The authors of the recently released study, “Downward Mobility from the Middle Class: Waking up from the American Dream” challenge the widely accepted idea that the economy is improving to the point where the  next generation of the world’s population has a high chance of living better than their parents. This may be, at least in part, due to decisions made by parents.

Some definitions:

• “Downward mobility” is the technical term describing the act of a person moving from one economic class down to a lower class.

• The “middle economic class” is defined as being in the 30th to 70th percentile in economic prosperity.  Obviously, the middle class encompasses a large number of people.

This study focused on those who fell from the middle class to the lower economic class — often described as poverty.  The problem is this: once a person falls to the lower classes, moving back up is difficult and becomes increasingly difficult for ensuing generations.  Certain life choices as well as characteristics out of a person’s control are shown to have an effect on their ability to hold their economic class.

Based on this study, what are some choices that help both you and your children?

Get an Education

According to the study, women who were raised in a middle class household and only received a high school education are 14% to 16% more likely to live their adult lives in the lower economic class; men are 7% to 15% more likely. Even some college education increases a person’s chances of remaining in the middle class.

Get Married and Stay Married

Women who are divorced, widowed, or separated are 31% to 36% more likely to make a downward move;  never married women are 16% to 19%. Men who were once married are 13% more likely to live in a lower economic class, while men who never marry are 6% to 10% more likely.

What are some of the factors you can’t (and probably don’t want to) control?

If you are an African American male you are 38% more likely to fall down a class compared with 21% of Caucasian men. For women, race was not found to be a factor.   Thirty percent of white women, but only 21% of white men can expect downward mobility.  Gender was not a factor for African Americans.

The most significant factors?

For women, divorce is the most detrimental economic event that could cause you to move down a class;  if you’re a man, stay away from drugs … heroin use was the single biggest factor that moved men down to the lower class.

How Will Your Children be Affected?

Children in poverty tend to stay in poverty as adults.  The cliché, “money doesn’t buy happiness” may be true, but reality is this: middle class households have more opportunities to prosper than do lower class families who have difficulty, beginning with baby costs,  paying for activities which could help their children toward upward mobility.

Whereas some factors which create downward mobility from the middle class are out of your control, this study does give credibility to what most of us already know: life choices can have a profound effect not only on you but also on your children.

According to the study, the best things you can do for the future of your children are 1) get an education and 2) maintain a stable marriage.

Readers: Just digging a bit here … the results of this study seem rational, yet somewhat sterile.  What do YOU think are the most important things you can do to help your children toward a stable financial future?

I have a hard enough time spending $200 on a phone and over $100 each month on our cell phone bill.  That’s well over $1,200 each year on cell phones!  Now, think about $25,000…that just seems absurd.  But it’s not that far off if your living in China and you want an iPhone.

Recently, I read about Apple selling the iPhone in China.  The iPhone would sell for 5,999 yuan or approximately $1,000 USD.  Seems a little high even for us Americans.  So where does the $25,000 come into play?  When you take into consideration that the average annual income in China is just 12,076 yuan and the iPhone costs almost half of the average family’s income, you get the equivalent of an American spending $25,000 on an iPhone.  Sounds hard to believe, but that’s the simple math of it!

Is Apple foolish to sell the iPhone in China?

With over 1.3 billion people in China, the market seems like a never-ending stream of potential business.  But when it comes to luxury goods, like an iPhone, I don’t know how much of a hit it will actually be.  Granted, you don’t need to capture much of a 1.3 billion person audience to make a giant profit, which might be why Apple has decided to tap into the Chinese market.

Is it ethical to charge so much?

Here’s the million-dollar question: is it OK for Apple to charge $200 in the US for an iPhone but $1,000 ($25,000 adjusted for income) in China.  Technically, they can charge whatever price they want and as long as there is demand, Apple wouldn’t need to lower the price.  That’s the simplicity of supply and demand.

While charging half a year’s wage for something that is actually made in Asia seems a little off to me, an iPhone is still a luxury good. Does Apple have a social responsibility to charge a fair price across the board, or is it acceptable to discriminate with pricing?  I would lean towards the latter.

If we were talking about bread costing $30 a loaf in China, then I would be concerned because bread is a necessity.  An iPhone, however, is not a necessity (contrary to popular belief) and people don’t need one to survive.

