Why We’re Nearly FUBAR’d

The financial ignorance of the Average American is so widespread, that you — yes you: sitting in your cubicle, making close to six figures at a stable white collar job — you are probably sitting next to someone who’s financially ignorant.

A story from the AP studying American’s understanding of insurance yielded some astoundingly bad results:

Health: Fewer than half (49 percent) of those surveyed were informed about the cost of coverage if they leave their job and choose COBRA (Consolidated Budget Reconciliation Act) insurance to continue their health benefits. And just 58 percent were aware that health insurance will not cover their living expenses if they become disabled and cannot perform their job.

Home: Only 19 percent knew that the requirement for private mortgage insurance on a newly purchased home depends on the size of the down payment and lender; almost 30 percent think PMI is required by law.

The shortcomings in awareness conflict with what respondents thought they knew. Before taking the quiz, nearly 60 percent said they felt “very confident” when making insurance decisions overall, with only 15 percent voicing any insecurity about their decision-making abilities.

I’ll admit, I’m probably one of those financially ignorant ones as well.  But I’m learning!  The problem is that there is a shocking lack of baseline financial education.  There is no standardized financial education test for high school students, as far as I know, and you know what?  Perhaps there should be and it should be a requirement for high school graduation or a G.E.D.  Perhaps two courses are in order: once in high school to cover basics for college students like credit cards, APRs, banking, paying bills, progressive tax brackets, credit scores, and so on.  Another, higher level course would cover things like renting (and your rights as a renter), mortgages, retirement savings, investing, more on progressive tax brackets, and so on as a national requirement for obtaining an associates degree or a baccalaureate.

(As an aside, one of the biggest peeves I had during the presidential campaign was the shocking lack of understanding of how a progressive tax bracket worked and the difference between a marginal tax rate and an effective tax rate.  I don’t think that most people even understood the real effect of raising the taxes by 3% — rolling back the Bush tax cuts — on the highest bracket would be and who it would affect…)

Come to think of it, this would be an awesome two pronged approach!  Get kids educated on the basics of finance and put all those laid off Wall Street workers to good use.

But seriously, I think this is one of the biggest arguments against privatized health insurance options as a method of increasing insurance coverage and availability: people just don’t know much about these things and people don’t want to spend the time to dig into the details while they’re healthy.  Most of the time, the materials are just too dense anyways.

There’s a story in Time this week, “The Health-Care Crisis Hits Home“, written by Karen Tulmuty, documenting her brother’s experience with the twisted world of health insurance.  What’s shocking are some of the numbers drawn from it:

When we talk about health-care reform, we usually start with the problem of the roughly 45 million (and rising) uninsured Americans who have no health coverage at all. But Pat represents the shadow problem facing an additional 25 million people who spend more than 10% of their income on out-of-pocket medical costs. They are the underinsured, who may be all the more vulnerable because, until a health catastrophe hits, they’re often blind to the danger they’re in. In a 2005 Harvard University study of more than 1,700 bankruptcies across the country, researchers found that medical problems were behind half of them — and three-quarters of those bankrupt people actually had health insurance. As Elizabeth Warren, a Harvard Law professor who helped conduct the study, wrote in the Washington Post, “Nobody’s safe … A comfortable middle-class lifestyle? Good education? Decent job? No safeguards there. Most of the medically bankrupt were middle-class homeowners who had been to college and had responsible jobs — until illness struck.”

Scary numbers.

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