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The Retirement Security Project • Removing Barriers To Retirement Saving in Medicaid and

Supplemental Security Income

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The Retirement Security Project • Removing Barriers To Retirement Saving in Medicaid and

Supplemental Security Income

Advisory Board

Bruce BartlettWashington Times Columnist

Michael GraetzJustus S. Hotchkiss Professor of Law,Yale Law School

Daniel HalperinStanley S. Surrey Professor of Law,Harvard Law School

Nancy KilleferDirector, McKinsey & Co.

Robert RubinDirector, Chairman of the ExecutiveCommittee and Member of the Officeof the Chairman, Citigroup Inc.

John ShovenCharles R. Schwab Professor ofEconomics and Director, StanfordInstitute for Economic Policy Research,Stanford University

C. Eugene SteuerleSenior Fellow, The Urban Institute

Commonsensereforms,real worldresults

www.ret i rementsecur i t yprojec t .org

1775 Massachusetts Ave., NW, Washington, DC 20036 • p: 202.741.6524 • f: 202.741.6515 •

The Retirement Security Project

is supported by The Pew

Charitable Trusts in partnership

with Georgetown University's

Public Policy Institute and the

Brookings Institution.

Table of Contents

Introduction 3

Asset Rules in Means-Tested BenefitPrograms Create a Barrier to Saving 4

How Do SSI and Medicaid TreatRetirement Savings? 5-6

Asset Rules Discourage Saving Among Families, People with Disabilities, and Seniors 7-9

What Changes AreNeeded in SSI andMedicaid to Promote RetirmentSaving? 10-17

Conclusion 18

Appendix: Calculating SSI Benefits on the Basis of an AssumedIncome Stream 19-21

Endnotes 22-23

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Most low-income families have inadequate retirement savings. They also aremuch less likely than higher-income households to participate in employer-basedretirement savings plans or to have individual retirement accounts (IRAs). Fewerthan 8 percent of individuals age 16 through 59 with household income belowthe poverty line hold a 401(k) retirement account or an IRA.1 Individuals withextremely low earnings, part-time employees, and employees with less than ahigh school diploma are especially unlikely to participate in an employer-basedretirement plan.2 Moreover, even when low-income households participate inretirement saving plans, they tend to contribute a smaller share of their incomethan higher-income households do.

In recent years, policymakers have expressed growing interest in increasing retirementsaving by low-income households. For many very low-income households, SocialSecurity benefits — or Social Security benefits plus benefits from the SupplementalSecurity Income (SSI) program — do not provide even a poverty-level income. In2004, the typical (or median) household in the bottom fifth of the income scalethat had managed to save for retirement had only about $5,000 in its retirementaccounts, a fraction of what would be needed on top of Social Security and SSIbenefits to avoid poverty in old age.3 If low-income families can accumulatesome retirement savings to supplement their public benefits, fewer of them willbe poor in retirement.

Moreover, the federal government provides more than $100 billion in tax benefitseach year to encourage retirement saving, primarily through employer-basedretirement plans and IRAs.4 These subsidies disproportionately benefit affluentindividuals: in 2004, about 70 percent of the tax benefits from new contributionsto 401(k) plans went to the top 20 percent of tax filers.5 Encouraging low-incomehouseholds to build some retirement savings could modestly reduce these largeinequities.


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Asset Rules in Means-TestedBenefit Programs Create aBarrier to Saving

Many low-income families rely onmeans-tested programs at times duringtheir working years — for example,during temporary spells of unemploymentor at times when their earnings areinsufficient to make ends meet. Also,many low-income people who are unableto work for an extended period of timebecause of a serious disability rely onSSI during such periods. Even with SSIbenefits, recipients are quite poor. In2007, the maximum federal SSI benefitamounted to 73 percent of the povertyline for an individual and 82 percentof the poverty line for a couple.

To qualify for these programs, familiesand individuals generally must meetan asset test; that is, their total countableassets must not exceed a dollar limitset by the program. In SSI, and inMedicaid for most recipients who areelderly or have serious disabilities, theasset limit is $2,000 for an individualand $3,000 for a couple. These limitsare far below the level of retirementsavings that a low-income employeewould need to stay out of povertyduring retirement. If a retiree whoseearnings had been consistently lowsought to use savings to make up thedifference between his or her SocialSecurity benefits and 70 percent of hisor her former earnings level (whichwould put the retiree just over thepoverty line), he or she would needapproximately $30,000 in savings atthe point of retirement.6

Moreover, the asset limits in theseprograms are not indexed to inflationand tend to remain frozen for many

years at a time. As a result, the assetlimits have shrunk substantially ininflation-adjusted terms over the pastseveral decades and are expected tocontinue declining in inflation-adjustedterms in the future.

In addition to imposing what amountsto a steep implicit tax on saving, assettests in means-tested benefit programstreat retirement saving in a confusingand seemingly arbitrary manner. Eachprogram has its own asset policy, sosome retirement accounts are countedin certain programs but not in others.And in some programs, a retirementaccount is counted in some states butnot in others. As a result, one familymay be able to retain its retirementsavings when it needs to turn tomeans-tested benefits, while a similarfamily that uses a different retirementsaving vehicle or lives in a differentstate may have to deplete its retirementsavings or forgo means-tested benefitsduring a time of need.

One of the most harmful inconsistenciesin current policies is that while means-tested programs generally do not countemployer-based retirement planstoward their asset tests if they arestructured as defined-benefit plans(such as traditional pensions), theyoften do count such plans if they arestructured as defined-contributionplans (such as 401(k)s). When theseasset rules were developed in theearly 1970s (or earlier), defined-benefitplans were the norm. Since then,employer-based plans have shiftedaway from the defined-benefit model,and most employees today do nothave access to a defined-benefit plan.Asset policies that treat the two kinds

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of plans differently put low-wage workerswho do not have access to a defined-benefit plan at a distinct disadvantage.

Research has shown that asset tests cancreate disincentives for families to save.Studies have found that families likelyto receive benefits from means-testedprograms tend to save less when assetlimits are instituted and save morewhen asset limits are relaxed.7

Moreover, a growing body of evidencesuggests that making it easy for low-income families to save, and presentingthem with a clear and effective financialincentive to do so, generate significantlyhigher contributions. For example,401(k) participation rates among newemployees rise substantially whenemployees are enrolled automaticallyin a 401(k) plan unless they opt out. Inone study, the participation rate amongnew employees earning less than$20,000 rose from 13 percent to 80percent when the employer adopted theopt-out approach.8 Similarly, a RetirementSecurity Project study showed that thecombination of a clear match for saving,accessible savings vehicles, theopportunity to use part of a tax refund tosave, and professional assistance couldsignificantly increase retirement saving,even among low- and moderate-incomehouseholds.9

Congress recently adopted legislationmaking it more attractive for employersto establish automatic enrollment for401(k)s.10 In addition, Congress mayat some point extend the benefits ofthe Saver’s Credit (a tax credit for low-and moderate-income individuals whosave for retirement) to employees whodo not earn enough to owe incometaxes.11 Such changes are important.But they will not be fully effective

unless policymakers also address thebarriers to retirement saving posed bythe asset tests in key means-testedbenefit programs.

How Do SSI and Medicaid TreatRetirement Savings?

SSI. SSI is a means-tested, federallyfunded and federally administeredprogram that provides modest cashpayments to low-income individualswho are aged, blind, or have seriousdisabilities. In December 2006, some7 million individuals received SSIbenefits. Approximately 4 million (or57 percent) of them were aged 18–64and had disabilities, another 2 million(or 28 percent) were aged 65 or older,and the remaining 1 million (or 15percent) were children under 18 withdisabilities. (Of the elderly SSI recipients,40 percent had been receivingdisability benefits before turning 65.12)

SSI eligibility rules are set by Congressand the Social Security Administration(SSA), which administers the program.In general, SSI is limited to peoplewho have very low incomes and nomore than $2,000 in countable assetsfor individuals and $3,000 for couples.13

These limits have not been adjusted,even for inflation, since 1989.