Price Discrimination in Action

Whether you agree or not with Apple, they are doing something called price discrimination.  It’s a term that economists use to describe a situation where a seller charges different prices to different groups of people.  The idea is that some will be willing to pay a premium price while others will not.  The seller makes large profits on those willing to pay a premium and minimal profits on those who aren’t willing to pay full price.  You’ll see this happen every day at car dealerships, which is why it’s so important to know how to negotiate.

So, while the idea of charging $25,000 for an iPhone may seem outrageous, to me spending $25,000 on an iPhone is even more absurd.  It all comes down to choice, so while I wouldn’t spend half of my family’s income on an iPhone, who am I to say someone in China shouldn’t spend what they want on a luxury item?

What do you think?

Tim is a personal finance writer at Faith and Finance a Christian financial help blog that provides financial insights for individuals, businesses, and churches. Outside of finance, Tim enjoys spending time with his wife, playing the saxophone, reading economics books, and a good game of RISK or Catan. Find him on Twitter and Facebook and subscribe to the Faith and Finance RSS feed.

As an Illinois resident, I am intrigued by newly-inaugurated Rep. Dwight Kay’s recent proposal (HB0110) to cut state lawmaker’s salaries by 10-percent.  Although Kay’s motives are not clear, I am assuming that he either wants to make a name for himself or punish those responsible for Illinois’ massive debt problems.  Probably some of each.

“It’s a 10-percent pay cut for all legislators,” Kay said. “I plan to take one.”

I have a better idea: Let’s put all lawmakers on commission, starting with Illinois.

How would this work?

My commission concept is a simple one: reward the lawmakers when they reduce the debt and punish them when they increase it.   The commission would be paid on actual debt reduction, not on sponsored bills or voting record.  Why?  Because if all legislators know their salaries depend on results, they will be forced to work together.

State level

Illinois currently has a total debt of over $120 Billion with the prospect of another $12.8 billion shortfall for the current budget year.

With my commission plan, our current legislators, by approving an additional 10.7% deficit ($12.8 B / $120 B) would get their $67,836 salaries cut to $60,578.   If this trend continues for the next five years, the Illinois lawmakers would see their salaries plummet from $67,836 to $38,523.  However, if they could decrease the debt  by 10% each year for five years, they would bump their salaries to $109,251 annually.  I, for one, would be glad to pay it.

Federal level

Our nation’s debt, according to U. S. National Debt Clock, is currently at $14  Trillion with an annual budget deficit of 1.3 Trillion: a 9.3 percent debt increase.   My commission plan would earn our  federal lawmakers a pay cut of $16,200 from their current $174,000 salaries.   Over a five year period, they would find themselves at $106,800 if the current trend continues.

Tax Hikes don’t count

If you have followed the news recently, you may have noticed that Illinois has increased their state income tax by 66% (from 3% to 5%).   Because this is the quick and easy (politician’s) technique for reducing debt, my commission plan would penalize, not reward, all tax hikes.  How?  I am thinking the lawmakers would pay double whatever tax increases they foist on their constituents.  On the other hand, we should reward legislators who choose to give taxpayers some of their money back in the form of window tax credits (example: energy tax credits for 2011).

One big problem with my Commission Plan

Unfortunately, any changes in salary must be approved by the lawmakers themselves.  In fact, they have scheduled annual increases which go into effect automatically unless they vote otherwise.  This being said, I would think that any normal business man would leap at the chance to work on commission, but, unfortunately, lawmakers are not normal businessmen.  Sooo, in spite of the good sense it makes, or perhaps because of the good sense it makes, I regretfully admit that my commission plan will never be seriously considered.

Makes one wonder about the possibilities of term limitations.  Hmmm.

Readers: What ideas do you have for reducing our state and national debts?

Have you read the reactions of Seniors on the news that Social Security increases won’t happen next year?

Here is a sampling:

From Huffington Post:

• “I think it’s disgusting,” said Paul McNeil, 69, a retired state worker from Warwick, R.I., who said his food and utility costs have gone up, but his income has not. He lamented decisions by lawmakers that he said do not favor seniors.   “They’ve got this idea that they’ve got to save money and basically they want to take it out of the people that will give them the least resistance,” he said.

