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From his column It’s Your Money

its-your-money-11-13-1Implementation of the 2010 Affordable Care Act (ACA) shifted into high gear on October 1, 2013, when the health insurance exchanges opened. The individual mandate provision requires persons to participate in a health insurance plan. This provision has generated a lot of debate and court challenges, as well as a short-term shutdown of many government services and frustration because of website registration problems. In this article I will not venture into the political tussle over the mandate, but merely make observations about one point.

The ACA makes the individual responsible. A person without health insurance from another source now must find coverage. If an employer provides health insurance as an employee benefit, the individual has a provider. However, verification of employer-provided health insurance comes on the individual’s Form W-2; the employer does not report to the federal government the total spent on healthcare for all employees. Beginning with the 2014 tax year, Form 1040 will be the mechanism by which the government monitors the mandatory provision of the ACA.

With the ACA, the responsibility of the individual continues a trajectory started some time ago. Over the past several years, employers have shifted the cost of health insurance to employees. Workers pay more of the premium in many cases. Higher deductibles and co-payments have been instituted to transfer more of the cost to the individual and to encourage thrifty medical care decisions. For those who itemize deductions on Schedule A (Form 1040) beginning in 2013, only medical expenses that exceed 10 percent of adjusted gross income can be included, up from 7.5 percent. All of these changes push more of the cost for healthcare to the individual.

Caution flags go up when I see these trends. It’s not that a person has limited access to information to guide the decision; the ACA provides navigators to assist on the trip through a maze of options and decisions. It’s not that I think an individual is incapable of fulfilling the responsibility. Rather, my concern arises from fear that individuals will make critical decisions based less on what they need from a long-term perspective and more on what is convenient from a short-term view. I’m afraid that with health insurance too many will choose a plan with only cash flow in mind, based on the lowest premium and not on the most appropriate risk management for their personal financial situation.

My unease is piqued by another major component of personal finance that has made a transition similar to what I see occurring in healthcare. The responsibility for building retirement savings has made a dramatic swing toward the individual in the past three decades.

Scholars at the Center for Retirement Research at Boston College did a study on the type of pension coverage provided for workers with retirement benefits. It indicates that in 1983, 62 percent had a defined benefit plan where the employer provided income during retirement. By 2010, this had dropped to 19 percent. In 1983, 12 percent had a defined contribution plan where deposits were made to the individual’s account during employment with no further employer responsibility after retirement. By 2010, this had jumped to 69 percent. Now, almost seven out of ten employees with retirement benefits have a 401(k), 403(b) or other form of individually directed retirement savings.

So how are we doing? The answer is alarming. The Center for Retirement Research developed the National Retirement Risk Index (NRRI). Based on data from the Federal Reserve’s 2010 Survey of Consumer Finances, the NRRI estimates that 53 percent of households will not maintain their standard of living in retirement. More than half of U.S. households will have more financial struggle in retirement than they did while working. The survey says the typical household approaching retirement had retirement account balances of only $120,000 in 2010. This figure is for a household that may include two wage earners. Even with two people contributing to retirement income, this amount provides only about $800 a month if paid out over 20 years (with a return of five percent).

Let’s put this in perspective. Fidelity Investments estimated that couples retiring in 2012 will need $240,000 to cover medical expenses through 20 years of retirement. Eight hundred dollars a month will barely pay half of their healthcare costs. Where will monies come from for food, housing, and other needs? Too many individuals are in dire financial straits.

I expect the shift of financial responsibility to the individual to continue. The mandate in this trend, in my estimation, is that the individual become knowledgeable about how financial systems work.

I’m encouraged by the number of congregations offering instruction in cash management. Managing expenditures and the use of credit is foundational to financial stability. Insurance is necessary, but woefully misunderstood. People need to better be aware of the role of insurance in risk management. Retirement planning needs to start with the first paying job, but I find that many young adults ignore it. Discovering early the miracle of compounding interest will move persons toward a more secure retirement. Investment, tax, and estate planning need attention too.

Expert assistance should be sought when needed, but the more an individual understands and directs personal financial decisions, the more likely that person will achieve financial security. That’s the reality of the current financial system—the individual is responsible.

Keith Schwanz is a freelance writer in Overland Park, Kansas, and the founder of Storian Press, a book production company.

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