SSI rules are based on the principlethat the program is a last resort formeeting an applicant’s current needs,and that those current needs outweighthe applicant’s future needs. Thus, allsources of available support must bedrawn upon before SSI will be provided,even if that means sacrificing futureretirement income or paying a penalty.14

Both IRAs and defined-contributionaccounts like 401(k)s generally counttoward the SSI asset limit. In contrast,

Studies have found

that families likely to

receive benefits from

means-tested programs

tend to save less

when asset limits are

instituted and save

more when asset

limits are relaxed.

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payments from defined-benefit plans arecounted as income, but the underlyingsavings are not counted as assets. If anindividual is eligible for periodic paymentsfrom a retirement account, he or shemust apply for such payments in orderto be eligible for SSI benefits. If anindividual is not eligible for periodicpayments but can make a lump-sumwithdrawal, SSA counts the entireaccount toward the asset limit.15

If an individual converts his or herdefined-contribution retirement accountto an annuity, SSA will not count it towardthe asset limit because the individualhas given up the right to the funds.Instead, SSA will reduce the individual’sSSI benefits by the amount of theindividual’s monthly annuity income.


Purchasing a lifetime annuity often isnot a wise choice for low-income people,however.17 Purchasing a fixed-termannuity, meanwhile, involves significantfees and leaves the individual withneither a guarantee of lifelong incomenor a cushion for one-time expenses.

Medicaid. Medicaid is a public healthinsurance program for low-incomeindividuals and families. In 2004 about58 million people, including 29 millionchildren, 15 million adults in familieswith children, 9 million people withdisabilities, and 5 million elderly people,obtained health coverage throughMedicaid.18 In most states, anyone whoreceives SSI is automatically eligiblefor Medicaid.

States pay an average of 43 percent ofMedicaid costs, and they have considerableflexibility over important areas of theprogram — such as its asset rules. Nearlyall states have used this flexibility toeliminate the asset test for children, andmost states have eliminated the asset

test for pregnant women as well. Moststates continue to impose an asset teston parents with children, however, andmost of these states count 401(k)s andIRAs toward the asset limit.19 Similarly, moststates impose an asset test on individualswho are elderly or have disabilities, andmany of these states count 401(k)sand IRAs toward the asset limit.

Individuals who do not qualify for fullMedicaid coverage may qualify for whatare known as the “Medicare SavingsPrograms,” under which Medicaidpays the Medicare premiums (and, insome cases, the Medicare deductiblesand co-payments) for these individuals,but does not provide coverage forhealth services that Medicaid coversbut Medicare does not. The assetlimits for the Medicare Savings Programsare $4,000 for individuals and $6,000for couples. As in Medicaid, statesdecide what counts toward the assetlimit, and they may use different rulesfor the Medicare Savings Programsthan for Medicaid.

Low-income seniors receiving SSIbenefits or Medicaid coverage alsoqualify for a low-income subsidy foroutpatient prescription drugs underthe Medicare prescription drug benefit.Medicare beneficiaries who are notenrolled in the SSI or Medicaidprograms are eligible for the full low-income subsidy if their income is below135 percent of the poverty line andtheir assets are less than $6,000 for anindividual or $9,000 for a couple.Medicare beneficiaries who do notmeet these criteria but whose incomesare below 150 percent of the povertyline and whose assets are less than$10,000 for an individual or $20,000for a couple are eligible for a muchsmaller, but still significant low-income

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SSI encourages people who havedisabilities to work when possible bydisregarding a portion of their earningsin the calculation of their SSI benefits.In 2005, more than 330,000 SSI recipientswith disabilities were working. Some78,000 of them earned enough that theyno longer qualified for an SSI cashbenefit; instead they participated in aspecial SSI program that allows theirMedicaid coverage to continue.22

To qualify for that special SSI programor for SSI cash benefits, an applicant’scountable assets must remain below theSSI asset limits of $2,000 for anindividual and $3,000 for a couple. Thisgenerally means that such an individualcannot take advantage of an employer’sdefined-contribution retirement planwithout risking the loss of SSI benefits,which he or she may need in order tocontinue working. Even for individualswho are well enough to rely solely onearnings for a period of time, SSI’streatment of retirement accounts maydiscourage them from participating intheir employer’s retirement plan whileworking, since doing so couldjeopardize their SSI (and Medicaid)eligibility in the future if their medicalcondition worsens and forces them tostop working.

Poor Seniors

SSI and Medicaid rules pose problemsfor poor elderly people as well.Seniors who meet the stringent SSIincome eligibility criteria are generallytoo disabled to have workedconsistently, though some of themmay have been able to accumulatemodest retirement savings during theirworking years. Approximately 58 percentof aged SSI recipients receive very smallSocial Security retirement benefits; they

subsidy.20 Retirement accounts, includingIRAs and 401(k)s, are counted as assetsbecause the program follows the SSIprogram’s rules regarding what countsas an asset and what does not.21

Asset Rules Discourage SavingAmong Families, People withDisabilities, and Seniors

The SSI and Medicaid asset rulesdiscourage saving among parents whoneed health insurance through Medicaid,working-age individuals with disabilities,and impoverished seniors, as well aspeople who anticipate falling into oneof these groups.

Families with Children

Often low-income working families needMedicaid temporarily during a recessionand then leave the program once theeconomy recovers and jobs return. Butif parents who have fallen on hard timeshad previously managed to accumulatemodest retirement savings, they may haveto deplete those savings — sometimesincurring a penalty for early withdrawals— to cover medical expenses if thosesavings make them ineligible for Medicaid.Such families may be dissuaded fromsetting earnings aside in a retirementaccount again. They also may bemore likely to need public assistancein their retirement.

People with Disabilities

To qualify for SSI, an individual who isnot yet 65 must be very poor and havea disability so severe that it preventshim or her from engaging in anysubstantial employment and has lasted(or can be expected to last) for acontinuous period of at least 12 months,or can be expected to result in death.

The SSI and Medicaid

asset rules discourage

saving among parents

who need health

insurance through

Medicaid, working-age

individuals with

disabilities, and

impoverished seniors.

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qualify for SSI because their Social Securitybenefits leave them far below the povertyline. Whether they receive SSI alone orboth SSI and Social Security, SSI recipientsare quite poor.

Individuals and couples whose lowincome and small assets would otherwisequalify them for SSI but who have modestretirement savings have several unappealingalternatives. They can forgo SSI, evenif this means they must live in deeppoverty, in order to retain their modestretirement savings for major unforeseenexpenses (such as uncovered medical costsor a major home repair). Alternatively,they can consume their savings quicklyand turn to SSI, which will provide themwith a monthly income and more completehealth coverage but still leave them belowthe poverty line — and without a financialcushion if an emergency strikes.

Moreover, requiring individuals to liquidatetheir retirement accounts to qualify forSSI or Medicaid may not generate largesavings for these programs. If a personreceives a lump-sum payment uponliquidation of a retirement account, SSAwill count as an asset whatever portionof that payment has not been spentwithin the month that the payment isreceived. This provides an incentivefor individuals to use a large part oftheir lump-sum payment for suchimmediate purposes as paying offaccumulated bills or undertaking deferredhome repairs. As a result, theseindividuals may become eligible forSSI within a few months, at whichpoint the programs’ savings would cease.

A third option for individuals is to usetheir modest retirement savings topurchase a lifetime annuity. But theirSSI benefits would then be reduced ona dollar-for-dollar basis to offset their

monthly annuity payment, and if thatpayment exceeds the maximum SSIbenefit (which equals only aboutthree-fourths of the poverty line for anindividual), they would become ineligiblefor SSI and in many states, for fullMedicaid coverage as well. As a result,the individual could have the sameincome in retirement (or could evenbe worse off, if the individual losesimportant health care coverage)despite having saved for retirement.

