Plan For America Q+A: The US Social Safety Net will be the best in the world
Entire contents copyright 2017 by Terry E. Nager, CFP®
1. What will make the U.S. social safety net under the Plan For America (PFA) the best in the world?
The PFA will make the U.S. social safety net the best in the world because, with the PFA, every U.S. citizen age 26 and over that elects to enroll in the plan will have a reasonably comprehensive financial plan provided for him/her. This is especially beneficial for those with very modest to moderate means.
2. What is meant by the phrase “a reasonably comprehensive financial plan?”
“A reasonably comprehensive financial plan” is a plan that deals with the five basic areas of financial planning, which are:
- Insurance planning
- Health insurance
- Long-term care insurance
- Disability insurance
- Life insurance
- Investment planning
- Tax planning
- Retirement planning
- Estate planning
Many of the following questions in this Q&A section regarding the social safety net will specify how the PFA meets these needs, but it is acknowledged that not every aspect of an individual’s financial life is addressed through the PFA, such as:
- Liability planning through property and casualty insurance
- Education planning for children
- Various other areas of people’s financial lives.
3. Why is the main focus on the very-modest up through moderate-income American individuals and families?
The wealthy and upper-middle class can afford professional assistance in developing a financial plan for their futures. The lower-economic classes up through the middle class, however, are often the ones that need help the most yet cannot afford it. They are left on their own to financially plan their futures.
4. How does the Plan For America (PFA) handle the health insurance aspect of the average American’s financial plan?
The PFA provides access to comprehensive health insurance for every U.S. citizen over 26 years of age that chooses to enroll in the PFA (or under age 26 if he/she is no longer dependent upon a parent or guardian). This insurance coverage would be available on a guaranteed issue basis with no exclusion for pre-existing conditions.
Since this coverage would be purchased through the For America Security Trust (FAST), there would be no ultimate cap on the total benefits available for the health care that is needed.
The health insurance policy would be paid for through payroll reduction and would be 100% tax deductible. A tax-deductible health savings account would be included as part of the policy. Any amount that was not used for health care cost (deductible + co-pay) can be withdrawn tax free at the end of the year as an incentive to not use the health insurance frivolously.
Some characteristics of the PFA health insurance plan are:
- The policy is individually owned.
- It is portable and usable in any part of the U.S.
- It is not tied to an employer.
- If the policyholder has very modest income or loses his/her job, he/she would be eligible for an interest-free loan so that the health insurance would remain intact regardless of economic circumstances.
Health insurance is one of the key parts of the financial planning puzzle that must be accessible on a continuous basis because, according to a 2001 Harvard study, about one-half of all personal bankruptcies are caused by health care costs.
5. How does the Plan For America (PFA) handle the long-term care (nursing home care) aspect of the average American’s financial plan?
The PFA handles the long-term care needs as part of the health insurance coverage in the “standard plan.” The health insurance premiums would reflect this coverage and the interest-free loan provision from the For America Security Trust (FAST) would take over if the policy maximum was reached and the participant did not have the personal means to deal with the long-term care expenses.
Consequently, PFA policyholders would not have to worry that their nursing home care in their elder years would be cut off because of lack of funding.
6. How does the Plan For America (PFA) handle the disability income insurance aspect of the average American’s financial plan?
The PFA provides access to high-quality disability insurance to every plan participant in two ways:
First, at time of enrollment in the PFA, a guaranteed-issue disability insurance policy would be available regardless of health status or occupation status.
Second, for those individuals not signing up for the disability insurance at time of enrollment, a guaranteed-insurability disability insurance purchase option would be required for all PFA participants.
- The reason for this requirement, that every participant have either disability insurance or option to purchase disability insurance at the “standard policy’’ rate, is because disability insurance is required for any participant (below retirement age) to be eligible for an interest-free loan from the For America Security Trust (FAST) if it is ever needed.
- This option would have a smaller premium than the premium for the disability insurance policy. The advantage would be the lower cost; but the disadvantage would be not having the coverage until the option was exercised and, even then, there would be a waiting period (maybe six months) to avoid “adverse selection.”
An individual could not wait until he/she became disabled and then exercise the option to get disability payments immediately- he/she would have to wait maybe six months; therefore, if it is affordable, it would be advisable to begin the insurance coverage at the time of enrollment.
The definition of disability would be the industry standard, not the Social Security definition. The “own occupation” standard would apply if it is applicable to the insured’s occupation or profession.
The amount of disability insurance available through the FAST would be 60% of earned income as measured by the amount subject to the 15.3% contribution to the FAST (formerly known as the payroll tax amount).
- The maximum that would be covered by this policy would be 60% of the payroll tax cap ($127,200).
