MONEY stocks

Jack Bogle Explains How the Index Fund Won With Investors

A Q&A with Vanguard Group founder Jack Bogle, the creator of the first retail index fund.

Mutual fund managers who pick stocks haven’t had much to show for their efforts (or their fees) in recent years. An investor would likely have made more money over the past decade by picking a low-cost index fund that mirrors the market as a whole. In 1976, John C. Bogle launched the first such fund for retail investors, Vanguard 500. This edited interview originally appeared in the August 2015 issue of MONEY magazine.

Q: Has the index fund won?
A: It certainly has. Vanguard has the largest share of fund assets—almost 20%—in the industry. Two-thirds of that is index funds.

But index funds had a fabulous year last year. [Vanguard’s flagship Total Stock Market Index Fund earned 12.4%, vs. an average of 7.8% for domestic stock funds.] It’s not going to happen again, maybe ever, so basically we got overly praised. You shouldn’t buy an index fund because you think it’s a hot performer. Buy it because you’re going to hold it forever.

Screen Shot 2015-07-24 at 3.15.30 PM

 

Look, all I did with the index fund was make sure you got your fair share of the market’s return. Sometimes that fair share is going to be bad, so you’re going to lose money. And that’s a great marketing message—candor as a marketing strategy. And it’s paid off. People hawking a particular fund have no idea how long it will continue to do well. They’ll say, “Our fund went up 500% in the last 10 years, and the index fund only went up 320%, so indexes are overrated.” That’s usually the end for that fund.

Q: Vanguard’s no longer the only big player in indexing. What’s the difference between buying a Vanguard fund and an index-based exchange-traded fund from, say, iShares?
A: The ETF is a different breed of cat. There are really two ETF businesses. One is huge and involves enormous amounts of trading. Then there’s the much smaller market of individual investors who aren’t trading all day long. They could just as easily be in the traditional mutual fund. [Vanguard sells its index funds in both ETF and traditional form.]

Q: So ETFs have short-term money in them. What’s wrong with that?
A: Investors will lose. It used to be you could get your money out of a fund at the close of a business day. Now you can trade in and out of the S&P 500 all day in real time. Don’t ask me what kind of a nut would want to do that. It works against investors because if you have a big collapse in the market, and you get out at noon, the odds are pretty good the market will be up by the close. In the long run, trading is just a big distraction. Warren Buffett believes this. He said that 90% of the trust he’s leaving to his wife should go in the Vanguard 500 Index Fund.

Q: If he’d asked, would you have suggested the more diverse Vanguard Total Stock Market Fund instead?
A: Yeah! I wrote him about that. I didn’t hear back from him. An even more interesting question is why he doesn’t use international. Everybody’s talking about how you have to have international, but I don’t know why.

Q: Why not? More than half of the stocks you could buy, by market capitalization, are outside the U.S.
A: In the long run, market returns are created by business returns. And I think American business and the American economy are going to be the strongest in the world. I think we have more innovation. I think we have better technology. And I know we have a better legal structure, better shareholder protections. Some foreign nations are fine, but not all.

I’ve said if you want to hold non-U.S. stocks, go to 20%. Now people are saying 40%. You know, if you go from 20% to 40%, and foreign stocks out-perform by two percentage points per year—which would be astonishing—that’s a 0.40 percentage point benefit. So my own view is it’s not worth it.

Q: What about the benefits of diversification or the idea that going abroad can lower overall risk because markets aren’t correlated?
A: Diversification is certainly true, but noncorrelation is bunk. It’s applying higher mathematics to something I don’t think requires it. We’ve overanalyzed the whole thing. I’m always the apostle of simplicity and lower costs.

Q: Since 2000, fees charged by mutual funds have been coming down. Have you won that argument too?
A: Forty or so of the 50 largest fund groups are owned by publicly traded companies. They are in business to earn a return on capital for that company’s investors, and that’s the great conflict. They become great big marketing companies. They hold the line on fees, conceding only where they have to or for PR purposes. The cost structure of the industry is insane—50% profit margins are not unknown.

Q: You set up Vanguard so that it’s owned by its own funds, which in turn are owned by fund investors. It seems to me that idea is as important to you as indexing.
A: The conflict of interest in the industry isn’t about indexing vs. active management. It’s cost. The point of the Vanguard structure is to eliminate the management company’s profit. Compare what investors pay at Vanguard to what they pay at a competitor, and we’re saving shareholders a total of $14 billion a year.