While a lifetime annuity ensures thatincome from retirement savings willnot run out before a person dies,purchasing a private lifetime annuityin today’s annuity market generally isnot a wise investment for low-incomeindividuals, especially those in poor

health.23,24 When a retirement accountis converted to a lifetime annuity, thevalue of the account is reduced tocover the annuity company’s marketingexpenses, agent commissions, otheradministrative costs, and profits.25 Thevalue of the account is further reducedto reflect the fact that people whopurchase annuities tend to havelonger-than-average life expectancies,and firms that sell annuities price theannuities to reflect that reality.26

For these reasons, it is not appropriatefor the SSI program to force low-incomeelderly people who wish to qualify forSSI to choose between purchasing anannuity that might be ill-advised forthem and spending most or all of theirretirement funds immediately.

Asset limits also pose a growing problemfor seniors whose income is just abovethe SSI and Medicaid income eligibilitylimits and who qualify for the MedicareSavings Programs. These seniors arelikely to rely heavily on Social Security

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benefits: those benefits provide about86 percent of the unearned income ofseniors in the bottom third of the incomedistribution.27 But over time, as SocialSecurity’s full retirement age increases,Social Security benefits for new retireeswill replace a smaller share of previousearnings, and these retirees will needto rely more heavily on their own

retirement savings to supplement theirSocial Security benefits and avoidpoverty.28 Since the asset limits for theMedicare Savings Programs ($4,000 forindividuals and $6,000 for couples) arenot adjusted for inflation, they will fallincreasingly below the levels thatseniors will need to maintain theirstandard of living in retirement.

SSI Rules Should Be Reformed to Enable Recipients

To Protect Their Surviving Spouses from Poverty in Old Age

This paper focuses on reforms in SSI’s and Medicaid’s treatment of retirement savings that have not been converted

to an annuity. However, SSI’s treatment of retirement savings that are annuitized also warrants reform.

Under most lifetime annuity arrangements, a married employee can receive either a monthly payment that ends

when he or she dies (a “single life annuity”) or a somewhat lower monthly amount that is payable until the

employee dies and is followed by (further reduced) monthly payments to the employee’s surviving spouse until the

spouse’s death. This “joint and survivor annuity,” under which payments continue to the surviving spouse, has long

been recognized as the approach that public policy should favor, as it reduces poverty among elderly widows —

especially those who live to a very old age.

Federal law governing tax-qualified pension plans goes to great lengths to encourage joint and survivor annuities. A

qualified plan can lose its tax-favored status if it fails to make the joint and survivor annuity the default mode of payment,

or if it fails to give the spouse a veto over an employee’s choice of whether to take a single-life annuity (or a lump-sum

payment) instead of a joint and survivor annuity. This policy is considered so important that the Internal Revenue

Code and the Employee Retirement Income Security Act (ERISA) of 1974, as amended, require a spouse’s consent to

the employee’s waiver of the joint and survivor annuity to be notarized or witnessed by a plan representative.

SSI rules, however, are contrary to this policy and push individuals to take annuities that end with their own death

— and consequently leave their widows (or widowers) with nothing. Under these rules, if an SSI recipient who has a

pension or retirement fund has the choice of a single-life annuity or a joint and survivor annuity, the recipient must

take the single-life annuity and eliminate the spouse’s ability to receive payments after his or her death. SSI rules

specifically state that SSA staff must “[a]dvise the SSI claimant/recipient that he/she must elect the higher current

benefit to retain SSI eligibility. Election of the lower benefit will result in the loss of SSI eligibility until such time as

the election is changed or the option for change is no longer available” (See SSA POMS SI § 00510.001.D.3).

SSI rules do state that SSA will not require the SSI applicant or recipient to take the higher monthly payment if the

spouse refuses to waive his or her right to a spousal survivor benefit. But recipients and their spouses often will

not know that this right exists. SSA rules do not require SSA staff to inform SSI applicants and recipients that a spouse

may refuse to waive his or her right to a spousal survivor benefit and that such a choice will not jeopardize SSI eligibility.

To ensure that surviving spouses’ right to a pension is protected, SSA should eliminate the requirement that

recipients elect the higher current annuity payment. SSA should also encourage SSI recipients to opt for a joint and

survivor pension benefit.

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What Changes Are Needed inSSI and Medicaid to PromoteRetirement Saving?

The treatment of retirement savings inSSI and Medicaid needs to be reformedto address the disincentives to retirementsavings these programs create for familieswith children, people with disabilities,and poor seniors. This section describesspecific policy changes that would removethose disincentives and allow poorindividuals who have accumulatedmodest retirement savings to benefitfrom having saved; a discussion of moredetailed policy design questions is inthe Appendix. The changes presentedhere do not represent the only workablepolicy design, however, and could bemodified as long as they continue toadhere to the principles of equity andsimplicity.

Encouraging Non-Elderly, Low-Income Individuals to Save forRetirement


For non-institutionalized individuals

under 65 years of age, exclude savings

in qualified retirement accounts from

the asset limits used to determine SSI and

Medicaid eligibility and eliminate the

requirement that such individuals apply

for periodic payments from retirement


Changing the SSI and Medicaid rules forlow-income, working-age adults couldreduce poverty among those individualsin old age, modestly reduce inequitiesin government subsidies for retirementsavings, and establish more equitabletreatment of different types of retirementsaving within and across means-testedprograms. Such changes would

primarily affect two groups: adults withserious disabilities who qualify for SSIbenefits (and, as a result, Medicaid coverage)and parents who, along with theirchildren, qualify for Medicaid for temporaryperiods during their working years.

Excluding retirement savings whendetermining SSI eligibility for non-elderlyindividuals would allow people withserious disabilities who are able to workat times to set aside some of their earningsfor retirement without jeopardizingtheir SSI eligibility. Moreover, becausemany SSI recipients’ Medicaid eligibilityis based on their receipt of SSI, such achange would allow the individual toretain Medicaid coverage as well. Theloss of health insurance coverage canconstitute a significant blow to peoplewhose disabilities are serious enough toqualify them for SSI, so the prospect oflosing Medicaid may act as a disincentiveto save for retirement. Allowingworking-age individuals with disabilitiesto retain their retirement savings wouldremove this disincentive. A working-ageperson with a disability who is able towork periodically ought to be encouragedto do so, and ought to be able to usehis or her retirement account as asavings mechanism for retirement.

A number of states already are movingin this direction in their “Medicaid buy-in”programs, under which people withdisabilities who are working and needhealth care but would not otherwisequalify for Medicaid can “buy into”Medicaid coverage. States have substantialflexibility in setting the income andasset rules in these programs. Of the 32states that offer them, 18 do not countretirement accounts as assets.29

To make the exclusion meaningful, therequirement that non-elderly individuals

The treatment of

retirement savings in

SSI and Medicaid needs

to be reformed to

address the disincentives

to retirement savings.

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apply for periodic payments from theirretirement accounts would need to beeliminated. Many SSI applicants wouldqualify for periodic payments from theirretirement accounts as a result of theirdisability, but if they take such paymentsthey often would deplete their savingsbefore retiring. SSI applicants shouldbe given the choice whether to applyfor periodic payments, which would becounted as income and reduce theirmonthly SSI benefits, or to retain theirsavings to draw upon during retirement.30

Excluding retirement savings whendetermining eligibility for the regularMedicaid program for non-elderly peoplewould enable parents who managed toaccumulate modest retirement savings buthave fallen on hard times to avoid thechoice of forgoing needed health servicesor depleting their retirement savings topay for that care before they can qualifyfor Medicaid. This change would beparticularly important for low-incomeworking families that need Medicaidtemporarily during a recession and willleave the program once the economyrecovers and jobs return.

Because only a limited number oflow-income families have retirementsavings, excluding these savings from theMedicaid asset test is unlikely to leadto substantial enrollment increases. Inmost states the Medicaid income limit forparents is at or below the poverty line,31

and among families below the povertyline, only 6 percent of adults in the 16-49age bracket have any savings in a401(k) or IRA.32

Moreover, the states that have gone furtherand eliminated the Medicaid asset testfor parents (as 21 had done as of July2006) generally report that this changehas helped them streamline the eligibility

determination process and reduceadministrative costs, while easing theenrollment process for families.33

In sum, excluding retirement savings whendetermining SSI and Medicaid eligibilityfor working-age, non-institutionalizedindividuals would allow them to accumulatemodest retirement savings during periodsin which they are able to work. Thatwould give them an additional source ofincome that could reduce or eliminatetheir need for SSI and/or Medicaid in old age.

