How do you keep your finances on track? Are there any online tools you use to keep track of what you’re spending and where? When was the last time you were caught off guard (pleasantly or not-so-much) when you checked your bank account balance?

It would be really easy to turn this response into a plug for my own company’s FinanceWorks, but I’ll restrict myself to mentioning it here. I actually do not use FinanceWorks because I don’t patronize a financial institution that has it. That being said, if I had access I would.

I keep my finances on track through a simpler method. I have two checking accounts. One pays the bills. The other one is my “running money” and only has a debit card attached. There are no printed checks and online bill pay isn’t set up (much to the bank’s apparent dismay).

Whatever I have in that account is whatever I have to spend on food, gas, entertainment and similar. If I’m careful, I can keep from running through the money that goes in with each paycheck and thus build up enough of a balance to do something really special. If I’m not careful, I have to skip luxuries and live cheaply.

Since my bills are paid, though, I don’t have to do without the essentials. By making the “pay bills” account a little less accessible — it does not have a debit or ATM card attached — I’m (mostly) able to maintain enough discipline to keep my overall financial picture on track.

I check both accounts’ balances daily so I tend not to encounter surprises of either type. I find that reassuring. I might not always have much in my bank accounts, but I have enough not to worry. That’s one less source for anxiety. On the other hand, I don’t always quite know where my money goes but heavy use of a debit card makes it hard for me to keep track.

That’s why I’d love to be able to hook a financial management tool to my debit card. Tools like mint.com won’t work because I want to track my spending real-time instead of having to enter data about each and every transaction. I’ll be glad when demand gets to the point that I have access to something within my bank account.

And as someone whose income partially depends on the popularity of FinanceWorks, I’d love to see my bank and credit union install that one in particular. :)

A new report released today by the Office of Advocacy of the U.S. Small Business Administration (SBA) details the cost of employee benefits by firm size. The report specifically looks at the cost of health insurance, pension plans, paid vacation, and sick leave.

The report finds that the offering of benefits and their associated costs can vary dramatically with firm size. For instance, the latest data show that the per-participant administrative costs of defined-contribution pension plans (such as 401(k) plans) are as much as 14 times more for the smallest firms than for their largest counterparts.

The authors also examined the share of all private industry employees eligible to enroll in health insurance plans. They found that about 40 percent of employees in the smallest firms were eligible for health insurance coverage while slightly more than 77 percent of the largest firms’ employees were eligible for health care coverage. [Text continued at site.]

According to the Small Business Administration, more than 56 million Americans — some 28.5% of those between the ages of 15 and 65 — are employed with businesses of 500 employees or fewer[1] (.pdf). That is an awful lot of Americans with limited or no access to benefits many others would consider “traditional.”

As the cost of benefits rises, pricing more and more businesses (and many will have more than 500 employees) out of the benefits market, there may come a time when a de facto universal system comes into being. We’re still a long way from such a situation but it is a logical projection of current trends. Now is the time to consider, though, who will be in charge of that system: will it be the businesses that stand to profit from it, the businesses that are its clients, or the entire base of this country’s people?

[1] This figure excludes farming businesses.

House Ways and Means Chairman Bill Thomas (R-Calif.) will include a provision in his Social Security legislation to help employers make enrollment in 401(k) plans automatic unless workers choose to opt out, according to congressional staff and knowledgeable lobbyists. The provision could have substantial impact on the nation’s savings rate, which has declined from 7.2 percent in 1992 to barely 1 percent today. Recent academic research has shown that employee participation rates soar among companies with automatic enrollment in retirement plans.

Christin Baker, a spokesman for the Ways and Means Committee, said she could not confirm whether any particular provision has been included in the broad package of retirement savings proposals Thomas is assembling. But lobbyists who have met with Thomas say he has given his word on the matter.

“You can take it to the bank,” said one Republican lobbyist with close committee ties, who spoke on the condition of anonymity to protect his relationship with the chairman.