From Reading Eagle:

• “No COLA (cost-of-living adjustments) again next year will certainly be problematic for a lot of seniors,” said Andrea Kurtz, director of administration for the Berks County Office of Aging.  “It will be especially hard on those who don’t have pensions or retirement monies, and whose only source of income is Social Security.”

From WAOW:

• “So many people you see shopping the stores these days are looking for bargains and it’s sad that they are going to have to step back because all prices are going up, and their income is going down,” says social security recipient Clifford Vanderwall.

In fairness, not all seniors are cry babies.

Huffington Post also quoted Stella Wehrly, an 86-year-old retired secretary.

• “I’m kind of glad in a way,” Wehrly said of the freeze. “One thing depends on the other and when people aren’t working there’s not enough people feeding into the Social Security system.” Wehrly and her husband, Hank, said curtailing government spending is necessary to maintain the Social Security system.

I agree with the Wehrlys.

The system simply can’t afford being squeezed when there is no funding mechanism to pay for the squeezing. Federal law requires the Social Security Administration to base annual payment increases on the Consumer Price Index for Urban Wage Earners and Clerical Workers, which measures inflation. Simply put, if inflation occurs this year, all Social Security recipients get raises the following year. If there is no inflation, there is no raise. I didn’t hear any complaints when the Social Security Administration announced the largest raise in 27 years (5.8%) in 2009, even though that raise was skewed upward by high energy prices in the 3rd quarter of 2008; prices which fell dramatically in January of 2009. These COLAs can cut both ways.

The point is that Social Security is an extremely fragile system, on target, according to their own literature, to be paying more out in benefits than the amount collected in taxes by 2016 and, without changes, be out of money in 2037.

Yes, going without raises is tough, especially for those whose retirement is primarily dependent on Social Security income. I am not unsympathetic to retirees whose needs increase while their revenues remain stagnant. But I also feel for our younger generations who are funding the system with little hope of ever drawing from it.  A discretionary increase in 2011 would further imperil those chances.  I believe that no COLA  in 2011 is a harbinger of even tougher future decisions if Social Security is going to be rescued. Things could easily get worse before getting better for recipients.

By the way, when I speak of Social Security recipients, I speak not of “they” but of “we”.

I draw a Social Security pension.

What are your thoughts?  Do Seniors have a legitimate gripe?  Should Congress go ahead and give raises even though there has been no inflation?

About the writer: This guest post was written by Garrett Driscoll from Debt Eagle.   Give Garrett a visit if you need help with credit card debt, debt management, or bankruptcy.

Debt Settlement world has been under scrutiny

The debt settlement industry has been under a mountain of scrutiny as the U.S. economy continues to slump. Consumers have been acquiring more debt as job losses rise and often turn to credit cards in order to pay the bills. Recently a flood of television, radio, and internet advertising has poured into the airwaves from debt companies that promise an easy fix for very complicated debt problems. Complaints about these companies to the BBB have grown and many consumers have gotten into serious financial trouble as a result of working with them. The New York Senator Charles Schumer is looking to change this with the 2010 “Debt Settlement Consumer Protection Act“. This act, as a part of the Obama administration’s overhaul of financial laws, should go into action on October 12, 2010. It will serve to fight predatory debt settlement companies that take advantage of this now booming market. Even though the debt industry is a magnet for bad business practices, not all debt settlement companies are predatory (Some even have triple A ratings from the BBB). There are still a good number that want to do good business and try to help their customers. Are these harsh new laws going to wipe out ethical debt companies as well?

Recessions fuel Debt Settlement company business

Companies that provide debt services thrive in a recession. This prosperity has seen many people willing to do bad business, make huge profits and consumers are paying a stiff price. Most debt settlement companies charge large upfront fees and monthly fees to people who can ill afford it. The companies promise that the consumer’s debt will be halved or quartered once it is settled with creditors would be great if it were true.  Unfortunately, many times this big debt reduction never comes. In these cases, debtors may have only bought themselves a bigger financial mess. A debtor can get sued, have wages garnished, or get a lien put on their property if the settlement doesn’t work. Many creditors hate working with settlement companies and may even escalate legal action if they find out you are doing business with one.