Eliminating Penalties on Seniorswith Retirement Savings


This proposal consists of three related parts:

1. For non-institutionalized

individuals age 65 or older, exclude

savings in qualified retirement

accounts below a specified ceiling

(indexed for inflation), such as

$10,000 for an individual and

$15,000 for a couple (or $15,000 for

all households), when applying the

asset tests used to determine SSI and

Medicaid eligibility and eliminate the

requirement to apply for periodic

payments from retirement accounts.

2. Reduce SSI benefits by $2 for every

$3 in unearned income from qualified

retirement accounts, rather than on a

dollar-for-dollar basis.

3. Treat savings in qualified retirement

accounts in excess of the above ceiling

either as an asset that counts against the

Medicaid and SSI asset limits or,

alternatively, as an assumed income

stream based on the individual’s age

and the amount in the individual’s

retirement account at the time of

application for Medicaid or SSI.

Excluding retirement

savings when

determining SSI and

Medicaid eligibility for

working-age, non-


individuals would allow

them to accumulate

modest retirement

savings during periods

in which they are able

to work.

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a complicated policy that could beburdensome for both SSA and beneficiaries.

Most SSI recipients have incomes wellbelow the poverty line, even countingtheir SSI benefits. In 2007, anindividual relying solely on the federalSSI benefit would have income at 73percent of the poverty line; a couplerelying solely on the federal SSI benefitwould have income at 82 percent ofthe poverty line.34 (Some statessupplement SSI benefit amounts.)

Seniors who qualify for SSI are generallytoo disabled to have worked consistentlyin their younger years. (Seniors whodid work consistently, even at lowwages, generally do not qualify for SSIbecause their Social Security benefitsput them over the SSI income limit.)For seniors who receive SSI as asupplement to modest Social Securitybenefits, their combined federal SSIand Social Security benefits put themat 76 percent of the poverty line for anindividual and 84 percent for a couple.Some of these individuals may havebeen able to accumulate modestretirement savings during the periodsin which they were able to work.

In 2007, an individual

relying solely on the

federal SSI benefit

would have income at

73 percent of the

poverty line; a couple

relying solely on the

federal SSI benefit

would have income at

82 percent of the

poverty line.

Seniors who managed to set asideretirement savings while they wereworking should benefit from havingsaved. But they also should be expectedto rely on their own savings to someextent, and should receive reduced SSIbenefits accordingly. It is important tonote that this proposal would not applyto people in long-term care and thuswould not enable someone with substantialretirement savings to obtain Medicaidcoverage for long-term care.

1. Exclude Retirement SavingsBelow a Certain Ceiling

There are two principal reasons to excludea certain amount of elderly individuals’retirement savings from consideration asan asset or as income when determiningtheir SSI and Medicaid eligibility. First, thiswould allow low-income elderly peopleto retain a modest cushion of savingsto cover substantial one-time expensesthat may arise (such as out-of-pocketmedical expenses or home repairs) or tosupplement their monthly SSI benefits,which leave many beneficiaries belowthe poverty line. Second, it would allow avery poor and vulnerable group of seniorsto benefit from SSI without establishing

The Need to Update SSI’s Unearned Income Disregard

In general, Social Security benefits reduce SSI benefits on a dollar-for-dollar basis. The only exception is thatSSI has a $20 unearned income disregard, which means that the first $20 a month in income from other sources(such as Social Security benefits) is disregarded in the calculation of an individual’s SSI benefit. Thus, anindividual receiving both Social Security and SSI can receive combined federal benefits that equal $20 moreper month than the maximum federal SSI benefit. In 2007, monthly Social Security and federal SSI benefitscombined did not exceed $643 for an individual and $954 for a couple.

The $20 disregard was intended in part to ensure that SSI recipients with a significant past work history (asevidenced by their eligibility for Social Security) would have higher total incomes than SSI recipients with littleor no work history. But this $20 disregard, first established in 1974, has never been adjusted for inflation. As aresult, there is now virtually no difference between what people with an extensive work history receive fromSocial Security and SSI combined and what people with little or no work history receive from SSI alone. Adjustmentof this and certain other SSI eligibility and benefit parameters that have been heavily eroded by inflation is overdue.

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Because of their extreme poverty, SSIrecipients often have little ability tocover one-time expenses such as out-ofpocket medical costs, significant homerepairs, or funeral and burial expenses.Poor seniors who qualify for Medicaidoften still incur significant out-of-pocketcosts for dentures, private duty nursing,personal care services, podiatry services,mental health treatment, and certainmedical equipment. In 2003, out-of-pockethealth care costs for seniors with fullMedicaid coverage averaged $525.35

In addition, funeral and burial expensescan be out of reach for poor seniors.SSI allows a beneficiary to exclude upto $1,500 in burial expenses for herselfor a spouse, as long as the funds aresegregated from other savings.36 Thisamount has been frozen for 25 yearsand is now far below actual funeralcosts. According to the National FuneralDirectors Association, an average funeralcost $6,500 in 2004 — more than fourtimes SSI’s excludable amount.37

How much retirement savings SSI shouldexclude is open to debate. Theimportant point is that seniors who arepoor enough to qualify for SSI but havemanaged to accumulate modest retirementsavings should be able to benefit fromthose savings, either to supplement theirincome or to cover one-time expensesthat may unexpectedly arise. In addition,the amount of retirement savings thatis excluded should be indexed toinflation so it does not erode over time.

When determining the appropriateexclusion ceiling, it is important to keepin mind that retirement savings aremeant to last for a number of years.Savings amounts that may sound highat first blush would contribute only asmall amount of income if drawn down

in regular monthly installmentsthroughout an individual’s retirement.One analysis found that if Medicare

beneficiaries’ total countable assets —not just their retirement savings — weredrawn down in monthly installmentsover their expected lifespan (based onage and gender), 90 percent ofbeneficiaries who otherwise have incomebelow the poverty line would stillhave income below the poverty line.38

The exclusion ceilings proposed here— $10,000 for an individual and $15,000for a couple, or alternatively, $15,000for all households — were chosen forseveral reasons.39 For individuals, theexclusion level should be sufficient toenable them to bring their monthlyincome closer to the poverty line or tocover some one-time costs, such asrepairing a roof or furnace. Also, theceiling should be significantly abovethe amount of retirement savings mostSSI applicants have, in order to minimizethe number of applicants for whom SSAhas to secure detailed asset information.A $10,000 or a $15,000 level seemsappropriate for these purposes. Ifanything, these levels may be too low.

For example, if a 65-year old SSI recipientwanted to draw on retirement savingsto bring her monthly income up to thepoverty line over the course of herexpected lifespan, she would need morethan $28,000 in savings; even an 80-yearold SSI applicant would need morethan $17,000 in savings for this purpose.Exclusion ceilings of $10,000 or $15,000would not be overly generous, as theywould not even be sufficient to allowan SSI recipient to live at the povertyline. Somewhat higher ceilings, suchas $20,000 for individuals and $30,000for couples, would allow poor individualswith modestly more retirement savings

Seniors who are poor

enough to qualify for

SSI but have managed

to accumulate modest

retirement savings

should be able to

benefit from those


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to come much closer to the poverty line,and could also be considered. (Legislationapproved by the House of Representativesin 2007 would have raised the overallasset limits for the Medicare SavingsPrograms and the low-income subsidyfor the Medicare drug benefit to $17,000for individuals and $34,000 for couplesin 2009, indexed for inflation insubsequent years.)