- This amount would be reduced by the guaranteed payout from the insured’s FAST account that would be triggered by the disability claim.
If the insured’s FAST account had a $200,000 balance at the end of the previous year, and the insured had $60,000 of earned income, the maximum payout would be 60% of $60,000 = $36,000 for the year or $3,000 per month. The $36,000 would come from the FAST payout and the disability insurance policy.
- $200,000 in the FAST account multiplied by 4% = $8,000
- The disability policy would provide $36,000 — $8000 = $28,000
- The payout would continue until recovery from the disability or until retirement age 65.
- At retirement age (assuming the disability was permanent), if the accumulation in the FAST account was not sufficient to produce an income (at a 4% payout rate) that would equal the disability income, then the disability payout would become the permanent retirement payout. The retirement payout would reach that level by means of an interest-free loan to the participant’s FAST account.
To produce a $36,000 guaranteed payout at 4% would require $900,000 to be in the participant’s account. The insured participant has $200,000; therefore, a $700,000 loan would be needed. This loan would be covered by $700,000 of life insurance that would be automatically purchased because of the interest-free loan.
The 60% payout maximum is necessary in order to avoid “moral hazard.” This encourages the insured to return to the workforce when the disability is over.
All disability insurance benefit payouts purchased through the FAST would be tax free.
If either the disability insurance or the guaranteed-purchase option is in force but the individual is not disabled, the insured’s premium would rise or fall as his/her income increases or decreases. The potential for increase would stop when the 60%-of-salary-cap was reached. Also, if the FAST account reached the amount (as measured by the previous year’s ending balance) that 4% of the amount equaled the face amount of the disability insurance, then the premium would decrease or even be eliminated.
The rate per $1,000 of the disability insurance would not increase or decrease, but the premium would rise, fall or be eliminated based on the amount of coverage in force.
If the FAST participant desires additional disability insurance beyond the limits offered through the FAST, then he/she could purchase it independently in the marketplace.
- Normal underwriting requirements would have to be met.
- The tax-favored status of PFA-purchased insurance would not be available to the insurance purchased outside of the PFA.
7. How does the Plan For America (PFA) handle the life insurance aspect of the average American financial plan?
The PFA provides access to life insurance on a guaranteed-issue “standard policy” premium basis regardless of health or occupation status at time of enrolling in the PFA. The specifics are described below:
Similar to the disability insurance, there is a guaranteed insurability purchase option for life insurance that is required as part of the “standard policy’’ for those who elect not to purchase life insurance at the time of enrollment.
- The reason for this requirement — that every participant have either life insurance or the option to purchase life insurance at the “standard policy” rate — is because life insurance is required for any participant to be eligible for an interest-free loan from the For America Security Trust (FAST) if it is ever needed.
- The premium for the guaranteed life insurance purchase option would be lower than the premium for the purchase of the life insurance itself, but exercising the option would include a waiting period to avoid “adverse selection” which occurs when an individual only purchases life insurance when he/she knows that there is a potentially life-threatening condition.
- The exception to the waiting period requirement would be triggered if an interest-free loan were granted to the participant by the FAST and the life insurance option had not been exercised prior to the loan being granted. This is to protect the FAST against unpaid loans.
The life insurance policy would be similar to a reducing term policy calculated to provide 60% of earned income up to the tax cap ($127,200).
- This amount would be reduced by an amount that would equal 4% of the participant’s FAST account value at the end of the previous year.
- This amount would increase as the participant’s annual earned income increases up to the maximum of 60% of the $127,200 cap (minus the 4% of the participant’s FAST account value at the end of the previous year).
- Once 4% of the FAST account balance equaled or exceeded the 60% of earned income level, the premium would stop and there would be no coverage or premium unless the 4% of the FAST balance fell below the 60% of earned income level.
- The life insurance premium per $1,000 of coverage would be uniform regardless of health, gender, age or occupation.
- If the current value of the participant’s FAST account was $200,000 and the annual earned income was $60,000.
- 60% of $60,000 = $36,000
- $200,000 FAST balance multiplied by 4% = $8,000
- $36,000 — $8,000 = $28,000
- To provide $28,000 of annual income (with a guaranteed 4% payout rate) to the heirs of the participant would require $700,000 of life insurance proceeds.
- The $700,000 from the life insurance+ the $200,000 FAST balance= $900,000
- $900,000 multiplied by 4% = $36,000 annual tax-free guaranteed benefit to the heirs.
The reason for the 60% of earned income cap is to not create a “moral hazard” where the family would have a greater economic benefit from the tax-free cash flow from the FAST than the insured was earning on an after-tax basis.