Q: What’s that mean, to cut out the profit? Vanguard keeps costs low, but people must certainly be making financial services industry salaries.
A: I never said we have low costs. I’ve said we have low expense ratios. That’s very different. If you multiply Vanguard’s average 0.14% expense ratio by its $3 trillion in assets, that’s total expenses of about $4 billion. Go back to when we had about $1 trillion in assets, charging 0.21%—that’s about $2 billion. So Vanguard’s costs have gone from $2 billion to $4 billion. When you have 20 million shareholder accounts, it costs money. When you’re employing 15,000 people all over the world, it costs money. We don’t disclose executive compensation anymore, which I think is a little strange. [Bogle stepped down as Vanguard’s senior chairman in 1999.] I designed the best company that I could design. But there are ways to make it better.

Q: What are some things you would have done differently?
A: I would have made it mandatory that we continue to disclose executive compensation. And maybe make the company’s financial statements more broadly available. I think openness is important if you’re a company like Vanguard because these people own not only your funds but the management company too. They’re entitled to any information they want. If it’s painful to disclose, well, that’s too bad.

Q: Okay, index funds win, but I still have to decide how much to invest in stocks. Should I worry that stock prices look high?
A: For most investors, if you’re around the norm of 60% stocks and 40% bonds, I wouldn’t vary it much now. But based on today’s low stock dividend yields and bond yields, be prepared for a period of low returns compared to history.

Q: So then why bother with stocks?
A; Well, put your money in a money-market account, and you get 0.1%. You have to invest, but you can’t control the returns. And you should know that if you do stretch for higher returns, you’ll be taking on extra risk.

Q: One critic of indexing, money manager David Winters, says that because index funds own a stock no matter what, corporate boards have no incentive to rein in executive pay.
A: He just doesn’t know what he’s talking about. There is, as far as I can tell, no difference between the corporate governance activity of actively managed funds and index funds. They’re both very low. But think through the logic of it: The old Wall Street rule was, if you don’t like the management, sell the stock. In the case of an index fund, the rule has to be, if you don’t like the management, fix the management, because you can’t sell the stock. So I look at indexing as the great hope of governance.

Q: You’re concerned that the financial sector is too big. Why?
A; The job of finance is to provide capital to companies. We do it to the tune of $250 billion a year in IPOs and secondary offerings. What else do we do? We encourage investors to trade about $32 trillion a year. So the way I calculate it, 99% of what we do in this industry is people trading with one another, with a gain only to the middleman. It’s a waste of resources.

Q: What keeps you at this? Why are you sitting here talking to me instead of, I don’t know, looking at paintings in Venice?A: It’s a little bit that you carve out, probably inadvertently, the kind of person you are. And people expect you to be that kind of a person. Those kinds of expectations—Adam Smith called them “the invisible spectator”—shape what you do. And I guess I am just the type that likes to keep moving. I can’t imagine starting a day not knowing what I’m going to do.

Read next: Vanguard’s Founder Explains What Your Investment Adviser Should Do

MONEY Social Security

What Happens If the Social Security Trust Fund Runs Out in 2034?

coin jar running out of coins
Getty Images

One things for sure: Benefits won't disappear entirely

The trustees of the Social Security system’s finances released their annual report on Wednesday afternoon. They say the combined trust funds that help pay old age and disability benefits are likely to run out by 2034, the year when today’s 48-year-olds reach full retirement age. The trustee’s estimate reflects the latest economic and demographic projections, and it changes a bit most years. Last year’s estimate for trust fund depletion was 2033.

But what does it mean to say the Social Security trust fund has run out?

Let’s be clear: Social Security benefits won’t disappear entirely when that happens. If nothing else changes, the payroll taxes still being paid by younger people in the workforce will be enough to fund about 79% of scheduled benefits, says the report.

That’s because Social Security is by and large a pay-as-you-go system. At the individual level is looks a bit like a savings account, where you contribute money now in order to draw it down after you stop working. But in fact, it’s never been primarily run on saved money. Taxes from today’s workers are used to fund the benefits of today’s retirees.

But after the system was overhauled in 1983 and up until 2010, the amount of payroll tax dollars flowing into the system was higher than the amount of money that was needed to fund benefits. That extra money is in the so-called trust fund, and it’s invested in special, untraded Treasury bonds. Thanks to interest from the Treasuries and taxes on higher-earning beneficiaries, the Social Security system still takes in a bit more money than it pays out each year.

But soon that will flip over and Social Security will have to start eating into its past surplus to pay beneficiaries—and 2034 is the year that the surplus is currently expected to run out.

When that happens, unless Congress intervenes, the Social Security administration will be able to pay only the benefits supported by current Social Security taxes.