Most poor retirees with retirement savingshave savings well below the $10,000 and$15,000 levels, so this exclusion wouldlikely reduce SSA’s workload in consideringassets. If an SSI applicant or recipienthas less than the ceiling in retirementsavings, no further information orcomputations would be needed, and theindividual’s retirement savings would bemonitored as they are under current law.Data from the Census Bureau’s Surveyof Income and Program Participationindicate that fewer than 4 percent ofindividuals aged 65-69 with incomesbelow the poverty line have retirementsavings that exceed $10,000.40

For seniors to have a meaningful choiceas to whether to supplement their incomeor retain their savings for one-timeexpenses, the current requirement thatindividuals apply for periodic paymentsfrom their retirement accounts wouldneed to be eliminated. The tax codealready requires seniors to make withdrawalsfrom 401(k) accounts or traditional IRAsupon reaching 70½ years of age.41 TheSSI program should not impose additionalrequirements on seniors. The SSI programshould allow seniors who are eligibleto make withdrawals to decide whento make such withdrawals and howmuch to withdraw, subject to therequirements of the tax laws. Someseniors may wish to live on somewhatless income each month in order to

have a cushion for one-time costs,while others may choose to make monthlywithdrawals to increase their incomemodestly above the SSI level.42

2. Disregard Only a Portion ofWithdrawals From RetirementAccounts

Under current SSI rules, regular paymentsfrom retirement accounts (includingpayments under a defined benefit plan orfrom a 401(k)) are counted as unearnedincome. The first $20 a month inunearned income is disregarded, but forindividuals who receive both smallSocial Security benefits and SSI (as mostelderly SSI recipients do), the $20 disregardis used up on the recipients’ SocialSecurity income. As a result, regularpayments from retirement savingsgenerally reduce SSI benefits on adollar-for-dollar basis.

This treatment amounts to a 100 percenttax rate on retirement savings. It meansthat poor individuals who have managedto save for retirement have no higherincome in old age than they would ifthey had not done so.

In contrast, SSI disregards 50 percent ofearned income, so every $2 in earnedincome reduces SSI benefits by only $1.Poor individuals who have some earningsthus have a higher monthly income —when SSI benefits and earnings arecombined — than poor individuals withno earnings.

Our proposal would treat seniors’payments from retirement savings moregenerously than other unearned incomebut less favorably than earned income.Specifically, this proposal is to reduceSSI benefits by $2 for each $3 inincome from a retirement account.

Under current SSI

rules, poor individuals

who have managed to

save for retirement

have no higher

income in old age

than they would if

they had not done so.

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This 33 percent disregard of withdrawalswould be applied to payments fromdefined-benefits plans, payments fromannuities, and withdrawals from aretirement savings account that isexcluded as a resource because theamount of savings is below the exclusionceiling at the time of application. Thischange to the treatment of paymentsfrom defined-benefit plans and annuitiesshould have little impact on SSI costs,since few SSI recipients receivedefined-benefit or annuity payments;in 2006, fewer than 2.5 percent of SSIrecipients age 65 or older had anyincome from pensions.43 But whileonly a small portion of recipientswould be affected, extending the 33percent disregard to payments fromdefined-benefit plans and annuities isnecessary to treat income from alltypes of retirement accounts consistently.

3. Treat Savings Above theExclusion Ceiling as an Asset or aSource of Annuitized Income

Although the vast majority of low-incomeseniors have less than $10,000 or$15,000 in retirement savings, reformsto SSI’s and Medicaid’s asset rulesmust address how to treat retirementsavings above this level.

One approach, referred to here asOption A, is to count any retirementsavings above the exclusion ceilingtoward the asset limit. This approachis simple for applicants to understandand for caseworkers to administer.But it retains two key disadvantages ofthe current rules.

First, this approach retains an eligibility“cliff.” If an applicant has retirementsavings modestly over the excludableamount, he or she could lose eligibilityfor SSI and Medicaid entirely (if the

amount of retirement savings thatexceeded the exclusion limit broughtthe applicant’s total countable assetsabove the SSI and Medicaid asset limit).Such a cliff would create a disincentiveto save more than the excludable amount.It also could lead low-income elderlyindividuals who have retirement savingssomewhat above the excludableamount, but who cannot make endsmeet on a monthly basis, to drawdown significant retirement savingsrapidly so that they could qualify forSSI and Medicaid.

Another concern is that because SSIand Medicaid do not count annuitiesas assets, Option A could encourageindividuals to purchase an annuity ratherthan retain their retirement accountand draw from it, even when an annuityis an unwise investment. (While SSIand Medicaid count monthly annuitypayments as income, the incomestream for some seniors would be lowenough that they would still qualifyfor those programs.) Annuities can bea sound approach to stabilizingretirement income for some seniors,but treating annuities differently thanother retirement savings in the contextof SSI raises significant equity concerns.Moreover, as explained above, purchasingan annuity is not always a wise financialchoice for a low-income individual.

To address these shortcomings, OptionB would treat any retirement savingsabove the exclusion ceiling as thoughthey were used to purchase a lifetimeannuity. Specifically, SSI and Medicaidwould exclude the “excess” retirementsavings as an asset, but count an assumed(or imputed) monthly stream of paymentsfrom them as income that reduces SSIbenefits. The assumed income streamwould represent the amount, based onthe individual’s age and the amount of

Although the vast

majority of low-income

seniors have less than

$10,000 or $15,000 in

retirement savings,

reforms to SSI’s and

Medicaid’s asset rules

must address how to

treat retirement savings

above this level.

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retirement savings above the ceiling, thatcould be drawn monthly from the retirementsavings account over the course of theindividual’s remaining expected lifespan.

A standard actuarial table would be used,such as that developed by the Thrift SavingsPlan. The assumed monthly amountswould be counted as unearned income,and amounts above SSI’s $20 monthlydisregard of unearned income wouldreduce SSI benefits on a dollar-for-dollarbasis.44 Actual withdrawals (asdistinguished from the assumed incomestream) would not be counted as incomeand would not affect SSI benefits. If anindividual outlived the expectedlifespan used to calculate the assumedincome stream, the counting of theassumed monthly amounts would end.45

To illustrate how Option B would work,consider a 65-year-old woman who has$20,000 in retirement savings but otherwisequalifies for SSI to supplement her SocialSecurity benefits (her only other sourceof income). If the exclusion ceiling were$15,000, her additional $5,000 in retirementsavings would not disqualify her fromreceiving SSI and Medicaid, but wouldreduce her SSI benefits. Using the ThriftSavings Plan annuity calculator, herassumed monthly income stream wouldbe $37, and her SSI benefits would bereduced by this amount.46 She couldthen use her retirement savings to bringher monthly income closer to the povertylevel or to cover one-time expenses.

Even under Option B, low-income seniorswith modest retirement savings wouldbe able to maintain only a relativelymeager standard of living. For instance,if the woman in the above example usedher $20,000 in retirement savings tobring her monthly income to the povertylevel, her savings would be depletedbefore she turned 72.

Option B does raise significant policydesign questions regarding how to treatindividuals in differing circumstancesfairly and how to avoid creating incentivesto liquidate retirement savings rapidly.(See the Appendix.) Once such decisionswere made and the policy was designed,it should not be too complicated toadminister. SSI caseworkers would havea table on which they would simply lookup the amount of the assumed monthlyincome stream, based on the applicant’sage and amount of retirement savings.

On the other hand, if policymakersdecided that greater simplicity shouldoverride other factors and sought anapproach that did not entail the use ofan assumed income stream for people65 and over Option A would servethat purpose.

Implementation Issues

Seniors who otherwise qualify forMedicaid should not be disqualifiedsolely because they have a modestretirement account. For seniors whoqualify for Medicaid based on SSI receipt,changes to the SSI rules are sufficientto ensure that modest retirementsavings won’t disqualify them fromMedicaid. But to ensure that the morereasonable treatment of retirementsavings proposed here applies to allseniors who otherwise qualify forMedicaid, two groups of seniors needspecial consideration — those whoreceive Medicaid but not SSI and thosewho live in “209(b) states.”

In some states, some non-institutionalizedseniors can qualify for Medicaid ongrounds other than being an SSIbeneficiary. For example, some statesprovide Medicaid to seniors withincomes between the SSI income limit

Seniors who otherwise

qualify for Medicaid

should not be

disqualified solely

because they have a

modest retirement


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and the poverty line. This coveragecan be important. AARP estimated thatin 2003, non-institutionalized Medicarerecipients age 65 and older spent anaverage of $3,445 annually on out-of-pocket medical costs, nearly three-quarters of which went for items otherthan prescription drugs.47 Medicaidcoverage can substantially reduce out-

of-pocket costs.