The decision comes as negotiations proceed on a retirement savings bill that will propose a long-term fix for Social Security. Thomas hopes to include enough items with broad appeal to win majority support for a Social Security plan that at least approximates President Bush’s proposal to convert some of the program’s defined benefits to private savings and investment.

According to two lobbyists familiar with the discussions, Thomas has suggested to life insurance interests that he would back incentives for employers to convert 401(k) balances to private annuities that would pay out slowly over a worker’s retirement. In exchange, the life insurance industry would not work against a dramatic expansion of Individual Retirement Accounts, 401(k)s and tax incentives designed to expand personal retirement savings. Such government-supported savings vehicles tend to eat into the insurance companies’ private annuities business. Such a deal would be controversial, one GOP lobbyist said, because converting 401(k) balances to privately managed annuities would eat into workers’ savings balances.

While this legislation appears to make automatic 401ks voluntary rather than mandatory, the idea itself bothers me. Many employers avoid direct compensation of employees (with associated taxes) by compensating them in company stock or using a similar arrangement. While completely legal, it leaves employees in a situation where their stated salaries are less than their actual salaries. Unfortunately, most programs requiring income qualification use stated salaries. (I ran into this several times while working with the state, since North Carolina is one of the few states where state employees have both FICA and 401a retirement plan deductions.) I’m concerned that the legislation could open the door to making this practice more common.

My greatest unease, though, is with the concept of turning 401ks into private annuities. In effect, this would mean that a worker will no longer have a choice about the method of payout for his/her 401k. As such, they would become more like pensions and social security, and less like true investments. There are sometimes very good reasons to take out 401k savings using a non-annuity method. Only the individual worker can make that decision — not the government and definitely not the worker’s employer.

The National Association of Professional Employer Organizations (NAPEO) defines a PEO as a business that:

provides integrated services to effectively manage critical human resource responsibilities and employer risks for clients. A PEO delivers these services by establishing and maintaining an employer relationship with the employees at the client’s worksite and by contractually assuming certain employer rights, responsibilities, and risk.

The critical difference between a PEO and the traditional understanding of a firm that does outsourced human resources services is the co-employment concept.

In traditional human resources outsourcing, the client company is still considered the employer. Although the outsourcing firm takes over (sometimes significant) administrative and consultative duties, the client is the business that bears the liabilities and risks associated with being an employer. It is the “group” for purposes of benefits; it is the entity responsible for compliance with employment-related statutes and regulations; it retains final authority for all human resources-related activities and actions.

PEOs, on the other hand, actually employ the client company’s employees – including, in many cases, the principals of the client company. Assuming the duties (and rights) of the employer means the PEO assumes a substantial portion of the risk and liability associated with being an employer. This is the client consideration in a PEO service agreement: the client is no longer able to overrule the PEO in employment-related decisions, but the client also no longer bears sole risk and liability for those decisions. (In practical application the client retains considerable employment-related authority as a matter of good customer service.)

To give an illustrative example, the W-2s for employees whose companies utilize a human resources outsourcing firm bear the name of the client company. The W-2s for employees of the PEO where I am employed bear my company’s name instead.

The PEO industry has been in existence for several decades, but it is considered a “newcomer” in the business world. At the moment, there is not much in the way of regulation, although NAPEO supports voluntary regulation and standards of ethics and responsibility. Technically, PEO organizations and human resources outsourcing organizations are competitors, although PEOs especially tend to set themselves apart from outsourcing organizations when establishing a corporate identity. In general, PEO services are more expensive than traditional outsourcing, but most clients consider the extra expense more than worth the savings in employer liability.

My employer, which is a NAPEO member, positions itself based on a very specific customer service model. Other PEOs market themselves using price, value and marketing factors familiar to any business organization. (Some even concentrate on specific niche markets.) The industry has been growing, especially as human resources becomes a more and more complex field. While the PEO industry may still be regarded as a “newcomer” in the business world, I feel certain it is a concept that is here to stay, especially as the number of small businesses grows. This is the biggest reason I was willing to accept a position in the industry.

