MEDICARE; How lt Effects Your Cost of Doing B u s iness

66 A T\ PICAL LL MBER COMPANY emn ploving ten persons must inerease their sales hr at least 250.000 board feet this year in- order to generate enough profit to meet the staggering increase in taxes brought about by the recent enactment of Medicare."

"This example is indicative of the sweep' ing changes in the cost of doing business brought about by Medicare," continued Trevor C. Page, treasurer and comptroller of Sun Lumber Company, Los Angeles, in a recent speech before the Top Manage' ment Conference of the Lumber Association of Southern California. Page spoke on "Medicare and How It Afiects Your Cost of Doing Business."

"Medicare is a deviation from our normal way of living in America, where credit is so easy. You know, fly now and pay latero eat now. pay later. With Medicare, you pay rrow, and then later if you're sick -and 65 or over-you may collect medical benefits"o' the speaker said.

There are three basic changes in Social Securitv being made this year, Page pointed out. First, the basic rate which has been in effect ol 35/a percent is going up to 3.85 percent. To this 3.85 percent is being added .35 percent designated as hospital insurance tax (Medicare)

More important than these two changes is the fact that the basic earnings on which this new combined rate will apply will be $6,600, instead of the $4,800 which has been in efiect this year.

I'his year, the rate ol 4.2 percent on $6,600 totals a mnximum ol $277.20. This is an increase ol $103.20 per employee. ushich amounts to a 59 percent increase in onc yea,r.

This $277.20 will be deducted from each employee's pay and in turn will be matched by an equivalent amount by the employer. (See Calilorni,a Lumber Mercha.nt, tan., p6e 24.)

"What effect this will have on your business is obviously something that each of you must decide for yourself," said Pap1e.

As an example of the impact of the Medicare legislation, Page ofiered the case of a typical lumher company employing l0 persons. "Say the company increases its sales by 250,000 h.f. At $100 per thousand b.f., this amounts to $25.000. If you're earning a profit before taxes of four percent, this means you'll have a profit from these increased sales of $1,030. This $1.030 represents the increased taxes which you'll have to pay on the l0 employees under Medicare," Page stated.

For larger companies, the new tax is even more burdening. To see what happens to a company employing I00 people, add a zero to each of the above figures. Sales will have to be increased by a whopping 2.5 million b.f. just to generate enough profit to meet the new taro the speaker pointed out.

The increased tax to pay for Medicare is not like the normal increases in the cost of business operation which come from higher wage demands from unions or salary raises given to individuals. Page said. The new tax will apply to all employeessalaried and hourly-and is multiplied nationally by every worker in the country.

'oThis means, in efiect, that the people who supply us with lumber and all the other things which we require to operate a business will have these additional costs, too. We must consider that these will be passed on to us in the form of increased prices. This means that selling proportionately more this year will still not generate suffi. cient profits to meet the increase in taxes," said Page.

"I don't want to paint a picture that sounds too pessimistic, as though things couldn't possibly get worse. Things not only could be worse, they will get worse: next year, the year a{ter and in years to come. The base rate on the new tax will increase each year until 1973, and thereafter, supposedly, it will remain unchanged. (See chart below.)

"The question is what can we do about this?" asked Page. "I have no magic formula, but there are several things which might soften the ,blow of the new tax."

Anything that can be done to reduce employee turnover will make a surprising difierence in tax rates, Page indicated. If an employee quits or is laid ofi after reaching the $6,600 annual salary base, the tax begins all over again when a replacement is hired. A company could conceivablv pay the tax twice in the same year.

Page also urged members to review their pension. plans, profit-sharing and hospitalization programs with an eye to modifying the fringe benefits to reflect the additional coverage that will accrue from Medi- o'In the case of employees past the age of 65, it might be wise to consider excluding them from your company group hospitalization program, since it would provide a duplication of medical coverage offered by Medicare," he said.

'oThose are some of the things we can do; how to do them is another thing. Careful planning, anticipating needs, hiring more carefully and perhaps the use of out. side agencies for temporary help might be worthwhile to consider." Pase concluded.