Such seniors should not be left out ofthe improved treatment of retirementaccounts proposed here. Nor shouldthey be induced to liquidate the accountquickly so they can qualify for Medicaid,as that would leave them with little orno savings for their remaining years.Accordingly, these proposed changesshould apply to non-institutionalizedMedicaid applicants age 65 or older whoqualify for Medicaid for reasons other thanSSI receipt. Because the Medicaid assetrules generally track the SSI asset rulesautomatically, no change to the Medicaidrules would be needed to ensure thatnon-institutionalized seniors who qualifyfor Medicaid on grounds other thanSSI receipt benefit from the proposedtreatment of retirement accounts.

In addition, the reforms proposed hereshould be designed so they apply toMedicaid in all states, including whatare known as “209(b) states.” Whilemost states provide Medicaid coverageautomatically to all SSI recipients, stateshave the option of providing coverageonly to those SSI recipients who meetthe state’s Medicaid income and assettests as those tests stood in 1972, beforeSSI was created. States that apply thisoption are known as 209(b) states. Thereare 11 such states: Connecticut, Hawaii,Illinois, Indiana, Minnesota, Missouri,New Hampshire, North Dakota, Ohio,Oklahoma, and Virginia.48

Poor elderly individuals in these 11 statesshould not be left out of the improvedtreatment of retirement accounts proposedhere. Specifically, they should not bedenied Medicaid coverage solely becauseof their retirement savings if thosesavings would not disqualify them forMedicaid in a non-209(b) state. BecauseMedicaid asset rules do not automaticallytrack SSI asset rules in those states,changes to the Medicaid rules wouldbe needed to ensure that the reformsdescribed here apply to seniors whoseek or secure SSI in all states.

Reforms Will Also Help SeniorsAfford Prescription Drugs49

Since 2006, Medicare has providedpartial coverage for outpatientprescription drugs. Most Medicarebeneficiaries have to pay a substantialamount in monthly premiums, annualdeductibles, and co-payments. Medicareprovides, however, for subsidies todefray part of these costs for: 1) thoselow-income Medicare beneficiaries whoare also enrolled in Medicaid (includingbeneficiaries who do not receive fullMedicaid coverage, but for whomMedicaid pays their Medicare premiums);2) Medicare beneficiaries who receiveSSI but not Medicaid; and 3) Medicareor SSI beneficiaries who are not enrolledin Medicaid but whose incomes andassets are below certain levels.

There are several tiers of these subsidiesfor low-income seniors. People whoare covered by Medicaid or SSI, orwhose income is below 135 percent ofthe poverty line and whose assets areless than $6,000 for an individual or$9,000 for a couple, qualify for thelargest subsidies. Medicare beneficiarieswho do not meet these criteria butwhose incomes are below 150 percent

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of the poverty line and whose assetsare less than $10,000 for an individualor $20,000 for a couple will be eligiblefor a much smaller, but still significantsubsidy. Individuals who are notreceiving Medicaid or SSI and haveassets of more than $10,000 for anindividual or $20,000 for a couple arenot eligible for a subsidy.50

The law establishing the Medicareprescription drug low-income subsidyrequires that the definitions used indetermining what income and assets arecounted be modeled on SSI programrules. The Social Security Administrationhas issued regulations spelling out thespecific rules to be followed.51 TheSSA regulations state that for purposesof the low-income subsidy, assets willbe counted if they are liquid resources(defined as those that can be convertedto cash within 20 workdays), including“retirement accounts (such as individualretirement accounts (IRA), 401(k)accounts), . . . and similar items.”

In 2005, the Kaiser Family Foundationconducted a detailed study of theestimated effects of the asset test forthese subsidies.52 The study estimatedthat the asset test for the low-incomedrug subsidies will disqualify about 2.4million of the 14 million Medicarebeneficiaries whose incomes are lowenough to otherwise qualify for thesubsidies. About half of those whomthe asset test will disqualify have assetsthat exceed the limit by $35,000 orless, the study reported.

The study also found that approximately70 percent of the individuals whom theasset test will disqualify have incomesbelow 135 percent of poverty. (Theothers have incomes between 135percent and 150 percent of poverty.)

The study reported that those whowill meet the income criteria for thesubsidies but be disqualified by theasset test “are disproportionately olderwidows who live alone.”53 In addition,the study found that 13 percent of theassets of those who meet the incomecriteria but not the asset test are in401(k)s, IRAs, Keoghs, or similarretirement accounts

These problems will be eased if themodifications regarding the treatmentof retirement accounts under the SSIasset test were adopted since they willapply to the asset test for the low-incomeMedicare drug subsidies as well.


Encouraging low-income families tosave for retirement would enhancetheir future independence and livingstandards. An important step in thiseffort is to remove the barriers toretirement saving created by the assettests in means-tested programs. Theproposals outlined here — to excluderetirement accounts from the SSI andMedicaid asset tests for non-elderlyapplicants, and treat the retirementaccounts of elderly applicants morereasonably — would do just that.

Encouraging low-

income families to

save for retirement

would enhance their

future independence

and living standards.

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Appendix: Calculating SSIBenefits on the Basis of anAssumed Income Stream

The proposal outlined here for SSIand Medicaid applicants who are age65 or older would (1) exclude retirementsavings below a certain ceiling, (2)disregard 33 percent of withdrawalsfrom retirement accounts below theceiling, and (3) either treat retirementsavings above the ceiling as an assetor count an assumed monthly streamof payments from these savings asincome that reduces SSI benefits.

The latter approach to part 3 of theproposal — Option B in the text — ispreferable on pure policy grounds.By eliminating the eligibility “cliff,” itwould allow for more equitable treatmentof retirees who have retirement savingsthat modestly exceed the exclusion ceiling.It also would avoid giving preferentialtreatment to the conversion of retirementaccounts to annuities, which may beunwise for many seniors with verylow incomes.

This approach, however, is morecomplicated because it would introducean assumed income stream into SSIbenefit calculations, and it would requiredecisions on several related policyquestions. This appendix brieflyconsiders some of the questions thatwould have to be addressed whencrafting an assumed income policy.

What would happen toindividuals who outlived theirlife expectancy?

Once people’s SSI benefits have beenreduced over the course of theirexpected lifespan (on the basis of theassumed stream of payments from

their retirement savings), no furtherreductions should be imposed if theylive beyond their expected lifespan.

This is necessary in order to treatolder retirees equitably. Otherwise,individuals who had drawn steadilyupon their retirement savings tosupplement their SSI benefits couldeventually run out of savings onwhich to draw and face a decline intheir already meager standard ofliving, simply because they livedlonger than had been assumed.

What would happen to individualswhose withdrawals bring theirretirement savings below theexclusion ceiling of, for example,$10,000 or $15,000 before theend of their expected lifespan?

For such individuals, the assumedincome stream should continue to beapplied — and should continue toresult in a dollar-for-dollar reduction intheir SSI benefits. If the assumed incomestream were eliminated as soon as abeneficiary’s retirement savings fellbelow the exclusion ceiling, an SSIrecipient could increase his or herlifetime SSI benefits by quickly spendingany retirement savings that exceededthe exclusion ceiling and securinghigher monthly SSI benefits as a result.

What kind of actuarial tablewould be used to calculate theassumed income stream?

A gender-neutral actuarial table, suchas that developed by the Thrift SavingsPlan, could be used to compute theassumed income stream for a single-lifeannuity. Such a table has the advantageof simplicity but makes no distinctionbased on the different life expectancies

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of women and men. It also implicitlyassumes that an individual’s savingsare not intended to be available tosupport his or her spouse in retirement.Alternatively, separate tables could beused for single women, single men,and married couples.

Under what circumstances wouldthe assumed income stream berecalculated?

