Health-Care Reform

Confused by the ongoing health-care reform debate? If so, you're not alone. With multiple bills and proposals in play, it's often hard to get a grasp on even the most basic elements of the discussion. While the outcome of the debate is uncertain, here are some of the major issues that are being discussed.

Universal vs. mandatory coverage

One of the main goals of health-care reform is to make affordable health coverage available to all Americans. To help provide coverage to individuals and families who can't afford it, most of the proposals provide assistance in various forms, including new tax credits, an expansion of eligibility for Medicaid, and insurance premium subsidies.

In fact, most of the major proposals currently being discussed actually require individuals to obtain health-care coverage (i.e., "mandatory" coverage). Under these proposals, individuals who refuse to get coverage would pay a financial penalty. Similarly, employers would be required to offer health-care coverage or pay a fine.

The "public option"

One of the most significant areas of debate centers on the so-called "public option." The term "public option" generally refers to the establishment of a government-run health-care plan that would compete with private insurers and provide coverage to millions of uninsured Americans. There has also been some discussion of establishing health-care cooperatives (nonprofit organizations that would be completely independent of the federal government) as an alternative to a government-run health-care plan.

Paying for reform

The costs associated with most of the health-care reform proposals being discussed are significant. The nonpartisan Congressional Budget Office (CBO) estimates that the legislation currently being considered in the House would cost more than $1 trillion over ten years, with a corresponding increase to the federal deficit over that period of time exceeding $200 billion. To help pay for health-care reform, reductions in Medicare spending are built into the House bill. Other proposals to raise revenue include raising taxes on high-income families, and taxing high-end health plans.

In his address to Congress on September 9, 2009, President Obama proposed a health-care reform plan he estimated would cost $900 billion over ten years, and pledged that he would not sign legislation that increased the deficit. The President described a plan in which savings within the current health-care system paid for most of the cost, with at least a portion of any shortfall paid by charging insurance companies a fee for their most expensive policies.

An evolving landscape

There are, of course, many specific provisions being discussed that we haven't mentioned here, and not all of them are controversial. For example, any health-care reform legislation is likely to tackle some of the current issues relating to pre-existing conditions. The entire discussion is evolving very quickly, however, with new proposals and ideas coming into play daily. The legislation that emerges will affect all of us in one way or another, so it's important to stay informed.
This article was provided by Forefield and distributed by Lawrence Sprung.

College Board Releases New College Cost Numbers

College cost trends

Every October, the College Board releases its Trends in College Pricing report that highlights college cost increases and trends. While costs can vary significantly by region and individual college, the College Board publishes average cost figures, which are based on its survey of 3,500 colleges across the country.

Here are highlights from its latest report:

  • At four-year public colleges for in-state students, tuition, fees, and room and board increased by 5.9% from last year, with the total cost for 2009/2010 averaging $19,388
  • At four-year public colleges for out-of-state students, tuition, fees, and room and board increased by 6.0% from last year, with the total cost for 2009/2010 averaging $30,196
  • At four-year private colleges, tuition, fees, and room and board increased by 4.3% from last year, with the total cost for 2009/2010 averaging $39,028

“Total average cost” includes tuition and fees, room and board, books and supplies, transportation, and a small amount for miscellaneous expenses.

To read the Trends in College Pricing report, visit www.trends-collegeboard.com.

Student aid trends

The College Board is quick to point out that the average "sticker price" cost figure is not necessarily representative of what most students pay. That's because almost two-thirds of undergraduate students receive grants that reduce the actual price of college. The largest provider of grant aid is individual colleges, followed by the federal government, private sources and employers, and state governments.

For the 2009/2010 year, the College Board estimates that students at public colleges will receive an average of $5,400 in grant aid from all sources and federal tax benefits, and students at private colleges will receive an average of $14,400 in grant aid from all sources and federal tax benefits. Federal tax benefits include the American Opportunity tax credit (formerly called the Hope credit), the Lifetime Learning tax credit, and the deduction for qualified higher education expenses.

Every year, the College Board also releases a sister report to Trends in College Pricing, called Trends in Student Aid, that examines student financial aid in more detail. To read this report, visit www.trends-collegeboard.com.

This article was provided by Forefield and distributed by Lawrence Sprung.