Debt Settlement Consumer Protection Act should clear out the riff raff

The only debt companies that will be left standing are the ones that offer “legitimate help”. Bad debt companies often change company names and addresses to avoid complaints and bad reputations, but they can’t hide from these new laws. The Consumer Protection Act has passed, but isn’t being enforced just yet because the debt settlement industry, who is not happy about these regulations,  may try to keep them tied up in court for as long as possible. Once the law is enacted, businesses aren’t allowed to charge any upfront fees and will not be able to take a commission until the debt is actually settled. They also will only be able to take a maximum of 5% of the settled consumer debt (it is currently around %10-30%). If this law is enacted, many of these companies will be out of business. The profit margins just got a whole lot slimmer and not just any fly by night companies will be able to tough it out. Companies who offer real help may continue to function, but the industry just got a whole lot less appealing.

The Act empowers federal and state governments

The “Debt Settlement Consumer Protection Act” also provides powers to the state and federal bodies to crack down on companies that profit on predatory practices. If they are caught violating these laws, the state will have the authority to pursue them. It will also force companies to have an adequate disclosure of all the fees that will be taken. The paperwork will itemize all fees and services a customer will be charged for before they sign up. This will give the debtor a clear, easy to understand, contract that they can mull over before they commit to the service. Settlement companies also will have to disclose that “stopping all payments to a creditor MAY BE RISKY” (this will be tough for them because stopping payments is at the heart of their business model). The act will also give consumers the ability to cancel settlement services for a full refund within 90 days of the signed contract. The refund will exclude any payments that were made to creditors on the debtors behalf.

Could The Debt Settlement Consumer Protection Act kill the entire industry?

Some debt settlement companies believe that this bill is less of a restriction and more of an effort to kill the entire industry. In spite of the many abuses committed in this sector there are still companies with good BBB ratings. So should the FTC be throwing out the baby out with the bathwater? The industry says that with the amount of profit left after the law is enacted isn’t enough to run a sustainable business. A settlement company could only profit around $300 dollars from of a customer with $10k in debt. With the amount of labor involved to run a debt case, this wouldn’t even pay the rent. I have mixed feelings because regulation is definitely needed in the industry, but the act will also put a lot of people out of businesses in a bad economy.

Who are the winners?

With the debt settlement industry on its final legs, consumers will still need help with their debt problems. If the settlement companies can’t find a way to work within the law, credit counseling companies will most likely fill the void. Credit Counseling Services are the winners here, because they have avoided all regulation in the new “Protection Act”. The new laws even give counselors the ability to charge more fees than the settlement companies! Credit counseling services involve working 1-on-1 with a client’s creditors. This fact alone helps avoid alot of the negative issues that arise because of settlement. It could be one reason why they avoided the new regulations to their industry. Credit counseling is much safer, but can still be abused (like anything else). Consumers can be easily taken advantage of in complicated financial transactions (adjustable rate mortgages, debt settlement, etc). Regulation to these industries is good, but the job losses and defunct businesses will always be collateral damage.

Readers: have you used debt settlement companies?  How did it go?  Do you think this new act is needed?   Why?

photo credit: Daquella manera

The book “Aftershock” by Weidemer, Weidemer and Spitzer documents economic predictions by people who should have known better but didn’t. Here is a sampling:

• Prediction: “A very powerful and durable rally is in the works. But it may need another couple of days to lift off. Hold the fort and keep the faith!” Richard Band, editor Profitable Investing Newsletter, March 27, 2008.

What actually happened: At the time of Band’s comment, the Dow Jones industrial average was 12,300. By December, 2008 it was at 8,500.

• Prediction: “AIG could have huge gains in the second quarter.” Bijan Moazami, distinguished analyst, Friedman, Billings, Ramsey, May 9,2008.

What actually happened: AIG lost $5 billion in the second quarter of 2008 and $25 billion in the third quarter. It was taken over in September by the U.S. Government.

• Prediction: “I think this is a case where Freddie Mac and Fannie Mae are fundamentally sound. They’re not in danger of going under…I think they are in good shape going forward.” Barney Frank (D-Mass.), House Financial Services Committee Chairman, July 14, 2008.

What actually happened: Within two months of Rep. Frank’s comments, the government forced the mortgage giants into conservatorships and pledged to invest up to $100 billion to each.

