop-holes (this was NOT TRUE--the Congressional Budget Office clearly shows that the actual tax dollars paid now by the rich are DRAMATICALLY reduced from the levels that they used to be and the middle class is paying a much HIGHER amount in actual tax dollars than ever before).

Some assert that the wealthy should not have to pay for their greater earnings since that would discourage them from the tasks required to do so or that they can not invest in American jobs when tax dollars are assessed. Again the Congressional Budget Office shows that the rich invested OUTSIDE of America with their tax-savings and that, during the short 8 years of the Reagan Administration, we DOUBLED the number of American millionaires! The Congressional Budget Office concluded that the "trickle down theory" did NOT work, but, instead, what actually happened is money "trickled UP" from the lower classes to the rich.

Prior to Reagan the progressive income tax went as high as 70% and as low as 11%. That meant that the LAST DOLLAR you earned was taxed at this "marginal bracket"---NOT EVERY DOLLAR!!! The average family in Utah seemed to be at about the 35% Federal Tax Bracket (paying 35 cents of the LAST dollar earned in the year) prior to Reagan and, therefore, actually paid about 15 cents AVERAGE on EVERY TAX dollar. There were more "tax forgiveness" then (dollars that escaped taxation up-front) so the average tax on EVERY dollar earned was somewhere around 11 cents. Now the minimum tax rate is 15% with fewer forgiven dollars leaving most Utahns an AVERAGE 15 cents tax on nearly EVERY dollar earned (an actual tax increase).