The trustees warned that a similar moment of reckoning could be coming much sooner for those who get Social Security disability payments. The trust fund that specifically supports disability insurance is scheduled to run out next year. In the past, Congress has addressed such problems by moving money from the much bigger retirement system into disability, but many Republicans in Congress are saying they want changes to disability-insurance rules before they’ll do this.

Returning to the system as whole, obviously a sudden drop to 79% of benefits is no trivial thing. It would be a brutal cut for many retired people who rely on Social Security. The point is that addressing a funding shortfall isn’t as challenging as stopping the system from going all the way to paying zero. All told, the gap between what Social Security promises to pay and what it will collect amounts to about 1.2% of GDP in 2035. That’s serious money, but also a fixable problem (except for the politics). For context, over the next decade, annual spending on everything besides Social Security and health care programs is projected to shrink by 1.7%, according to the Congressional Budget Office.

Proposals to keep Social Security on track for the longer term range from promising to pay less—by further raising the retirement age, or adjusting benefit formulas—to raising taxes on higher earners or wealthier beneficiaries.

Think of 2034 as the rough political deadline for Congress to work that out, although the sooner it does so, the more gradual changes can be for either beneficiaries or taxpayers.

MONEY Economy

Would Hillary Clinton’s Profit-Sharing Plan Put More Money in Your Pocket?

Democratic presidential candidate Hillary Clinton speaks during a campaign town hall meeting in Dover, New Hampshire July 16, 2015.
Brian Snyder—Reuters Democratic presidential candidate Hillary Clinton speaks during a campaign town hall meeting in Dover, New Hampshire July 16, 2015.

It might. But it wouldn't address the bigger forces holding down wages.

Democratic presidential candidate Hillary Clinton on Thursday outlined a plan to encourage companies to share more of their earnings with workers. It’s a tax credit companies could get for two years if they set up a profit-sharing plan tilted toward the lower- and middle-income employees on the payroll. (The tax credit would phase out for higher-paid workers.) In an example used by the campaign, if an employee was paid $5,000 in a profit-sharing bonus, the company would get a tax break of up to $750.

At least at first, the plan has generally been interpreted as part of Clinton’s tilt toward the progressive side of the economic debate. “Veering left…” is how the insider political paper The Hill put it.

Clinton herself has fit profit sharing into her broader message about fixing economic inequality. Here’s a graphic from the campaign website that illustrates the story Clinton is telling about what’s driving inequality. Companies are doing great and getting more productive, but they haven’t haven’t been sharing those gains with workers:

SOURCE: hillaryclinton.com, based on data from the Economic Policy Institute

But even though profit sharing has the word “sharing” in it, it’s actually a pretty business-friendly approach. (The idea that the credit phases out for higher earners is the main way you can tell the proposal comes from a Democrat.) Lots of companies like the idea of paying their people more only when the business is doing well; the flip side is they can pay less in fallow years. In the jargon of human resources, other names for profit sharing are the much less warm and fuzzy sounding “pay-at-risk” and “variable pay.” Walmart, a company that’s famously tough about holding down its labor costs, used to be well-known for profit sharing.

At qz.com, writer Alison Shrager worries that more profit-sharing would just shift more pay out of steady wages and into up-and-down bonuses, adding another source of instability to the finacial lives of low-and middle-income workers. The Clinton campaign told Vox.com that companies would only be able to get the credit for profit sharing above regular wages—presumably meaning they couldn’t cut salaries and then get a credit for adding a profit-sharing plan. But over time, as companies gave out regular raises and made new hires, or as new firms started up, the mix of pay might still shift toward variable bonuses. Profit sharing eligible for the credit would be capped at 10% of salary.

If Clinton’s proposal became law, it would really be just one more of several tax policies that shape how companies structure their pay. If you get health insurance at work or a 401(k) match, that’s because the tax code makes it appealing for companies to pay you that way. You pay less tax on $1 of health insurance or $1 of a 401(k) match than you do on $1 of straight cash pay, so companies like to offer those benefits; similarly, it would be slightly cheaper for a company to give you $1 of profit sharing than to give you $1 of a raise. As an economist will tell you, the health insurance you get at work isn’t a free gift on top of your pay. It’s part of your overall compensation. If companies didn’t offer health coverage, they’d have to pay us more. (Of course, then we’d still have use that money to buy insurance.)

So perhaps Clinton’s plan would largely move money from one line in your pay stub to another. But it might be better than a zero-sum game. For one thing, it’s effectively a tax cut on pay, which the Clinton campaign says is worth $10 billion to $20 billion over ten years—not huge as these things go. Companies would get the credit directly, but to the extent that it encouraged companies to make more money available for profit-based bonuses, the tax break could flow through to workers. (Though the campaign says one purpose of the temporary credit is simply to offset the administrative costs of starting up a profit-sharing program.)