• Prediction: “I think Bob Steel’s the one guy I trust to turn this bank around, which is why I’ve told you on weakness to buy Wachovia.” Jim Cramer, CNBC commentator, March 11, 2008.

What actually happened: Within two weeks of Cramer’s comments, Wachovia came within hours of failure as depositors fled. Steel eventually agreed to a takeover by Wells Fargo. Wachovia lost half their value from September 15 to December 29.

• Prediction: “I think you’ll see (oil prices) at $150 a barrel by the end of the year”. T. Boone Pickens, one of the wealthiest and most respected oilmen today, June 20, 2008.

What actually happened: Oil at the time of Pickens’ prediction was around $135 a barrel. By late December it was below $40.

• Prediction: “I expect there will be some failures…I don’t anticipate any serious problems of that sort among the large international active banks that make up a very substantial part of our banking system.” Ben Bernanke, Federal Reserve chairman, February 28, 2008.

What actually happened: In September, 2008, Washington Mutual because the largest financial institution in U.S. history to fail. Citigroup needed an even bigger rescue in November.

Why don’t they tell us the truth?

How do you feel when your read these failed predictions? Angry? Confused? Miffed? Cynical? I probably feel some of all. And while I don’t claim to know another person’s motives for their actions, I have some theories about why these “experts” didn’t tell us the truth.

They do not know the truth.

They may be “experts”, but (being charitable) I concede that many really had no clue to the imminent housing, banking and stock market collapses. But then should they be called experts?

Finally: someone who tells the truth

They have agendas which are contrary to the truth.

Again, I don’t claim to know another person’s motives, but T. Boone Pickens, an oil man, is not likely to make negative predictions about oil. Richard Band, editor of Profitable Investing Newsletter, knows that dire market predictions will normally curtail investing.

Predicting failures could make a leader seem inept.

Barney Frank, as House Financial Services Committee Chairman, may have realized that failures of Fanny Mae and Freddy Mac could be reflections on his leadership ability. Same with Federal Reserve Chairman Ben Bernanke in regard to impending bank failures.

They honestly believe that knowing the truth is not a good thing.

Have you ever had someone hide the truth from you because they didn’t think you could “handle it”? Have you ever heard, “what you don’t know can’t hurt you?” If you are like me, once you learn that a friend or relative withheld the truth because it was “for my own good”, I feel patronized…and angry. It may be that certain experts simply don’t think that us normal down to earth citizens have the fortitude and integrity to deal with reality, so they keep it from us.  Is “arrogant” a fitting word here?

The doctor/disease analogy

If your doctor knew you had a life threatening disease, which of these would you prefer:

• Not telling you because your disease would reflect poorly on his ability as a doctor?
• Not telling you because he didn’t think you could deal with the truth?
• Telling you the truth?

You want the truth of course. I realize that economic forecasting is not as an exacting science as practicing medicine, but, be it a doctor, a politician, or an economic pundit, I want to know the truth.

Whom do you trust?

I don’t want to become a cynic, but recent history has given me little reason to trust the so called economic experts. I have therefore vowed to do something far too few of us do: think for myself. I might not get it right either, but at least I know my own motives. And I am the expert in one financial arena: my own finances.

How about you? How do you filter economic predictions? Whom do you trust? Why?

photo credit: LowImagination

photo credit: Shot By Darko

photo credit: alancleaver_2000

I know. Tax season just concluded and the last thing you want to hear about is taxes. I understand, but think of it this way – right now, while this stuff is fresh in your mind, is the best time to start considering what the future holds. So…are you ready?  Take a deep breath and read on.

We heard it over and over again from candidate Obama during the 2008 Presidential campaign: “I will not raise taxes on any single person earning under $200,000 or family making less than $250,000 a year.” Of course the implication is, “If you make over those thresholds, watch out!”

The Obama administration has a great opportunity to keep both the promise and the implication as taxes will undoubtedly go up.

According to MoneyWatch.com, we can expect the following tax changes:

1. Hike from Health Care Legislation

Starting in 2013, if your income is above the $200,000/$250,000 level you will pay an additional 0.9 percent on your federal payroll taxes, and your investment income and gains will be bumped up by 3.8 percent levy.