If a PFA participant desires additional life insurance, then he/she could purchase it in the marketplace, not through the FAST. However, normal underwriting requirements would have to be met and the tax-favored status of the PFA-purchased life insurance would not be available.
The life insurance purchased to cover an interest-free loan from the FAST would not be impacted or limited by the earned income calculations as in the above example.
8. How does the Plan For America (PFA) handle the retirement planning aspect of the average American’s financial plan?
The PFA handles the retirement aspect of the average American’s financial plan through the same 15.3% of earned income that is presently collected as the payroll tax.
- For those individuals that enroll in the PFA, the 15.3% of their earnings would be withheld and deposited into the For America Security Trust (FAST) and then credited to his/her individual FAST account.
- The money contributed to this account would be invested in a portfolio of all U.S. domiciled stocks similar to a total-market stock index.
- The participant’s return would be the market rate of return less 2% paid to the FAST as a charge for the plan administration and the 4% guaranteed return.
- The cash flow at retirement would be determined each year as the greatest of the three options:
- The present level of Social Security benefits.
- 4% of the total of all of the participant’s contributions to the FAST made over his/her lifetime plus a 4% compounded annual rate of return.
- 4% of the total accumulation in the participant’s FAST account at the end of the previous year.
9. How does the Plan For America (PFA) aid in the investment planning aspect of the average American’s financial plan?
The PFA participant would be automatically saving and investing at least 15.3% of his/her earned income into the For America Security Trust (FAST) and deducting it from his/her taxable income.
Also, if the participant has earned income exceeding the $127,200 tax cap, then he/she could elect to have 15.3% of earnings over the tax cap up to the total amount earned contributed to his/her FAST account.
In addition, to the extent that it was affordable, he/she could invest up to $100,000 annually into his/her FAST account and have it be tax deductible.
If the FAST participant wanted to invest some money but was not in a position to put any extra money into the retirement account, then investing in U.S. publicly-traded stocks, stock mutual funds, or exchange traded funds that held U.S. publicly-traded stocks would produce dividends that would be tax free, thereby enhancing the returns.
10. How does the Plan For America (PFA) aid in the tax planning aspect of the average American’s financial plan?
The PFA incorporates many tax benefits into its basic structure to benefit all Americans.
- All insurance premiums paid through the For America Security Trust (FAST) through payroll reduction would be tax deductible whether these premiums were for health, disability, or life insurance.
- All payments for the health savings account would be tax deductible, and whatever amount was left unspent on medical care (deductible+ co-pay) at the end of the year could be withdrawn tax free.
- The 15.3% of earnings contribution up to the $127,200 cap would be tax deductible.
- The 15.3% of earnings contribution over the $127,200 cap is optional but, if opted for, would be tax deductible.
- The optional contribution of up to $100,000 over and above the 15.3% of earnings would be tax deductible. The $100,000 limit is in place to primarily benefit lower up through middle-class taxpayers and not mega-wealthy billionaires.
- All insurance proceeds from policies purchased through the FAST would be tax free (health, disability, or life).
- All retirement payouts from the FAST account would be income tax free to the participant and income and estate tax free to the heirs.
- Dividends of U.S. domiciled publicly-traded corporations would be tax deductible to the corporation and tax free to the recipient (both federal and state).
11. How would the Plan For America (PFA) provide a legacy for each participant that contributed?
Each U.S. citizen that has contributed to the For America Security Trust (FAST) would have a legacy to leave to his/her heirs.
The surviving spouse and dependent children would receive the full amount of income from the deceased’s FAST account for the balance of his/her lifetime.
After that the monthly cash flow would be paid out to the beneficiaries of the original participant. It would be the greater of:
- 4% of the total contributions to the FAST+ a 4% compounded rate of return.
- 4% of the balance at the end of the previous year.
- The third option (the present level of Social Security benefits) is not available to the heirs. It is only available to the original participant and spouse or dependent children.
- Also, the heirs would be delayed in receiving any benefits until all outstanding interest-free loans from the FAST had been fully repaid.
- Once the loans had been repaid, the heirs would receive the full amount of the cash flows — income and estate tax free — which is the legacy of the original participant.
12. What characteristic would distinguish the Plan For America (PFA) from most?
The PFA is based on individually-owned and individually-funded insurance policies and retirement account. The funding is accomplished through payroll contributions and/or interest-free loans that are ultimately paid back from the cash flow from the individual’s For America Security Trust (FAST) account.
The FAST account is individually owned and funded, whereas, most of the nations have government owned, controlled and funded plans. This mostly unique characteristic enables the PFA participants to pass the wealth that he/she has accumulated on to heirs in the form of
tax-free cash flow because the account is not with the government and is not ceded to the government upon death.