Because the size of the assumed incomestream would be based on an individual’slife expectancy, the stream calculatedat the first eligibility determination foran SSI applicant who is age 65 or oldershould generally remain in effect untilthe individual reaches his or herexpected lifespan. Frequently recalculatingthe income stream would rewardindividuals who spent their retirementsavings more quickly than assumed(their assumed income would decreaseand their SSI benefits would rise),while punishing individuals who livedmore frugally in order to preservemore of their savings for unforeseencosts (their assumed income streamwould increase and their SSI benefitswould fall).

Under the following limited circumstances,however, a recalculation of the assumedincome stream would be appropriate:

• If an SSI recipient’s retirementaccount balance has suffered capitallosses of more than 20 percent (orsome other percentage specified inlaw or regulations) as a result ofmarket performance, he or sheshould be permitted to request arecalculation at the next SSIeligibility redetermination. Thiswould protect individuals who suffersubstantial losses as a result of

market forces. Otherwise, SSIwould essentially be treating theindividual as though he or she hadaccess to savings that are no longeravailable, even though the savingswere never spent. (This situation isdistinct from one in which anindividual has withdrawn fundsfrom the account and gotten thebenefit of the savings.)

The capital loss would be computedby taking the account balance at thetime of the original calculation,subtracting the withdrawals madesince then, and comparing the resultto the current account balance. Ifthe current balance is more than 20percent below the original balanceminus withdrawals, a newcalculation of assumed incomewould be made at recertification,upon request, based on current age,life expectancy, and savings.

• If there has been a break in SSIbenefit receipt of at least threemonths (or, alternatively, at least sixmonths), an applicant would bepermitted to request a newcalculation of the assumed incomestream, based on current age, lifeexpectancy, and retirement savings.If there has been a longer break inbenefit receipt, such as one year ormore, a new calculation of assumedincome would be doneautomatically.

An optional recalculation after arelatively short break in benefitreceipt would protect individualswho needed to draw heavily upontheir savings to cover a majorexpense. Consider an individualwho has been drawing steadilyupon his or her retirement savings

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at the assumed income rate tocompensate for receiving reducedSSI benefits but then has a majoruncovered medical expense or hasto make a significant home repair.This individual may have consumeda sizeable share of his or herretirement savings and thus mightnot be able to continue drawingupon the remaining savings at thepreviously assumed rate. Such anindividual could forgo SSI benefitsand live exclusively off retirementsavings for a number of months,then reapply for SSI and request arecalculation of the assumed incomestream.

After a longer break in benefitreceipt, an automatic recalculationseems more appropriate than anoptional one. SSA would becompleting a new eligibilitydetermination anyway in suchcircumstances, and under thisapproach, the beneficiary would notneed to know that he or she mayrequest a recalculation.

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1 By contrast, among all individuals aged 16 to 59, about30 percent held a 401(k) account or an IRA. RetirementSecurity Project analysis of 2001 data from the Survey ofIncome and Program Participation.2 Peter Orszag and Robert Greenstein, “TowardProgressive Pensions: A Summary of the U.S. PensionSystem and Proposals for Reform,” prepared forWashington University’s “Inclusion in Asset Building:Research and Policy Symposium,” September 2000, pp. 6and 10.3 See Adam Carasso and Signe-Mary McKernan, “TheBalance Sheets of Low-Income Households: What WeKnow about Their Assets and Liabilities,” The UrbanInstitute, The Center for Social Development, and TheNew America Foundation, November, 2007, AppendixExhibit 1, 411594_low-income_balance_sheets.pdf.4 See Budget of the United States Government for FiscalYear 2008, Analytical Perspectives, Table 19-1, See Leonard E. Burman et al., “Distributional Effects ofDefined Contribution Plans and Individual RetirementAccounts,” Urban Institute-Brookings Institution TaxPolicy Center, Discussion Paper No. 16 (August 2004), 6 Many financial planners suggest that a comfortablestandard of living during retirement requires about 70percent of pre-retirement income. This suggested“replacement rate” is less than 100 percent for variousreasons, including that retirees have no work-relatedexpenses and often have time to shop for lower-pricedgoods and services. In the example here, “consistentlylow earnings” is defined as earnings over the course of acareer that average about 45 percent of the SocialSecurity average wage index; this is the illustrativemeasure of low earnings used by the Social Securityactuaries. In 2006, this would have meant averageearnings of approximately $17,427. See “The 2007Annual Report of the Board of Trustees of the FederalOld-Age and Survivors’ Insurance and DisabilityInsurance Trust Funds,” May 2007, Tables V.C1 andVI.F10, 7 For a more detailed discussion of this body of research,see Gordon McDonald, Peter R. Orszag, and GinaRussell, “The Effect of Asset Tests on Saving,” TheRetirement Security Project, June 2005, For arecent contribution to the research, see Signe-MaryMcKernan, Caroline Ratcliffe, and Yunju Nam, “TheEffects of Welfare and IDA Program Rules on the AssetHoldings of Low-Income Families,” The Urban Institute,Center for Social Development, and The New AmericaFoundation, September 2007, 8 Brigitte Madrian and Dennis Shea, “The Power ofSuggestion: Inertia in 401(k) Participation and SavingBehavior,” Quarterly Journal of Economics 116, No. 4(November 2001).9 Esther Duflo et al., “Saving Incentives for Low-Incomeand Middle-Income Families: Evidence from a FieldExperiment with H&R Block,” Quarterly Journal ofEconomics 121, No. 4 (2006).10 The Pension Protection Act of 2006 was designed toencourage 401(k) plan sponsors to adopt automaticfeatures, including automatic enrollment. For a moredetailed discussion of the legislation and automatic401(k) plan features, see William G. Gale, J. Mark Iwry,and Spencer Walters, “Retirement Savings for Middle- andLower-Income Households: The Pension Protection Actof 2006 and the Unfinished Agenda,” The RetirementSecurity Project, January 2007, The Retirement Savings for Working Americans Act,introduced June 14, 2007 and sponsored by

Representatives Emanuel, Ramstad, and Welch, wouldmake several changes to the Saver’s Credit, one of whichwould effectively make the credit available to individualswho do not earn enough to owe income taxes.12 Social Security Administration. “SSI Annual StatisticalReport, 2006,” Table 7, SSI distinguishes between an “asset” and a “resource.”Resources are assets that are considered accessible to theindividual and thus count against the resource limit(unless they are explicitly excluded); assets that are notresources are not counted against the limit. This paperuses the term “asset” to refer to both assets andresources; it uses the term “asset limit” to refer to what isknown as the “resource limit” in SSI, because these termsare more commonly understood outside the program.14 This principle, the ways in which it conflicts with theobjectives of defined-contribution retirement plans, andthe shift in retirement plans from defined-benefit plans todefined-contribution plans are discussed in the SocialSecurity Administration’s, “Defined Contribution PensionPlans and the Supplemental Security Income Program,”Policy Brief No. 2006-01, March 2006, See SSA POMS SI §§ 01120.210 and 00510.001.16 As explained in this paper, SSI disregards the first $20 amonth of an individual’s unearned income (annuitypayments are considered unearned income) and thenreduces SSI benefits on a dollar-for-dollar basis for allunearned income after that. 17 This issue is discussed in more detail on page 7. 18 See enrollment data reported by each state through theMedicaid Statistical Information System, available at For the most recent compilation of state Medicaidpolicies with regard to retirement savings held byfamilies with children, see Zoë Neuberger, RobertGreenstein, and Eileen Sweeney, “Protecting Low-IncomeFamilies’ Retirement Savings: How Retirement AccountsAre Treated in Means-Tested Programs and Steps toRemove Barriers to Retirement Saving,” The RetirementSecurity Project, June 2005, Appendix A, The asset limits were set at these levels in 2006 andwill be adjusted for inflation each year. 21 The treatment of retirement accounts in the Medicareprescription drug subsidy program is discussed in moredetail beginning on page 18.22 See “2006 SSI Annual Report,” Table V.E1, In contrast, annuities that are paid from a defined-benefit plan are much more likely to be a wise investment, asthe attendant costs and fees are likely to be lower.24 See Cassio M. Turra and Olivia S. Mitchell, “TheImpact of Health Status and Out-of-Pocket MedicalExpenditures on Annuity Valuation,” University ofMichigan Retirement Research Center, Research Brief2005-079, January 2005, 25 This reduction has been estimated as 3 to 5 percent ofthe value of the retirement account. See Jeffrey Brown,Olivia Mitchell, and James Poterba, “Mortality Risk,Inflation Risk, and Annuity Products,” National Bureau ofEconomic Research, Working Paper 7812, July 2000, 26 This reduction has been estimated as roughly anadditional 10 percent of the value of the retirementaccount. Ibid.27 See Alicia H. Munnell et al., “Households ‘At Risk’: ACloser Look at the Bottom Third,” The Aspen Institute,October 2007, Figure 7, Ibid., pages 4-6.29 The 18 states are Arizona, California, Connecticut,

