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Legislation in 2005, known as the Bankruptcy Abuse Prevention and Consumer Protection Act, made it harder for debtors with means to simply file and walk away; they must discharge their debts if they can. There was a large “bubble” of bankruptcy filings before this law went into effect. Even with this law, bankruptcy filings have been on the rise over the years, as consumer debt and the likelihood of catastrophic medical bills has increased. Many Chapter 13 filings allow a complete discharge of medical debt alongside the payment plan for ordinary debts. The economic crisis, not surprisingly, triggered a rise in business and personal bankruptcies. According to federal statistics, nonbusiness bankruptcy cases rose from about a million in 2008 to over 1.5 million in 2010; they are projected to drop to a level near 1 million for 2013.
Why You Should Care
Even with the protection that bankruptcy affords, you don’t want to go there if you don’t have to. That said, it’s good to know that there’s a fair and reasonably unthreatening way to settle insolvency should it ever become your unfortunate circumstance. So if you’re pla
50. ENTITLEMENTS: SOCIAL SECURITY AND MEDICARE
Entitlements, or “social insurance” programs, are designed to stabilize the economy in several ways. First, they allow people to retire with some degree of financial security, else they would have to keep working well into advancing age. That would, of course, not be good for them or their employers, and it would fill jobs that would otherwise be available for younger employees. Second, these programs take the burden of caring for elder family members off younger family members.
What You Should Know
Social Security is a child of the Great Depression, an era where some 50 percent of citizens over sixty-five reportedly lived below the poverty line. The program stands largely as originally conceived and passed in 1935. The most important component is the Old-Age, Survivors and Disability Insurance program, or OASDI. Benefits are paid for retirement, disability, survivorship, and death. Retirement and survivorship are the most substantial parts of the program; disability benefits are difficult to qualify for, and the death benefit is minimal.
When a citizen reaches a certain age, a retirement benefit is calculated based on work and earnings history. The “full retirement” age was once sixty-five, but now has been extended depending on birth date. A reduced benefit can be taken starting at age sixty-two; if the retiree chooses to defer benefits to age seventy, those benefits increase. Both adjustments are done by spreading a projected benefit over a different number of years; that is, the total projected benefit is the same, just divided differently. In rough numbers, the payout increases 8 percent for each year you delay retirement. The Social Security Administration has an informative website covering benefits and other topics; see www.ssa.gov.
Social Security is funded by the so-called FICA tax (which stands for Federal Insurance Contributions Act) taken from every paycheck or collected as “self-employment tax” from self-employed individuals. The FICA tax, which combines Social Security and Medicare, is 15.3 percent of gross income; in the case of employees, employers pay half. Of that amount, 12.4 percent is for Social Security; the remaining 2.9 percent is for Medicare. Social Security funds are collected on the first $113,700 of gross income, while Medicare collections have no limits. In addition, Congress passed an additional Medicare tax of 0.9 percent for individual earnings over $200,000, which now also includes “unearned” income (from investments, etc.).
The Social Security funds collected go into the Social Security trust funds. Those funds are used to pay current beneficiaries and to buy U.S. Treasury debt obligations—that is, to fund current deficits. Currently receipts exceed payouts, but many economists are concerned that the trust funds are a giant Ponzi scheme—that future receipts will go to support current recipients, leaving insufficient money for future retirees who are currently paying in. Social Security is the world’s largest government program, and continues to represent about 20 percent of overall U.S. government expenditures.
Medicare, the “single-payer” health insurance and care program for those over sixty-five, came into existence in 1965. Medicare benefits are divided into four groups. Summarizing the four parts:
Part A provides basic hospitalization, and is free for seniors otherwise eligible for Social Security—those who have paid into the trust funds for forty quarters (ten years).
Part B provides outpatient benefits such as doctor’s office visits and other care, and costs $104.90 per month in 2013 for individuals earning $85,000 or less, $170,000 filing jointly (rising to $325.70 monthly for individuals with over $214,000 in income, $428,000 filing jointly), a premium typically deducted from the Social Security Benefit.
Part C, or “Medicare Advantage,” was created in 1997 to help those who had private coverage through an employer health benefit plan or who chose to purchase such coverage; the benefits are modified to dovetail with such a plan, and often include items otherwise not included, like prescription drug coverage.
Part D is a prescription drug benefit started in 2006 and costs $31.17 per month, again rising for higher earners.
Beyond Medicare, Medicaid provides additional benefits and pays some of the deductibles for seniors in serious financial need. Unlike Medicare, Medicaid programs can also cover qualifying needy families, and are administered at the state level; each state has different rules, although most of the funding is from the federal government. Typically, eligible seniors must have no more than a few thousand dollars in assets in addition to a home or car to qualify.
Why You Should Care
Beyond plugging what could be a huge—and growing—gap in the economy, these entitlement programs are important for your future financial pla
51. RETIREMENT PLANS
Someday you’re going to retire. And when that day comes, you should be eligible for Social Security, assuming you’re at least sixty-two when you decide to leave that cubicle or workshop for good. But most financial experts expect that Social Security will only cover 20 to 50 percent of your income needs, especially if you are still paying for or renting a home.
That’s where retirement savings plans come in.
What You Should Know
First, it’s important to distinguish retirement plans from retirement pla
Retirement pla