On Social Security and Medicare (Part I)
3/1/2004
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With baby boomers heading for retirement age, one may wonder what to expect from the government’s “safety net”. After all, a retiree has contributed to the fund throughout his or her entire working life.
Social security and Medicare insurance are funded by employees and employers in the form of FICA taxes. FICA tax consists of two parts, OASDI and Medicare.
OASDI, old age, survivors and disable insurance, assesses 6.2% of tax on a worker’s earned income up to a certain amount. (2004’s limit is $87,900 so anyone earning more than $87,900 will pay OASDI no more than $5,450). Medicare assesses 1.45% of tax on a worker’s compensation and there is no dollar limit.
That’s only half of the story. For every dollar an employee pays into the government fund, his or her employer needs to match exactly the same amount. Thus, the government actually receives a total of 15.3% of each worker’s compensation that is under $87,901 for 2004. Earnings over $87,900 (in 2004) are subject to FICA tax at a rate less than 7.65% of the salary for both employee and employer, respectively.
For a sole proprietor, the so-called self-employed tax is nothing but double of what an employee or an employer pays into the system because he or she is both an employee and employer.
The government pays to the retired and some others as follows.
OASDI can be broke down into two parts. OASI, old age and survivors insurance, pays monthly benefits after a worker retires. It’s also obligated to pay a worker’s surviving spouse and under-age children if the worker dies. DI, disability insurance, pays monthly benefits if a worker becomes disabled. The monthly benefit generally is calculated based on a worker’s contribution during his working years. The benefit is also adjusted each year in accordance to the cost-of-living.
Medicare is divided into part A and B. Part A, also called hospital insurance, pays for hospital care of those age 65 and older or the disabled. Part B, also called supplementary Medical insurance, pays for doctor’s bills and some other medical expenses for those age 65 and older or the disabled.
Medicare covers primarily acute care and a certain amount of skilled nursing. For example, part A covers up to 150 days hospitalization (with a patient’s certain co-pay) and the first 100 days’ home health care. Part B covers doctor’s bills and outpatient treatment (with co-pay and a small amount of the deductible) and all clinical lab services. (Prescribed drugs are not covered but it’s becoming a red-hot topic in the Congress mainly due to the run-away medicine price in recent years).
On the other hand, Medicaid is designed mainly for providing nursing home care. To qualify for the assistance, one cannot have sufficient income to provide for his/her own care. Different from Medicare (which is funded and administrated through federal government), Medicaid is funded by both federal and state governments and every state has a great control of its own program.
If you would like to find out more about how the government program works, please feel free to contact us any time.
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