IRS Announces Pension Plan Limitations for 2010

On October 15, 2009, the IRS issued news release IR-2009-94 announcing cost-of-living adjustments to dollar limitations for pension plans. Items addressed for 2010 include:

Elective deferrals

1) The annual elective deferral limit for 401(k) plans, 403(b) plans, 457(b) plans, SAR-SEPs, and the federal government's Thrift Savings Plan remains unchanged at $16,500
2) The annual elective deferral limit for SIMPLE plans remains unchanged at $11,500

Employee "catch-up" contributions for individuals age 50 or older

1) The annual limit on additional catch-up contributions to 401(k), 403(b), and Section 457(b) plans remains unchanged at $5,500
2) The annual limit on additional catch-up contributions to a SIMPLE plan remains unchanged at $2,500

Other key figures

1) The dollar limit on annual additions to a defined contribution plan remains unchanged at $49,000
2) The dollar limit on the annual benefit under a defined benefit plan remains unchanged at $195,000
3) The annual compensation limit for qualified retirement plan purposes remains unchanged at $245,000
4) The annual compensation amount used in the definition of a highly compensated employee remains unchanged at $110,000
5) The annual compensation amount used in the definition of a key employee in a top-heavy plan remains unchanged at $160,000
6) For purposes of determining a qualifying employee under a simplified employee pension (SEP) plan, the minimum amount of annual compensation remains unchanged at $550

For more information, see IR-2009-094.

This article was provided by Forefield and distributed by Lawrence Sprung.

Estate Tax Update

There has been much discussion about the temporary repeal and reinstatement of the federal estate tax.

And, for your own information, here is a brief summary of some of the current proposals.

There are three major bills in Congress:

Senate Bill 722:

1) Makes permanent the 2009 $3.5 million exemption and top 45% tax rate
2) Reunifies the estate and gift tax exemption (the gift tax exemption is $1 million in 2009)
3) Indexes the exemption for inflation
4) Allows for exemption portability (i.e., allows the transfer of a decedent's unused exemption to his or her surviving spouse)

House Bill 2032:

1) Makes permanent the exemption level at $2 million
2) Establishes top tax rates of 45% for estates valued between $2 million and $5 million, 50% for estates valued at $5 to $10 million, and 55% for estates valued over $10 million
3) Reunifies the estate and gift tax exemption
4) Indexes the exemption for inflation
5) Allows for exemption portability
6) Restores the state death tax credit

House Bill 436:

1) Makes permanent the 2009 $3.5 million exemption and top 45% tax rate
2) Reunifies the estate and gift tax exemption
3) Limits the valuation discount for family limited partnerships (FLPs)
4) Provides strict valuation rules for the transfer of non-business assets

And, the Congressional Budget Office has modeled these four options for Congress:

Option 1:

1) Makes permanent the exemption level at $5 million
2) Establishes the tax rate to equal the top rate on capital gains (currently 15% in 2010 and 20% thereafter)
3) Indexes the exemption for inflation
4) Disallows the deduction for state death taxes

Option 2:

Makes the same changes as Option 1, but a two-tiered rate would be used -- the first $25 million of taxable assets would be subject to the top capital gains rate, then taxable transfers above $25 million would be taxed at 30% (and the $25 million threshold would be indexed for inflation)

Option 3:

Makes permanent the 2009 $3.5 million exemption and top 45% tax rate

Option 4:

1) Repeals the estate tax in 2010
2) Retains the $1 million gift tax exemption
3) Institutes a carryover basis regime

This article was provided by Forefield and distributed by Lawrence Sprung.

Bonds, Interest Rates, and the Impact of Inflation

There are two fundamental ways that you can profit from owning bonds: from the interest that bonds pay, or from any increase in the bond's price. Many people who invest in bonds because they want a steady stream of income are surprised to learn that bond prices can fluctuate, just as they do with any security traded in the secondary market. If you sell a bond before its maturity date, you may get more than its face value; you could also receive less if you must sell when bond prices are down. The closer the bond is to its maturity date, the closer to its face value the price is likely to be. Though the ups and downs of the bond market are not usually as dramatic as the movements of the stock market, they can still have a significant impact on your overall return. If you're considering investing in bonds, either directly or through a mutual fund or exchange-traded fund, it's important to understand how bonds behave and what can affect your investment in them.

The price-yield seesaw and interest rates

Just as a bond's price can fluctuate, so can its yield--its overall percentage rate of return on your investment at any given time. A typical bond's coupon rate--the annual interest rate it pays--is fixed. However, the yield isn't, because the yield percentage depends not only on a bond's coupon rate but also on changes in its price. Both bond prices and yields go up and down, but there's an important rule to remember about the relationship between the two: They move in opposite directions, much like a seesaw. When a bond's price goes up, its yield goes down, even though the coupon rate hasn't changed. The opposite is true as well: When a bond's price drops, its yield goes up. That's true not only for individual bonds but also the bond market as a whole. When bond prices rise, yields in general fall, and vice versa.

What moves the seesaw?

In some cases, a bond's price is affected by something that is unique to its issuer--for example, a change in the bond's rating. However, other factors have an impact on all bonds. The twin factors that affect a bond's price are inflation and changing interest rates. A rise in either interest rates or the inflation rate will tend to cause bond prices to drop. Inflation and interest rates behave similarly to bond yields, moving in the opposite direction from bond prices.

