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There are three types of retirement savings plans. The first two are offered and administered through employers:
Defined benefit plans, as the name implies, specify the benefit. For example, you and your surviving spouse will receive $2,000 a month for as long as you live, come heck or high water. Your employer funds the plan, and its investments usually are managed by a third party; how they come up with enough to pay you is their problem. Traditional pension plans, as offered by most government agencies and legacy corporations, are defined benefit plans. These plans are going out of style because companies don’t want the burden of extra funding for the plans in bad times. The Pension Benefit Guaranty Corporation, a government corporation set up to guarantee pension benefits, estimates there were 22,697 such plans in effect in early 2013, down from 80,000 such plans in the United States in 2005, and down from 250,000 in 1980. If you have a defined benefit plan, consider yourself fortunate.
Defined contribution plans, on the other hand, define the employee (and employer) contribution—what goes in—not the benefit that comes out. The widely used 401(k) plan is most common, allowing an employee to set aside up to $17,500 in funds each year, with an additional catch-up amount of $5,500 for employees over 50 years of age; some company plans offer matching funds. Public entities use 403(b) plans as an equivalent, and there are many other flavors. You must understand that the benefits you realize from these plans are both a function of how much you set aside and how well your investments perform; there are no guarantees. This lack of guarantee is of considerable concern to economists and savvy individuals alike; there is no assurance that retirees in the future will have sufficient funds to retire on, regardless of how much they set aside. Hit by the triple whammy of reduced earnings, lower stock prices, and increased emergency withdrawals, the Great Recession created a large drop in 401(k) balances to an average of $30,200 across 17,000 corporate 401(k) plans, according to plan administrator Fidelity Investments. More positively, that number recovered to an average of $75,900 by 2012, with sizable increases in employer and employee contributions along the way.
The third type, as the name implies, are individually set up and administered—individual retirement plans, or “arrangements” (IRAs). These plans behave like defined contribution plans, except there is no co
Why You Should Care
It pays to know what kind of retirement savings plans you have or are available to you, and to make the best use of them. While there is no single source or website that covers the entire gamut of resources, some consumer-friendly brokerages, like Fidelity (www.fidelity.com), get pretty close. Providing for retirement involves two steps: retirement pla
52. UNEMPLOYMENT BENEFITS
When unemployment rates double to over 10 percent in one year as they did during the Great Recession, obviously there’s a big impact on the economy. Not only does the absence of income hurt the one in ten who aren’t working, but it also hurts the economy at large, which of course leads to more unemployment. Thus, unemployment insurance, or “Jobseeker’s Allowance,” as it’s called in the United Kingdom, helps to stabilize the economy and reduce the effects of boom and bust cycles.
As part of the 1935 Social Security Act in the wake of the Great Depression, unemployment insurance and benefits were established to help people through such times of general strife—or individual strife inherent in the transition of an individual company or industry. Although no longer part of Social Security, these benefits continue today and have been bolstered to a degree to mitigate the effects of the Great Recession.
What You Should Know
Today’s unemployment insurance programs are actually a joint venture of the federal government and the states. They are funded through employer-paid payroll taxes paid to the states and to the federal government; the federal funds are then reallocated back to the states. The federal unemployment tax is collected under the Federal Unemployment Tax Act (FUTA) from most employers, exceptions being made for small companies with few employees. The base FUTA tax is 6.0 percent of the first $7,000 in wages. You won’t see this tax on your paycheck; it is paid by the employer. State taxes vary by state, and may offset some federal taxes. FUTA funds are then given back to the states to administer unemployment and jobs programs, and to fund state-paid benefits.
Benefits are paid as a percentage of wages up to a maximum, and are typically available for twenty-six weeks upon filing a valid claim. Legislation may be invoked during bad times to extend benefits, as was the case in late 2008, and benefit periods have been extended since. Eligibility varies by state. To find the rules in your state, one resource is the “CareerOneStop” locator, maintained in conjunction with the U.S. Department of Labor, at www.servicelocator.org/OWSLinks.asp.
Why You Should Care
Most people get through their working lives without having to file for unemployment benefits, but obviously they can help a great deal in times of stress. Particularly if you feel your job is in jeopardy, it’s worth knowing about the rules before something bad happens—that way, you can plan, for instance, on how you will get by on two-thirds of your salary for six months. Also, the more you know and the sooner you know it, the faster the application process can be. If you feel unemployment is imminent, it’s worth checking the rules and resources with your human resources department and with your state unemployment office.
53. HEALTH INSURANCE PROTECTION: COBRA AND HIPAA
It’s no news that the cost of health care has skyrocketed over recent years despite relatively tame inflation. There are many causes for this—administrative costs, technology, and the separation of consumer and payer (usually an insurance plan)—and it’s too big a subject to tackle here. But when health care generates (or costs, depending on how you look at it) 17.6 percent of our GDP while manufacturing activities generate only 10 percent, something is off-center. Suffice it to say that the solution appears to be complex and far-off.
As a consumer, you will bear a greater burden for your health care costs. That’s bad because you’ll pay more. But in the bigger picture it may be good, because when you have to pay for something, you shop for the best value and hold providers accountable for what they deliver. That said, events that may severely affect your ability to get insurance coverage are out of your control—specifically, job changes and layoffs. If you are forced to transfer between states where an insurer may not provide benefits in both states, or you are forced to leave a job, your insurance coverage could be dropped “cold turkey,” leaving you worse off, or forcing you to prolong an unfavorable situation just to keep the insurance.