And there’s at least some evidence that companies with profit sharing actually do pay more overall. An influential think-tank policy paper on “inclusive prosperity,” which the Clinton campaign is reported to be be drawing from, points to a study of the effects of profit sharing by the economists Joseph Blasi, Richard Freeman, and Douglas Kruse. Based on surveys of workers, it found that pay was generally as high or higher among companies that gave workers some kind of stake in company performance. That includes not just profit-sharing bonuses but employee stock options and other programs.

Why? Partly it may be because you have to give people a shot at higher total pay to compensate for the risk that they might not do as well in some years. Or, the economists write, it could be that people are getting paid more because profit sharing spurs them to be more productive. That looks like a win-win, but its not exactly money for nothing. Maybe profit sharing works because it improve morale, reduces employee turnover and gives people an incentive to worker smarter and more creatively. Or perhaps anxiety over losing a bonus scares people into working harder and faster.

But the wage stagnation of the past several decades isn’t mainly a productivity problem—just look at the Clinton campaign’s own graphic above. People with jobs these days are already working smart and working hard.

Profit-sharing tax credits might nudge some companies to share more of the gains from that productivity with people outside the C-suites. But the story of the last several years is that it’s taken employment a long time to climb back from the hit it took in 2008. One thing that really helps people get more pay—whether it’s in cash, bonuses, stock option, pensions, or insurance—is full employment and a hot labor market, where companies have to do everything they can to get the workers they need. That’s something Washington has had a hard time delivering.

MONEY Apple music

Is the New Apple Music Worth the Money?

Apple's senior vice president of Internet Software and Services Eddy Cue speaks during the Apple WWDC on June 8, 2015 in San Francisco, California.
Justin Sullivan—Getty Images Apple unveils its new approach to selling you music. (It's a lot like what Spotify and Rdio already did.)

The new all-you-can-listen-to service is a worthy competitor to Spotify. What to know before you sign up or switch.

The new Apple Music streaming service has been live for about two weeks now, providing ample time to not just to test its various features out but to live with it. (It’s free for the first three months.) I’m already a big fan of the similar Spotify premium service, and I also hate, hate, hate iTunes, the often-confusing desktop software Apple Music is tethered to. So I was prepared to resist the call of Apple’s take on the all-you-can-listen-to music subscription.

But now, with some reservations, I’m considering switching over when the free trial is up. And if you aren’t already using a streaming service, this is one you’ll want to try.

I suspect Apple Music will probably be especially interesting to slightly older users like me (as in, over 40). Not only are we used to the idea of paying for music, but Apple Music is designed to mesh with the digital collections we already own. Here’s what you should know about Apple Music, what it (really) costs, and how it stacks up against other streaming-music options.

Where do I get Apple Music?

It’s built into the latest versions of iTunes on your computer and the Music app on your iPhone or iPad. You have to upgrade to the latest version of iTunes or the iOS operating system on your phone or tablet to see it. Apple Music isn’t available on Android phones yet; that’s coming in the fall.

How is Apple Music different from buying music on the iTunes Store?

Apple pioneered the idea of buying music online, but until recently their focus has been selling song-by-song downloads via iTunes for 99 cents to $1.29 each. With Apple Music, you pay a flat $10 a month to listen to any of the songs in its catalog. The songs or albums can stream to your computer, iPhone, or iPad over an Internet connection, or you can download them to play directly from your device. But you’re renting, not buying. Even if it’s on your phone or computer, the songs from Apple Music won’t play if you let the subscription lapse. (Music you bought on iTunes is still yours, though.)

Apple says it has a selection of 30 million songs on Apple Music, and it’s similar to what you can buy directly on iTunes, with a few notable exceptions like the Beatles. More on those exceptions in a moment—there’s a way to work around them (sort of) and it may be Apple’s main weapon against the competition.

What does it cost?

An individual subscription is $10 a month. This isn’t groundbreaking: It’s the same as what Spotify and most other streamers including Rdio, Google Play Music All Access, Rhapsody and Tidal charge for similar plans. An Apple Music family plan, which lets up to six family members use the service at the same time, is $15 a month. For families with more than two users, that’s a slightly better deal than the current family plans on most other services, which charge $5 for each additional user. For example, Spotify currently costs $15 for a two people, and $20 for three. Apple Music is just $15 either way.

For anyone who remembers buying CDs at $15 a pop, any of these options will look like a bargain. But it’s not quite the whole cost. If you start streaming music and listen a lot in your car, or while running or walking or otherwise out of wi-fi range, you are going to start eating up a lot of your wireless data plan. (For example, my wife uses less than 1 gigabyte of data per month, while I often use more than 2 gigabytes. The difference is almost entirely my Spotify and now Apple Music usage.) Depending on your plan and how much you currently use, starting to stream music on any service could easily add $15 to $30 a month to your bill if you aren’t careful. And I’m usually not.