If inflation means higher prices, why do bond prices drop?

The answer has to do with the relative value of the interest that a specific bond pays. Rising prices over time reduce the purchasing power of each interest payment a bond makes. Let's say a five-year bond pays $400 every six months. Inflation means that $400 will buy less five years from now. When investors worry that a bond's yield won't keep up with the rising costs of inflation, the price of the bond drops because there is less investor demand for it.

Why watch the Fed?

Inflation also affects interest rates. If you've heard a news commentator talk about the Federal Reserve Board raising or lowering interest rates, you may not have paid much attention unless you were about to buy a house or take out a loan. However, the Fed's decisions on interest rates can also have an impact on the market value of your bonds.

The Fed takes an active role in trying to prevent inflation from spiraling out of control. When the Fed gets concerned that the rate of inflation is rising, it may decide to raise interest rates. Why? To try to slow the economy by making it more expensive to borrow money. For example, when interest rates on mortgages go up, fewer people can afford to buy homes. That tends to dampen the housing market, which in turn can affect the economy. When the Fed raises its target interest rate, other interest rates and bond yields typically rise as well. That's because bond issuers must pay a competitive interest rate to get people to buy their bonds. New bonds paying higher interest rates mean existing bonds with lower rates are less valuable. Prices of existing bonds fall. That's why bond prices can drop even though the economy may be growing. An overheated economy can lead to inflation, and investors begin to worry that the Fed may have to raise interest rates, which would hurt bond prices even though yields are higher.

Falling interest rates: good news, bad news

Just the opposite happens when interest rates are falling. When rates are dropping, bonds issued today will typically pay a lower interest rate than similar bonds issued when rates were higher. Those older bonds with higher yields become more valuable to investors, who are willing to pay a higher price to get that greater income stream. As a result, prices for existing bonds with higher interest rates tend to rise.

Example: Jane buys a newly issued 10-year corporate bond that has a 4% coupon rate--that is, its annual payments equal 4% of the bond's principal. Three years later, she wants to sell the bond. However, interest rates have risen; corporate bonds being issued now are paying interest rates of 6%. As a result, investors won't pay Jane as much for her bond, since they could buy a newer bond that would pay them more interest. If interest rates later begin to fall, the value of Jane's bond would rise again--especially if interest rates fall below 4%. When interest rates begin to drop, it's often because the Fed believes the economy has begun to slow. That may or may not be good for bonds. The good news: Bond prices may go up.

However, a slowing economy also increases the chance that some borrowers may default on their bonds. Also, when interest rates fall, some bond issuers may redeem existing debt and issue new bonds at a lower interest rate, just as you might refinance a mortgage. If you plan to reinvest any of your bond income, it may be a challenge to generate the same amount of income without adjusting your investment strategy.

All bond investments are not alike

Inflation and interest rate changes don't affect all bonds equally. Under normal conditions, short-term interest rates may feel the effects of any Fed action almost immediately, but longer-term bonds likely will see the greatest price changes. Also, a bond mutual fund may be affected somewhat differently than an individual bond. For example, a bond fund's manager may be able to alter the fund's holdings to minimize the impact of rate changes. Your financial professional may do something similar if you hold individual bonds.

Focus on your goals, not on interest rates alone

Though it's useful to understand generally how bond prices are influenced by interest rates and inflation, it probably doesn't make sense to obsess over what the Fed's next decision will be. Interest rate cycles tend to occur over months and even years. Also, the relationship between interest rates, inflation, and bond prices is complex, and can be affected by factors other than the ones outlined here. Your bond investments need to be tailored to your individual
financial goals, and take into account your other investments. A financial professional can help you design your portfolio to accommodate changing economic circumstances.

The inflation/interest rate cycle at a glance

  • Inflation goes up.
  • Bondholders worry that the interest they're paid won't buy as much in the future because inflation is driving costs higher.
  • The Fed may decide to raise interest rates to try to control inflation. To get investors to lend money by purchasing bonds, bond issuers must pay higher interest rates.
  • When interest rates go up, bond prices go down.
  • Higher interest rates make borrowing money more expensive. Economic growth tends to slow, which means less spending.
  • With less demand for goods and services, inflation levels off or falls.
  • With lower inflation, bond investors are less worried about the future purchasing power of the interest they
  • receive. Therefore, they may be willing to accept lower interest rates on bonds, and prices of older bonds with higher interest rates tend to rise.
  • Interest rates in general fall, fueling economic growth and potentially a new round of inflation.

This article was provided by Forefield and distributed by Lawrence Sprung.

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