Is Social Security headed for a crisis sooner than thought? Although President Bush says so, not everyone agrees. The system’s trustees estimate the Social Security trust fund is in good shape for another four decades. The nonpartisan Congressional Budget Office figures five decades. Many independent economists think Social Security is healthy for more like six or seven decades.

Unlike ordinary government functions, Social Security is funded by its own tax, the payroll tax. In 1983, at a time when Social Security was genuinely facing a crisis – it was mere months away from failing at the time – a commission appointed by President Reagan and headed by Alan Greenspan proposed a series of fixes. Among other things, the Greenspan commission recommended increasing payroll taxes. Knowing that the baby boomers would begin retiring around 2010, Mr. Greenspan recommended raising payroll taxes by much more than was needed to pay benefits at the time.

Because the surplus payroll taxes were handed over to the federal government (in return for Treasury bonds), this meant ordinary income taxes could be kept low. After all, the federal government has a fixed need for money, and if it gets excess money from payroll taxes it can afford to keep income taxes lower than they’d otherwise be.

So this was the implicit bargain in the reforms recommended by Greenspan and signed into law by Reagan: From 1983 to 2018, low- and middle-income earners would pay excess payroll taxes. This allowed income taxes to be kept low, and primarily benefited high earners. Then, beginning in 2018, instead of raising payroll taxes to pay for baby-boomer retirement benefits, Social Security would begin selling its bonds back to the government. To pay for those bonds, income taxes would be raised – high earners would begin paying higher income taxes.

For more than two decades, low- and middle-income Americans have kept their part of the bargain, paying more in payroll taxes than Social Security needs and helping to keep income taxes low. In return, beginning in 2018, high earners are expected to start paying a bit more in income taxes in order to help keep payroll taxes low.

That’s the bargain that was struck in 1983. It’s one we should keep.

Essentially, Greenspan’s plan allowed high-income Baby Boomers to get around paying for the majority of their own social security benefits. I don’t think it’s too much to ask that they pay higher income taxes for less than a decade in order to fulfill their end of the bargain, given that those in my generation and the ones after will pay the higher taxes for much longer.

Being a cynic when it comes to such matters, I have no doubt that Bush II will find a way out of it. I am, however, interested to see how he’s going to do that without directly contradicting Reagan’s actions.

The Sixth Annual Transamerica Small Business Retirement Survey dispels the myth that Echo Boomers [born between 1979-86 – cc] are simply too young to care about saving or planning for retirement. Survey data shows that younger workers are hungry for more retirement planning education and advice from their employers and, unless they receive it, their participation in company retirement plans may continue to remain low.

“There is a misperception that workers in their 20s are simply too young to care about retirement planning,” said Catherine Collinson, retirement and market trends expert for the Transamerica Center for Retirement Studies. “The truth is, these workers are very concerned about saving and want more information – especially from their employers. It’s important that employers find a way to reach their younger workers through targeted education.”

The reality is that Echo Boomers do care about retirement planning. The majority (93 percent) view employee-funded retirement plans, such as 401(k) plans, as an important workplace benefit. They are just as likely as older workers to have approached their supervisor or human resources department about retirement benefits, either with questions or suggestions about the plan.

Yet, Echo Boomers lag behind other generations when it comes to saving for retirement – either in a company plan or on their own. Just 37 percent of Echo Boomers with access to an employee-funded retirement plan participate, compared to 75 percent of Gen Xers [born between 1965-78 – cc] and 85 percent of Baby Boomers [born between 1946-64 – cc]. A similar trend is found in non-workplace retirement savings. [Text continued at site.]