You can, however, control this cost somewhat by downloading playlists or favorite songs to your phone when you are on wi-fi. (On Apple Music, pick a song, album or playlist, touch the “…” icon and select “Make available offline.” The other services have similar functions.)

Aren’t there lots of free streaming music services I can use instead?

Yes, but you face limits if you aren’t willing to pay. Spotify and the similar Rdio have account options that you pick all the music you want for free—but only if you are listening on a computer. On a phone or tablet, you have less control over the specific songs you listen to; on Spotify’s free option, for example, you can pick an album you want to hear, but only listen on shuffle. To get total control, you’ll have to pay the monthly $10.

Internet “radio” services like Pandora and Songza also have free ad-supported options, but again, you can’t pick the specific songs you want to hear. Instead, you’ll get a station or playlist built around your taste, favorite artists, or mood.

Apple Music also has free radio stations, including the live Beats 1 (complete with old fashioned DJs cueing up it high-energy pop music). They’re fine, but nothing really new, except for the convenience of having them built right into the iPhone’s Music app.

How is Apple Music different from the premium subscriptions at Spotify, Rdio, Google Play Music all Access, Rhapsody or Tidal?

Honestly, once you are paying for a subscription, most of the differences between services aren’t huge, at least not for iPhone users. All those other services have slick apps that will play on iPhones and iPads, though they also have the benefit of working on Android, too. Every $10-a-month plan including Apple Music offers a roughly similar selection, though each organizes playlists and music recommendations in a slightly different way. Apple Music, for example, is big on pushing you to listen to relatively short “curated” playlists put together by Apple’s own editors, or by big-name magazines and music websites. At Spotify, it’s easier to stumble upon quirky playlists put together by other Spotify users, a feature I particularly enjoy.

I also like Spotify’s specialized playlists and tools aimed at runners, including a feature that picks music matched to your pace. Apple’s running playlists weren’t as interesting to me. For audiophiles, Tidal’s added selling point is a more expensive, $20-a-month option that let’s you listen to streams with a higher sound quality.

But all these things are a matter of personal taste.

Most music you can think of us is available on all the different platforms. The differences are frustratingly random, since it’s about the deals each company can ink with whoever controls the rights to the music. No service is without important catalog gaps. Taylor Swift is on Apple Music and no other streamer. Prince is on Tidal, but not Spotify or Apple Music. Neil Young has just yanked his music from all the on-demand services. Nobody’s snagged the Beatles for on-demand streaming yet.

So if I already like Spotify or Rdio or Tidal, is there any reason to switch? Besides Taylor Swift?

Well, here’s the one thing that has me at least considering it: You may not be able to stream the Beatles or Prince on Apple Music, but if you own that music already (or buy it on iTunes), Apple makes it easy to mix that music in with subscription music you stream, all inside the same Music app.

To be clear, Apple isn’t alone in letting you combine the music you own with the stuff it streams. Spotify lets you do this fairly easily on your computer, and you can also download files from your computer to your phone to listen to inside the Spotify app. Google Play Music All Access lets you upload your own music to its cloud service, to listen to on any device within the Play Music app. (Google was really a step ahead of Apple Music with this function.) But if already you use iTunes as your music hub, Apple Music’s process is a lot more seamless and obvious.

Here’s an example of what I’m talking about: Before a recent run, I went into the Music app and was able to quickly create a playlist mix that included two Beatles songs I already owned, a Prince song, and even an unreleased recording of my father-in-law’s jazz group, along with a half dozen songs I don’t own but streamed from Apple Music.

If I was an Apple competitor, this would drive me nuts. Apple Music has an edge here because of Apple’s control over the default Music app on its phones. But many users, it’s going to be an attractive feature.

What’s not so great about Apple Music?

As mentioned, Apple Music isn’t available on Android phones or tablets yet. And if you want to listen on a computer, you have to do it through iTunes, whereas other services offer the option of listening through any web browser. That can come in handy if, for example, you aren’t allowed to load the latest version of iTunes onto a computer you use for work. (Then again, you can always use free Rdio or Spotfiy for that.)

iTunes is still a sprawling, over-complicated piece of software—you could write a dissertation about how Apple Music is supposed to interact with Apple’s iCloud, iPhone syncing, and the separate, “complementary” iTunes Match online music backup service. Some users have reported—angrily—that signing up for Apple Music and enabling its iCloud Music Library made their music listings on iTunes seriously buggy, mixing up tracks on albums or messing up album artwork. In response, Apple has already released a new update of iTunes and instructions for fixing a mixed-up library, but if you care a lot about how you organize your existing music on iTunes, you may want to wait to see if most of these complaints get ironed out. (I didn’t run into problems, but I had already backed up my music up on iTunes Match, which may have helped things run more smoothly.)