2. Higher Income Taxes for High Earners

This is an easy one. All Congress needs to do is nothing in order to raise taxes on high earners. “How can this be?” you ask. Unless the Bush tax cuts of 2001 and 2003 are extended, they expire this year, pushing the top incremental brackets back to the 2000 levels. Specifically, the top levels of 33% and 35% will revert to 36% and 39.6% respectively. The 36% increment will include singles with taxable incomes of $192,000 and married couples filing jointly with incomes above $232,950. The 39.6% bracket includes everyone (singles or married) earning above $375,000. If no action is taken, these higher rates start in 2011. All other brackets will become permanent.

Strategy

Mark Juscombe, senior tax analyst at CCH publications, says, “You might want to reverse the usual tactic of deferring income into the next year.” Also, higher earners who are converting a traditional IRA to a Roth IRA may want to pay the conversion tax at the 2010 level instead of spreading the tax bill out to 2012. Recommendation: meet with your tax advisor!

3. Investment Gains

This is another “do nothing” tax hike. Long term capital gains and qualifying dividends, which have been at a 15% maximum rate for several years, will automatically go up without Congressional action; the capital gains to 20% and the dividends to be treated as ordinary income. According to MoneyWatch.com, the most likely fix will be to lock in the dividends at 20 percent, which is certainly better for those in brackets above that level.  Also, keep in mind that if you are in the $200,00/$250,000 income levels, you will be adding another 3.8% of taxes to those gains starting in 2013 (see 1. above).

Strategy

Home owners of high value real estate who are considering down sizing would save considerably by doing so in 2010 instead of waiting. The first $500,000 capital gains for a married couple who has lived in the house for more than 24 months is not taxed, but what if the gain is $1 million? The capital gain tax difference between 15% (2010) and 20% (2011) is $25,000.

4. Return of Estate Tax

There is no federal estate tax this year (2010), but, without Congressional action, it will automatically revert to 2000 levels starting in 2011. What will this mean? Estates between $1 million and $10 million would be hit with a top rate of 55 percent while those above $10 million would pay 60%. However, Congressional leaders have promised to reinstate the 2009 rules – no tax on estates up to $3.5 million ($7 million for married couples) and a maximum rate of 45 percent on assets above that level, retroactive to January 1, 2010.

Strategy

Money Watch says, “Hope Congress gets its act together pronto – and talk to your attorney while you wait.” The current status is muddied by the fact that there is currently no 2010 federal estate tax but Congress is considering passing a bill that would make it retroactive to the beginning of 2010.

5. Fewer Write-Offs for High-Income Earners

The Obama 2011 budget calls for reinstating the phase-out of personal exemptions and itemized deductions for taxpayers in the two highest brackets. One proposal would cap the deduction rate for these brackets (36 percent and 39.6 percent) at 28 percent, which will certainly raise the ire of organizations who depend on charitable contributions.

For a great post and ensuing discussion on this topic, see Financial Samurai’s Why Are President Obama And The Democrats Against Charity?

Strategy

Hopefully, not getting a deduction in 2011 will not deter you from giving to charitable organizations, but reality is that the less taxes you pay, the more money you have to give. Tax wise, for those in the top two brackets, you might want to give an extra amount this year to offset the reduced deduction next year.

Summary

Has Obama kept his promise to not tax singles earning below $200,000 and married couples under $250,000 range?

Not exactly. The legislation he signed raising the tobacco tax nearly 62 cents on a pack of cigarettes will most certainly hit the average working class the hardest. However, the likely hikes discussed in this post will affect high earners the most.

As we said, the promise NOT to raise taxes on those earning under the given thresholds were implied promises TO raise taxes on higher earners. To that degree, President Obama is keeping his promises.

This post was included in Yakezie Carnival hosted by Foreigner’s Finance

photo credit: Brett L.

Allow me to preface this post by referring you to some other great posts on the health care legislation.  The Amateur Financier gives a balanced look at the legislation and what it means to us.  Other bloggers who have weighed in are Financial Samurai who is in favor,  Darwin of Darwin’s Finance who is convinced that we will have buyer’s remorse, Kevin of 20s Money who is certain (based on government’s history of underestimating projected costs) that it will be way more expensive than expected and Evan of My Journey to Millions who digs into whether the bill is even constitutional.

