Archive for March, 2010

Retired couples may need $250k for health care (AP)

Wednesday, March 24th, 2010 | Finance News

BOSTON – Relief to seniors facing high prescription drug costs is one of the first changes to come under the new health care overhaul. But ultimately that won't offset the relentless increase in retirees' medical expenses.

A couple retiring this year will need a quarter of a million dollars, on average, to cover medical expenses in retirement, according to a study to be released Thursday by Fidelity Investments.

The estimate is up 4.2 percent from Fidelity's projection last year. The Boston-based financial services company has updated its estimate annually since 2002 as part of its business helping employers design workplace benefits programs.

The study is based on projections for a couple of 65-year-olds retiring this year with Medicare coverage. The estimate factors in the federal program's premiums, co-payments and deductibles, as well as out-of-pocket prescription costs. The study assumes no employer provided insurance in retirement, and a life expectancy of 85 for women and 82 for men.

The estimate has risen 56 percent from Fidelity's initial $160,000 projection in 2002. The average annual increase has been 5.7 percent, so this year's 4.2 percent rise — from $240,000 last year to $250,000 — is modest.

But with broader inflation now near zero amid a recession, health care costs continue to rise faster than other expenses, said Sunit Patel, a senior vice president at Fidelity.

The findings illustrate the importance of factoring in health care alongside housing, food and other expenses in retirement planning.

"It turns out to be a surprise for many, and one of the largest expenses in retirement," Patel said.

The increase in this year's estimate was relatively small because a surge in patent expirations for brand-name drugs meant many cheaper generic versions reached the market, Patel said. That helped limit out-of-pocket prescription costs.

Fidelity's estimate doesn't factor in most dental services, or long-term care, such as costs from living in a nursing home. A 2008 study by Fidelity estimated a 65-year-old couple would need $85,000 on average to cover insurance costs for long-term care in retirement.

Thursday's study also didn't account for the health care overhaul that President Barack Obama signed into law Tuesday. Fidelity was updating its 2010 estimate before legislative details were clear, Patel said.

The law's focus is expanding access to people under age 65. But it also would benefit many retirees by gradually closing what's known as the "doughnut hole" coverage gap in the Medicare drug benefit. Seniors fall into that hole once they spend $2,830 per year. The legislation would begin narrowing the gap by providing a $250 rebate this year. The gap would be fully closed by 2020, when seniors would still be responsible for 25 percent of the cost of their medications until Medicare's catastrophic coverage kicks in.

Patel said the gap's closure is likely to yield only a "very modest" reduction to Fidelity's $250,000 overall cost estimate.

Fidelity's estimate is a projection of what an average couple would need. Actual costs will vary widely, depending on a couple's medical needs and how long they live.

The Employee Benefit Research Institute, an independent nonprofit, conducts similar research but, unlike Fidelity, doesn't focus on an average. That's because there are so many variables that many retirees' costs will end up far lower or higher than any average, said Paul Fronstin, EBRI's director of health research and education.

For example, EBRI estimated last year that a retired couple would need $416,000 for health care costs if their drug costs were far higher than average, in the 90th percentile. If that same couple lives longer than three-quarters of retirees, the estimate rises to $614,000.


Britain hits rich in pre-election budget (AFP)

Wednesday, March 24th, 2010 | Finance News

Britain's finance minister vowed to hike taxes on the rich to help the poor hit by the global downturn, and to cut borrowing targets in a budget unveiled weeks before a knife-edge election.

Alistair Darling on Wednesday warned that growth would be weaker than expected in 2011 as Britain recovered from a record recession, as he unveiled the last budget before the general election, which is expected on May 6.

Opinion polls suggest that the election will be a tight contest between the ruling Labour Party and the main opposition Conservatives.

"Those who have benefited the most from the strong growth in incomes in past years should now pay their fair share of tax," Chancellor of the Exchequer Darling said.

"Looking across all the tax rises since the beginning of this global crisis, 60 percent of them will be paid for by the top five percent of earners."

Darling revealed that 2.0 billion pounds (2.2 billion euros, 3.0 billion dollars) raised from a supertax on bankers' bonuses would be ploughed into a programme to help boost recovery.

This 2.5-billion-pound "growth package" would "help small business, promote innovation, invest in national infrastructure", Darling told parliament.

Economists played down its importance.

"As the headline 2.5-billion-pound package is worth just 0.2 percent of GDP, it will not have a significant impact on the economic outlook," said Daiwa economist Colin Ellis.

"Instead, it seems designed to put some clear water between the Labour government and Tory opposition ahead of the expected election in May, allowing the government to paint itself as investing in the recovery rather than cutting too sharply and risking a double dip."

There was more bad news for high earners, who already face a 50-percent income tax rate on earnings over 150,000 pounds this year.

Britons with annual incomes in excess of 100,000 pounds would have their annual tax-free allowance gradually withdrawn, said Darling.