For a lot of users, the fact that the other services keep you from having to touch iTunes, and don’t mess with the digital collection you own, is actually a huge selling point.

So Apple Music isn’t a hands-down winner against other services out there. You have plenty of good choices, and if you are used to using Spotify or Rdio or Google Play, and already have lots of playlists set up there, you may not be in a rush to change. But Apple Music is likely to be the intuitive first choice of anyone with an iPhone. Streaming is hitting the mainstream, and with exceptions like the Fab Four and the Purple One, you might not find yourself buying much music outright in the future.

MONEY Health Care

What is Obamacare?

140603_FF_QA_Obamacare_illo_1
Robert A. Di Ieso, Jr.

Here's how President Obama's health insurance reform law actually works

Today, there’s been a lot of talk about the Supreme Court’s latest ruling on the Affordable Care Act, better known as Obamacare. But while the law signed by President Obama in 2010 made huge changes to the health insurance system, most people under 65 still get their coverage the way they always did: from their employer. Unless you bought a health insurance plan on a government-run marketplace, you might not be familiar with how the ACA provides coverage. Here are answers to some common questions:

How does the law help people get insurance?

The law set up insurance “exchanges” that offer consumers and small businesses a choice of standardized and heavily regulated health plans. For the most part, this marketplaces serve people who aren’t offered insurance by a large employer.

And how is that different from the way people bought their own insurance before?

On the exchanges, insurers are not able to turn anyone down because of a pre-existing condition; from pregnancy to heart disease, they’re all covered. The law also restricts or blocks annual and lifetime limits on what insurers, including in employer plans, will pay.

Rates aren’t tied to your health, although smokers may have to pay up to 50% more. The oldest people in a plan will pay no more than three times the rate paid by the youngest. In short, policies you buy yourself will be a lot more like the group plans you get at work.

What does coverage cost?

The insurance on the exchanges isn’t free—a family of four could well face annual premiums of $10,000 a year. But many of those using the exchanges will also receive federal subsidies—technically, tax credits—to help them buy. Those subsidies reach deep into the middle class: For families earning up to four times the poverty line—about $95,000 for a couple with two kids—the tax credits will be set so that they pay no more than about 9.5% of their income for a fairly basic health plan. (That cap is designed to rise gradually should premiums grow faster than incomes.)

People with lower incomes pay even smaller percentages. Some pay almost nothing.

The law was also meant to allows millions of the near poor to join Medicaid through the exchanges, although a Supreme Court decision left it up to individual states whether to participate in the expansion. Currently, 21 states are opting out.

What kind of coverage can I get?

All the plans must provide at least a standard menu of essential benefits. They come in four basic types: bronze, silver, gold, and platinum.

Although plans can compete by mixing different premiums, deductibles, and co-pays, you’ll know the average level of out-of-pocket costs you can expect in each type. For example, the silver plans ask you to pay about 30% of your costs out of pocket. (Subsidies are based on the cost of the silver plans.) The more expensive platinum plans, which would be most similar to a large employer’s coverage, would have out-of-pocket costs of just 10%.

How is all this paid for?

In a number of ways, but the most direct one is that high earners got a payroll tax hike. Starting in 2013, couples have paid additional taxes on earnings above $250,000 ($200,000, if you’re single)—0.9% on earned income and 3.8% on investment income.

Why are some people fined for not buying coverage?

By 2016 you’ll be dunned $695 a year or 2.5% of your income, whichever is higher, if you don’t have health insurance. However, there’s an exemption if premiums top 8% of your income. Insurers fought for this provision. Even with subsidies, some people may decide that coverage is too expensive. They’ll tend to be healthier than average—that’s why they’d be willing to take the risk. But that poses a problem in a system where insurers have to take all comers. If healthy people drop out, the pool of people paying in will typically be sicker and more expensive to treat. That causes premiums to rise, which causes more healthy people to drop out, which means higher premiums, and so on. To prevent this “death spiral,” the law pushes people to buy.

Adapted from “The Truth About Health Care Reform,” which appeared in the May 2010 issue of MONEY.

MONEY Airlines

Airline Group Says Your Carry On Bag Should Be Even Smaller

You might have to pack lighter--and buy a new carry-on bag

On Tuesday, a trade group representing airlines around the globe published new guidelines for the size of carry-on bags. The International Air Trade Association says that if bags are limited to 21.5 inches high (standing up on wheels) by 13.5 inches wide by 7.5 inches deep, then “theoretically” everyone on a 120-seat plane should be able to bring a suitcase on board.