There’s probably another reason why Echo Boomers are lagging behind Generation X right now: many of them are still getting started in their careers and aren’t making high incomes yet. (Studies show that the highest income years tend to be between ages 30 and 55.) It’s not always easy to devote 5% or more of one’s income toward retirement when living on 100% of the income involves barely scraping by. Retirement plan participation by Gen Xers has risen dramatically in the past few years as we get into our late twenties and early thirties.

I do think, however, that there will be a similar dramatic rise for Echo Boomers as they get into the same age bracket – and that it will be enhanced if the educational programs are put into place. This interest in information is an excellent sign. Both Generation X and the Echo Boomers have reason not to trust the social security system, as we’re the ones upon whom the burden will fall as the overall age in the United States creeps up. (Both of our generations are smaller than the Baby Boomers, although there are more Echo Boomers than Generation X.) We’re learning, simply from watching our parents, that saving for retirement is absolutely critical.

Old-line companies have pledged a trillion dollars to retirees. Now they’re struggling to compete with new rivals, and many can’t pay the bill. [Full text at site.]

This article is a very comprehensive (albeit negatively-toned) analysis of the status of defined benefit retirement plans in this country. Although it concentrates on corporate defined-benefit plans many of the issues in the article also apply to government plans. Interestingly enough, however, the State of North Caroline has lost two class-action lawsuits pertaining to retiree benefits. One (Bailey-Emory-Patton) would not have applied to plan administration — but one (Faulkenbury et. al.) did. I would be interested in finding out whether or not corporate defined-benefit plans run a similar legal risk of class-action lawsuits if benefits are abruptly reduced. My guess is that they don’t, since to my knowledge the PBGC only covers corporate plans…but I am not a lawyer so that guess shouldn’t be taken very seriously.

I’m not sure how to develop a workable solution to such a head-in-the-sand attitude among employees. Obviously, education is key, but it seems that employees are not responding well to theoretical information. Unfortunately, confidentiality restrictions stand in the way of telling horror stories (for good reason, I should add). I’m terribly afraid that the prevailing attitudes in this country won’t change until social security actually collapses, and by then it will be too late.

I am one of those beneficiaries: my father died when I was fifteen and I received social security survivors’ benefits until the month before I turned eighteen. (The assertion that survivors’ benefits continue until age 22 if a non-disabled dependent is still in school only applies to secondary schools, not post-secondary schools. Believe me: I fought this one hard.) This partial replacement for my father’s income meant the difference between survival* and poverty for my family because he had been the main wage earner.

According to statistics for November 2003 (the last month for which they are available), 1,902,000 children under age 18 received social security survivors’ benefits that month. Another 189,000 beneficiaries were widowed parents, and given that Generation X is approaching or past the age of thirty now, this definitely means some of the parents fall into our generation. 1,562,000 children of permanently disabled workers also received benefits — and anyone who thinks it’s easy to qualify for SSDI ought to try it.

So the next time you take a look at that OASDI (6.2% of FICA) withholding, you might want to think about the fact that some of the people getting the money aren’t retirees, and many people who are no longer receiving benefits did at some point in their lives. I have never once complained about FICA withholding and I never will, because I know from experience how very beneficial the programs really are.

For the record, I do think retirement benefits will still be around in forty years, although there’s no way they’ll be the same as they are today. The Congress and administration that actually allows the fund to run out of money will effectively commit political suicide. What politician is willing to do that?

Also for the record, social security was never intended to be a full-fledged retirement savings program anyway. Even when President Roosevelt established it, it was meant as a safety net only. So I’m not at all saying that people shouldn’t save. It has always been assumed that they would. What happens, though, when your savings get eaten up in medical bills because a person hits their lifetime maximum for health insurance (which happened to my father)? Or when a parent dies before he or she has had the chance to work long enough to save any appreciable amount? There are lots of legitimate needs for a safety net.

* By “survival” I most certainly do not mean that my family lived the lifestyle we had before my father’s death. Even though he had life insurance, there was an extremely significant drop in standard of living. It just didn’t drop to the poverty level.