But economists argue that further tax hikes and spending cuts will eventually be needed to fix the public purse, which has been hit by banking bailouts and recession-hit taxation revenues.

In a measure aimed at helping first-time property buyers struggling to get a rung on the housing ladder, Darling said people buying a property would not have to pay tax on properties costing less than 250,000 pounds.

That was double the previous ceiling.

The new measure would be paid for by increasing tax payments on properties costing more than 1.0 million pounds, he said.

The chancellor also announced measures to allow more of Britain's poorest people access to basic bank account facilities. According to Treasury figures, 1.75 million adults do not yet have them.

The chancellor cut his economic growth forecast for 2011 to 3.0-3.5 percent but held his prediction of 1.0-1.5 percent expansion this year.

He also trimmed his official borrowing target to 167 billion pounds for the current financial year, which runs until the end of this month.

That was equivalent to 11.8 percent of GDP but was lower than the previous estimate of 178 billion pounds.

In a vitriolic response to the budget, the Conservatives' leader David Cameron lashed out at the government for having helped guide Britain into the worst economic downturn in modern history.

"It is time this country had a radical change of direction," he added.

Some British newspapers saw the budget as manoeuvring ahead of the election: the Times labelled it "breathtakingly political."

"The chancellor delivered a skilful political budget yesterday. But this was a time for sound economics, not for playing politics," said the paper.

The Daily Mail said the change on property taxes was a "clear pre-election bribe just weeks before Gordon Brown goes to the country."

Related article: Britain plans 'green' investment bank


Banks on verge of losing student lending business (AP)

Wednesday, March 24th, 2010 | Finance News

WASHINGTON – President Barack Obama's health care success has an intended side effect: Attached to the fast-track package of health care fixes is an overhaul of college assistance programs that would cost private lenders billions of dollars in college loans.

Industry lobbyists have watched helplessly as Democrats and the Obama administration this week appear on the verge of shifting student lending from private banks to the federal government.

Under the measure, private banks would no longer get fees from the government for acting as middlemen in loans to low- and middle-income college students. With those savings, the government would increase Pell Grants to needy students and make it easier for some workers burdened by student loans to pay them back. It would also help pay for a small portion of expanded health care.

The bill would mean the loss of a $70-billion-a-year business to a lending industry that includes student loan giant Sallie Mae as well as large financial institutions such as Citigroup, JPMorgan Chase and Bank of America.

"The education secretary is the new banker of the year," said Sen. Lamar Alexander, R-Tenn., himself a former education secretary. Alexander offered an amendment Wednesday to use the savings to lower student loan rates instead of using those savings on health care spending. But any change to the expedited measure would send it back to the House, and Democrats vowed to avoid further delays. Like other amendments, Alexander's was defeated.

In an unusual twist, the fate of the student loan overhaul went from certain death in the Senate to certain victory, thanks to Republican Scott Brown's election in January in the race for the seat of the late Sen. Edward Kennedy.

Until then, the legislation was stalled in the Senate because it lacked 60 votes to overcome a filibuster. But after Brown's election, Democrats decided that their health care initiative must be accompanied by a companion bill that resolved differences between the House and Senate health care plans.

The companion measure was expedited to require a simple majority and not 60 votes. That measure became a home to the student lending proposal and that gave it a new lease on life.

Earlier this month, six Democratic senators wrote a letter to Senate Majority Leader Harry Reid voicing concern over the president's lending overhaul plan.

But on Wednesday, only two of them — Ben Nelson of Nebraska and Blanche Lincoln of Arkansas — indicated they planned to vote against the Senate "fix it" bill. Nelson's home state is headquarters for Nelnet, another major lender and a big employer in the state.

The industry has conducted an all-out lobbying effort against the bill, arguing it would cost thousands of jobs and unnecessarily put the program in the hands of the government.

"The industry plays a role in maintaining competition and choice," said Scott Talbott, the chief lobbyist for the Financial Services Roundtable, an industry group. "If the government is the only lender, there is no choice."

But private lenders would still keep a hand in the government lending business, competing for contracts to service the loans. What's more, they would continue to service about $500 billion in outstanding student loans.

Under the existing college lending program, financial institutions provide college loans at low interest rates, and the government guarantees the loans in the event of default and subsidizes private lenders when necessary to keep rates low.

"This is a case of corporate welfare, a giveaway to bankers and to Sallie Mae," said Sen. Tom Harkin, D-Iowa.

The bill would see $61 billion in savings over 10 years from the switch to direct government lending. It would pay for Pell Grants and provide more than $4 billion to community colleges and historically black colleges. It also would direct about $19 billion to reducing the deficit and offsetting expenses in the health care legislation.

In addition, beginning in 2014, college graduates with certain income and family sizes would be allowed to devote no more than 10 percent of their monthly income to repay their student loans. The current cap is 15 percent.