Thursday, February 06, 2014

Will the ACA boost retirement savings?

The CBO's new projection that the Affordable Care Act would lead to a labor force reduction equivalent to 2.3 million jobs by 2021 stems in part from an assumption that some people will be reluctant to boost their income because doing so may reduce or eliminate their ACA subsidies.

Perhaps. The ACA includes some subsidy cliffs -- break points at which reporting an extra dollar of income will sharply increase the cost of insurance.  But besides earning less, there are other ways to reduce one's taxable income that should be available even to many lower-income workers.

First, the cliffs. As I have noted before, the ACA premium subsidies for young people phase out gradually. An extra thousand dollars of income will boost premiums by at most about $15 more per month near the upper end of the scale (e.g., income rising from $32k to $33k), less at lower income levels. But the subsidies for out-of-pocket costs change more abruptly, with break points at income levels of 150%, 200% and 250% of the Federal Poverty Level (or FPL).  And the premium subsidies do cut off abruptly for older adults, because the base rates for their premiums are up to three times higher, but the subsidies reduce their share to the same percentage of income as a younger person of the same income will pay.

Look first at the cliffs for the out-of-pocket subsidies. For a single person earning up  to $17,235, subsidies for the cheapest silver plan set the deductible at $100 and the out-of-pocket (OOP) maximum at $750.  Just over that ridge, these subsidies remain generous but fall  to a $300 deductible and $1,550 OOP max.  At $23,265 income, they jump again, to $1,250 and $3850. At $28,275, they phase out.

I doubt that those jumps are likely to motivate many people to keep their hours down -- unless they have medical conditions that they know will bump them against the out-of-pocket maximum (and they have either the awareness or good enough help to pay attention to that).  If you're healthy, the OOP max is likely to seem a bit abstract. Perhaps the deductible jump at 200% FPL ($23,265) might get a few people's attention. But who, as a year is progressing, has an exact sense of their total year's income, much less their modified adjust gross income (MAGI), on which the ACA subsidies are calculated? Perhaps a vague sense that "if I work more, my health insurance will get more expensive" may operate on a few people. But at these cliff levels, I doubt that that factor would motivate many to cut hours.

The premium subsidy cliff for older exchange buyers is more serious, especially if there are two of them in a household.   To return to an example I cited previously, take a pair of 55 year-olds with a 23 year-old son or daughter. For them, the cheapest silver plan in Essex County New Jersey is $1,357 per month.  If the family income is $63,000, the monthly subsidy is $876, their monthly payment $481.  At $79,119 (299% FPL), the subsidy has dropped modestly, to $756. At $79,121, it's -- zero.

In this case, some serious money is at stake at the cliff. But it seems to me that the likeliest reaction is not to reduce hours or income but to manipulate MAGI -- especially since the stakes are higher as you go up the income scale, and so those at the steeper cliff's edge are likely to be more sophisticated. In fact, they're likely to be self-employed -- i.e., earning a relatively decent income while lacking access to employer-sponsored insurance. And as I've noted before, the taxable income of the self-employed is notoriously malleable at the margins. Sticking another thousand or two in an individual 401k or buying yourself a new computer at Christmas may put you a few inches back from the subsidy cliff.

The ACA added a few skyscrapers to the submerged state.  It will spur some creative accounting. Tax advisers catering to all income levels, e.g. H&R Block should incorporate subsidy levels into their advice to those without access to ESI; tax preparation software should throw up red flags at the subsidy break points. In fact, if the new MyRAs were not structured like Roth IRAs, i.e. not reducing current taxable income, there could be a direct tie: feed your MyRA, lower your premiums!  Hey, Obama.....

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