(The press release doesn’t elaborate on whether their theory accounts for duty-free-shop hauls and that guy in front of you who insists his weirdly-shaped garment bag can fit if you push down on the door really, really hard.)

According to the Washington Post, the new guidelines, which individual airlines may or may not choose to adopt, call for bags about 21% smaller than currently allowed by major U.S. carriers. (That’s measuring by volume.)

carryon2

Considering that many travelers intentionally purchase the largest carry-on bag possible in order to pack as much as they can, many pieces of luggage would be too big to be carried onto the plane if the change is made.

That’s a big if, of course. An American Airlines spokesman, for one, told the Post the carrier has no current plans to change the rules.

Here’s a look at the current rules for airlines (in inches), and how much your bag might have to shrink if they went with the new guidelines. One thing that jumps out is how varied the rules actually are.

American, United, Delta, Jet Blue, Aeromexico, Virgin Atlantic

Current policy: 22 high x 14 wide x 9 deep

How it would shrink if they followed IATA guidelines: 0.5 x 0.5 x 1.5

Change in volume: 21%

Southwest

Current policy: 24 high x 16 wide x 10 deep

How it would shrink if they followed IATA guidelines: 2.5 x 2.5 x 2.5

Change in volume: 43%

Air Canada

Current policy: 21.5 high x 15.5 wide x 9 deep

How it would shrink if they followed IATA guidelines: 0 x 2 x 1.5

Change in volume: 27%

Alaska Airlines

Current policy: 24 high x 17 wide x 10 deep

How it would shrink if they followed IATA guidelines: 2.5 x 3.5 x 2.5

Change in volume: 46%

WestJet

Current policy: 21 high x 15 wide x 9 deep

How it would shrink (grow) if they followed IATA guidelines: (+0.5) x 1.5 x 1.5

Change in volume: 23%

Spirit

Current policy: 22 high x 18 wide x 10 deep

How it would shrink if they followed IATA guidelines: 0.5 x 4.5 x 2.5

Change in volume: 45%

British Airways

Current policy: 22 high x 18 wide x 10 deep

How it would shrink if they followed IATA guidelines: 0.5 x 4.5 x 2.5

Change in volume: 45%

Air France

Current policy: 21 high x 13 wide x 9 deep

How it would shrink (grow) if they followed IATA guidelines: (+0.5) x (+0.5) x 1.5

Change in volume: 11%

Lufthansa

Current policy: 21.6 high x 15.7 wide x 9 deep

How it would shrink if they followed IATA guidelines: 0.1 x 2.1 x 1.5

Change in volume: 28%

Read next: Airlines Aren’t Making Nearly As Much Money As You Think

MONEY The Economy

What’s Inflation?

What's inflation? How is it calculated? And how does it affect your life? Money's Pat Regnier has the answers.

In this Money 101 Explainer, editor Pat Regnier walks through how inflation, the rate of change in the prices you pay for everything in your life, is calculated. He also explains why you might feel that inflation is worse than the government tells you it is, and why a big jump in housing prices might not be a sign of inflation. Also covered are how taxes and Social Security benefits can be linked to inflation, and why the Federal Reserve pays close attention to it.

MONEY The Economy

What Do the Jobs Numbers Actually Mean?

A look at the monthly employment reports and what they mean.

The unemployment rate can often be used as a measure of how tough or easy it may be to get a job at a certain time. That one number, however, paints a picture that’s a little too simplistic. The unemployment rate fails to include people who have given up looking for work and those who consider themselves underemployed. To get a clearer picture, look at the employment growth number and the unemployment rate together.

MONEY Taxes

What Happened When I Did My Taxes With My 10-Year-Old

What I learned about my kid—and what she learned about money—when we filled out the Form 1040 together.

This past weekend, I asked my 10-year-old daughter Lucy to help me do our family’s taxes. She read off from my W-2 and our 1099 forms as I filled in the boxes on the tax prep website we use. This meant, of course, that she got to see exactly how much her parents earn.

I expected that this was going to feel like the Big Reveal of a closely guarded secret. As I probably should have known, the numbers at first meant nothing to her. Annual incomes are an abstraction to a kid who has never written a rent check.

The real talk came a couple of days later, when Lucy and I had a chance to look over the actual 1040 I sent to the IRS, and I could show her how it all fit together. I’m glad we did that.