If you want a great summary of what the bill covers and which provisions kick in when, I highly recommend jumping over to this article provided by Health Insurance Providers.

What do I think?

Did we need health care reform?  I think everyone agrees that we did.  Me too.  But I also believe that this bill will ultimately result in poorer quality of health care for all of us.

Let me explain:

What will happen to Health Insurance Companies?

Imagine the following conversations:

Homeowner, “I need to purchase some homeowner insurance.”

Insurance Agent, “Tell me where you live so we can drive by and look your home over.”

Homeowner, “My address is 100 Main St, but my house burned to the ground yesterday.”

Or…

Woman, “I would like to purchase some term life insurance for my husband.”

Agent, “I will need to ask some questions.  How old is your husband?”

Woman, “He died yesterday.”

“Ridiculous!” you say.  “No insurance company is going to issue insurance against an event after the event has already happened.”  Right.  But, starting this year, the new health care bill requires insurance companies to extend coverage to children with pre-existing conditions.  By 2014, all pre-existing conditions must be covered for all ages and (get this), higher health insurance rates cannot be levied because of health, gender, etc.

“But…but…shouldn’t everyone have health insurance regardless of their circumstances?”

Good question.  One I don’t have an answer to.  But here is my question:  How can insurance companies stay in business if they are forced to insure all pre-existing conditions and not allowed to raise their rates?  Well, they can and will pass those increased costs on to other policy holders, but my prediction is that within five years all health insurance companies will have closed their doors, forcing the single payer government health insurance to be the only insurance in town (or in the nation).

What will happen to doctors?

Our government has promised to trim heath care costs and help save money on health insurance premiums.  While I haven’t read anything specific about the new bill monitoring pay for medical treatment, they will have to find ways to hold down health care costs if we default to the public option plan.  I envision them setting limited payments per procedure, effectively stifling doctors’ incomes.  With less income incentive, current doctors are going to start leaving the system and prospective doctors will think twice before spending $250,000 and 8-10 years of their lives for the privilege of working for a capped salary.

By 2014, the new bill forces all U. S. citizens to have health insurance or else pay a fine.  In effect, the 30,000,000 who are currently uninsured will then be insured.  Even if we keep the same number of doctors, each doctor will be seeing more patients thus reducing the quality of care.  If my theory is true about fewer doctors in the future, each doctor will be seeing even more patients,  further diminishing the quality of care per patient.

What will happen to pharmaceutical companies?

Pharmaceutical companies invest hundreds of millions of dollars in research to discover new cures for our health issues.  They must recoup these investments within the patent time period in order to justify future research.  Why?  Because once the patent has expired, any and every drug company will start selling the generic version for practically nothing.  For example, I pay only $10 for three months supply of the generic blood pressure medication.

The new Health Care Reform bill requires that, starting in 2011, seniors enrolled in Medicare Advantage or the Prescription Drug Plan will receive a 50% discount on brand name drugs immediately with additional prescription drug discounts to follow.  Now…ask yourself what will happen if the Pharmaceutical companies are not allowed to recoup their research investments because they are restricted in what they can charge.  Right.  They will simply stop doing the research.  We won’t notice for years, but, without the research, no new drug discoveries will be made.

Summary

I hope I am wrong, but it seems to me that the health care bill we passed is going to lower the quality of health care for all of us.   When the insurance companies close their doors, we will all have government run health care.  Because of our nation’s debt problems, restrictions could be capped on rates health care providers charge, which would discourage prospective doctors from entering the medical field.   The equation of fewer doctors and more patients equals metered care for all.  If pharmaceutical companies cannot profit from new medicinal discoveries, there will be no new discoveries.

An ironic silver lining: if the quality of health care is lessened, we might start taking better care of ourselves.  That would definitely be a good thing.

Please jump in and share your thoughts on the new Health Care Bill.   Do you agree that it will lower our quality of health care?  If so, is insuring the uninsured worth it?

This post has been included in the following carnivals:

Yakezie Carnival #6 hosted by Canadian Finance Blog

Baby Boomers Blog Carnival hosted by Baby Boomers US

Carnival of Financial Planning hosted by The Skilled Investor

Carnival of Financial Planning hosted by Green Panda Tree House

It is starting again. According to CNN Money, gas prices are up 45% from last March and still rising. Prices may not reach the record high of $4.114 per gallon as reported by AAA on July 17, 2008, but people are nevertheless rumbling, “Gas prices are rising through the ceiling and there is nothing I can do about it.”