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Indiana, Iowa, Kansas, Louisiana, Michigan, Minnesota,Missouri, New Jersey, New Mexico, Oregon, Utah,Vermont, Washington, West Virginia, and Wisconsin. (InVermont, only retirement accounts based on earningsafter January 1, 2000, are excluded. In West Virginia, onlyretirement accounts initiated after enrollment in the buy-inprogram are excluded. Washington has no asset test inits buy-in program.) See Allen Jensen, “State MedicaidBuy-In Program Design Features,” Work Incentives Project,George Washington University, September 4, 2003, draft, If an individual elects periodic payments, 33 percent ofsuch payments should be disregarded as income, asdescribed in the section beginning on page 15. Thistreatment would allow for consistent treatment ofpayments from retirement accounts for all SSI recipients.31 In fact, in the median (or typical) state, the Medicaidincome limit stands at just 63 percent of the poverty line.For more detail on state Medicaid income eligibility rules,see Donna Cohen Ross, Aleya Horn, and Caryn Marks,“Health Coverage for Children and Families in Medicaidand SCHIP: State Efforts Face New Hurdles — A 50 StateUpdate on Eligibility Rules, Enrollment and RenewalProcedures, and Cost-Sharing Practices in Medicaid andSCHIP in 2008,” Center on Budget and Policy Prioritiesand Kaiser Commission on Medicaid and the Uninsured,January 2008, Among families with incomes below 200 percent of thepoverty line, fewer than 10 percent of adults in this agebracket have any savings in a 401(k) plan or an IRA.Retirement Security Project analysis of 2001 data from theSurvey of Income and Program Participation.33 See Vernon Smith et al., “Eliminating the Medicaid AssetTest for Families: A Review of State Experiences,” KaiserCommission on Medicaid and the Uninsured, April 2001, For more information on SSI eligibility criteria and howSSI benefits alleviate poverty for people who are elderlyor have disabilities, see Eileen P. Sweeney and ShawnFremstad, “Supplemental Security Income: SupportingPeople with Disabilities and the Elderly Poor,” Center onBudget and Policy Priorities, revised August 17, 2005, AARP Public Policy Institute, Data Digest, “Out-of-Pocket Spending on Health Care by MedicareBeneficiaries Age 65 and Older in 2003,” Medicare prescription drug coverage enacted sincethen may have reduced this figure somewhat, but thedifference (if any) is likely to be modest because theseseniors already had prescription drug coverage throughMedicaid. Moreover, under the Medicare prescriptiondrug coverage, poor seniors sometimes have to pay out-of-pocket for specific medications prescribed by theirdoctor but not covered by their plan; they also pay smallco-payments for covered drugs.36 A penalty is paid if the funds are used for otherpurposes. See SSA POMS SI § 01130.410. The value of aburial space is also excluded. See SSA POMS SI §01130.400.37 See Thisfigure includes the cost of a casket, which may beexcluded as a burial space under SSI rules.38 See Marilyn Moon (The Urban Institute) and RobertFriedland and Lee Shirley (Georgetown University’sCenter on Aging Society), “Medicare Beneficiaries andTheir Assets: Implications for Low-Income Programs,”The Henry J. Kaiser Family Foundation, June 2002,Exhibit 5, SSI uses a 1:1.5 ratio for individuals and couples in itsbenefit levels and income and asset limits; exclusion

ceilings of $10,000 for an individual and $15,000 for acouple would be consistent with that approach. Also,SSI generally uses a single dollar level for income andasset exclusions, and a $15,000 exclusion ceiling for allhouseholds would be consistent with that approach.40 Retirement Security Project analysis of 2001 data fromthe Survey of Income and Program Participation.41A senior reaching age 70½ who withdraws less in ayear than the minimum withdrawal amount specified inthe tax code must pay taxes as though the minimumamount had been withdrawn, as well as a tax penalty.(The penalty equals half of the difference between theactual withdrawal and the minimum requiredwithdrawal.) These tax provisions have the practicaleffect of requiring seniors to withdraw the minimumamount specified. (There is an exception for a seniorwho reaches age 70½ and is still working for theemployer who maintains the worker’s 401(k) account;such an individual is not required to make withdrawalsuntil he or she retires. Such individuals generally wouldhave income too high to qualify for SSI, anyway.)42 In accordance with other recommendations made inthis paper, we recommend that 33 percent ofwithdrawals and periodic payments from retirementaccounts be disregarded as income. As discussed in thenext section of the paper, this treatment would allow forconsistent treatment of payments from retirementaccounts and annuities.43 Social Security Administration, “SSI Annual StatisticalReport, 2006,” Table 7, Note that the assumed income would be treated asunearned income and would reduce SSI benefits on adollar-for-dollar basis. The assumed income streamwould not be given the more generous treatmentproposed for withdrawals from smaller retirementaccounts — those below the exclusion ceiling — so thatSSI benefits remain targeted on those with more modestretirement savings.45 Actual withdrawals of retirement savings by individualswho have outlived their expected lifespan would besubject to the 33 percent disregard of retirement savingsdescribed in the previous section.46 The Thrift Savings Plan annuity calculator may befound at amount in this example was calculated in November2007 based on an annuity interest rate index of 5.25percent. 47 AARP Public Policy Institute, Data Digest, “Out-of-Pocket Spending on Health Care by MedicareBeneficiaries Age 65 and Older in 2003,” Figure 1, Five of these states — Connecticut, Indiana, Missouri,New Hampshire, and Ohio — have Medicaid asset limitsthat are lower than the SSI asset limits of $2,000 for anindividual and $3,000 for a couple.49 This section is an updated version of material that wasoriginally published in Zoë Neuberger, RobertGreenstein, and Eileen Sweeney, “Protecting Low-Income Families’ Retirement Savings: How RetirementAccounts Are Treated in Means-Tested Programs andSteps to Remove Barriers to Retirement Saving,” TheRetirement Security Project, June 2005,, pp. 22-23.50 The asset limits were set at these levels in 2006 andwill be adjusted for inflation each year. 51 See 20 C.F.R. 418.3405.52 See Thomas Rice and Katherine A. Desmond, Low-Income Subsidies for the Medicare Prescription Drug

Benefit: The Impact of the Asset Test, The Henry J. KaiserFamily Foundation, April 2005, Ibid., p. 21.

Acknowledgements:The authors wish to thankWilliam G. Gale, J. Mark Iwry,and David C. John of theRetirement Security Project andReid Cramer of the New AmericaFoundation for providingfeedback on the policy proposalsdescribed in this paper; SpencerWalters of the RetirementSecurity Project for the analysesof Survey of Income andProgram Participation data citedin this report; and John Springerand Paul Van de Water of theCenter on Budget and PolicyPriorities for reviewing drafts ofthis report.

The views expressed in this paper arethose of the authors alone and shouldnot be attributed to the BrookingsInstitution, The Pew Charitable Trusts,or any other institutions with which theauthors and the Retirement SecurityProject are affiliated.

Copyright © 2008 GeorgetownUniversity. All rights reserved.

Zoë Neuberger is aSenior Policy Analyst atthe Center on Budgetand Policy Priorities.

Robert Greenstein isExecutive Director atthe Center on Budgetand Policy Priorities.

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