Before I get that to that conversation, though, a word about why I decided to do this. I was inspired in part by New York Times columnist Ron Lieber’s case for telling your children what you make. As Lieber points out, kids have a knack for figuring this out anyway. And showing them how you handle money—even when (believe me) you are far from perfect at it—can be a first step toward showing them how to be competent with it themselves.

I was also motivated by a more cranky-old-man impulse: I’ve been surprised by the number of young adults I meet who don’t know how to do their own taxes. To me, knowing how to fill out a 1040 is a just a basic life skill everyone should have by 18. I know this is more sentimental then reality-based. After all, I also put driving a stick shift in this category. And for years I’ve been farming out the hard work of my own taxes to the H&R Block website. (Thanks, AMT.)

Still, I remember that I was in the eighth grade, our teacher Sister Loretta had students fill out 1040s using mock W-2s as a math exercise. She was cracking the door on the adult world a little bit wider. Kids are always eager for those peeks, and when they get one, they seem especially open to learning. And talking.

For me and Lucy, the tax talk turned into one of the most impressively grown-up discussions we’ve ever had. She saw what we make, and I tried to put that in the context of what other Americans earn. She also saw what we pay, and so then we turned to where that money goes and what it’s used for. I tied the conversation in to a news story I read that day, about legislation in Kansas that would bar families on public assistance from spending that money on a long list things, including casinos, but also movie tickets and trips to the swimming pool. We talked about why some families need financial help, and why people have such strong opinions about that.

Lucy doesn’t need me sharing her nascent political views with the world, so I’ll just say that she surprised me (the way kids do) with her insights about what’s fair and about the choices people should have. Her ideas seemed too thought-out for her to just be parroting back what she guessed I’d like to hear. So I learned something about my daughter. And my wife and I also had a chance to articulate some of the values we are trying to pass on to our kids.

Lucy also asked a simple but very good question about our own money: “So this is how much you made, but how much do you have?” The distinction between making money and actually having any is an important one, and these days in our family we are frankly doing better on the former than the latter. Turning from our income tax forms to our savings, I was able to at least hint at some of the tricky choices her mom and I are trying to juggle.

Lucy didn’t get a “wow” moment of understanding from this, but I think I laid the groundwork for future discussions of things we have to be realistic about. Like how we’ll pay for Lucy to go to college, and where she’ll be able to go. And why (to hit on a question that’s really on her mind) she still has to share a room with her little brother.

I was able to have this conversation from a standpoint of some comfort. For a lot of parents, opening up about money means talking about losing a job, or how they’re dealing with a foreclosure, or how they’re going to buy the groceries this week. Those are much tougher things to talk about. But starting from where we are, and knowing we’ll have some ups and downs in the future, I think I’m glad that for my daughter this part of real life is already a little less mysterious.

MONEY Economy

The Gloomy Economic Message Hidden in the Fed Statement

Despite hints of a rate hike, stocks and bonds rallied on the Fed's latest announcement. Here's the kinda depressing reason why.

For the uninitiated, here’s a primer on Fed-ology 101: When the economy looks stronger, the Federal Reserve will want to raise interest rates to curb inflation. And once the Fed’s benchmark rates go up, that’s generally bad for the price of bonds — and (indirectly) for stocks too.

But we aren’t in a 101 class right now.

On Wednesday, Fed chair Janet Yellen announced the latest Federal Open Market Committee decision on rates, and dropped the word “patient” from her statement. That’s a signal that the Fed could raise rates as early as June. In other words, it thinks the economy is healing from the Great Recession.

So what happened next? The stock and bond markets rallied. That’s partly because the market already expected the language change. But it may also be because traders hear the Fed suggesting something a bit unnerving about the economy.

Along with the statement on current rates, the Federal Reserve also releases a survey of where FOMC members expect rates to go in the future. They brought down their estimates for where short-term interest rates are headed next year, from a median of 2.5% to 1.875%. In other words, even if the economy is getting better, the definition of “better” is looking a little slower than previously thought.

This at least rhymes with, even if it does not confirm, a worry among some economists that the global economy could be at risk of something called “secular stagnation,” or a pokey “new normal.” In a new normal world, interest rates and inflation tend to be lower for longer, but long-term growth is subdued too.

Factors that might contribute to a long-run slowdown range from inequality (which dampens demand) to demographics (slowing the growth of the workforce) to technology (which could mean companies need fewer workers and less capital investment.) Economist Lawrence Summers, who put the phrase “secular stagnation” on the map, says that this is a risk to be guarded against, not a sure thing or even the most likely one. And “new normal” has been a bit of a fad among bullish bond investors, who of course may be overconfident in their prediction that rates will stay low.

That said, the Fed’s latest statement is a reminder that the global economy is still very wobbly.

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