I disagree. Maybe we can’t lower gas prices, but we can minimize the impact these prices have in our lives. The following suggestions should help:

1. Adjust your budget.

How much money do you spend on gasoline every month? If you answered, “I don’t know” then you have just confessed that you don’t have a working budget. If you know the answer, then you must cut back on another item as you spend more on gasoline. Hint: If you drive 1000 miles a month at 20 MPG, you are currently spending $150 a month if gasoline is $3 a gallon.

2. Establish your priorities.

Non-negotiables in any budget are food, transportation, housing and utilities. How about eating out? Going to movies? Saving for that Hawaiian vacation? Driving a luxury car? Cable TV? Starbucks coffee? These may seem important, don’t get your wants confused with your needs. Take care of needs first, prioritize your wants and cut the ones you can’t afford.

3. Manage your miles.

Driving to work is a necessity (unless you can car pool…and you should if you can) but think of other driving as a luxury. Be selective and plan ahead so you can multi-task your trips.

4. Consider a more fuel efficient car.

No, I do not recommend that you go into debt to buy a newer car. However, selling your gas guzzler and paying cash for a more efficient one is worth considering.

Although gasoline has risen 45% in the past year, the actual increase in the average budget is only about $50 a month (assuming 1000 miles a month at 20 MPG). Face reality, make adjustments and enjoy life. You can cope.

How do you cope with rising gas prices?

This post was included in the following carnivals:

Festival of Frugality hosted by Frugal Upstate

photo credit: Andres Rueda

Also banned: Selling of students’ personal information

I applaud the Illinois lawmakers and Governor Pat Quinn for passing legislation which bans the gimmicky marketing of credit cards to college students. The bill, which won’t take effect until January, could impose fines on colleges and universities if they allow credit card companies to offer free gifts when marketing their products on campuses.

According to State Treasurer Alexi Giannoulias, who lobbied for the new law,

“Too many students have had to learn the hard way that there is nothing free about these gifts.”

Giannoulias noted that college students can run up huge debts that, when unpaid will remain on their credit histories for years after graduation, affecting their abilities to purchase homes or vehicles.

Credit Cards and College Students

I totally agree, adding this statistic: the Jump$tart Coalition for Personal Financial Literacy reported that 19% of all bankruptcies are filed by people under age 25. “How,” I ask myself, “could people this young accumulate this much debt?” Yes, they could have huge student loans, but these can’t be bankrupted, so the logical conclusion is credit card debt. And just when did this credit card debt start? These credit card predators, errr..companies, know full well that the minimum age for owning a credit card is the same age as most incoming college freshmen: 18. They also know that many of these young adults are naive about owning a credit card, so they sink their hooks into them with an innocent give-away (Tee shirt, free pizza, etc.). And, as Mr. Giannoulias points out, “too many students learn the hard way that there is nothing free about these cards”.

The new law, House Bill 2352…

also prohibits schools from selling student’s names and personal information to credit card lenders. Did you get that? If not, read it again and let it soak in. I ask you to consider exactly what your universities have been up to. First, they have been receiving payoffs from the credit card companies to allow them to market their students. Secondly, they have been selling the student’s names and personal information to these credit card lenders. “Why” I wonder, “has this even been an issue? Shouldn’t our colleges and universities be protecting their students from vultures instead of making deals with them?” I would like to think that our colleges have a fiduciary relationship with their students, but this is obviously not the case when the price is right. And doing the right thing only when forced by legislation doesn’t improve their credibility.

The measure, which was approved by large margins in both the House and the Senate, affects both four year colleges and community colleges. Again, I applaud Treasurer Alexi Giannoulias, our Governor and our legislators for getting this one right.

One closing thought:

the bill doesn’t go far enough. How about requiring these centers of higher learning to give full disclosure to incoming students and their parents about any and all agreements they have made with credit card companies? Of course this would be nice if done voluntarily, but based on our colleges’ track records, it is not likely to happen.

Readers:  Do credit card companies market students on campus where you live?  What kinds of free give aways do they use?  Do colleges in your state sell students’ names and personal information to credit card companies?