The Moral Ambiguity of Obamacare Subsidies for Early Retirees

first off, you guys — a huge THANK YOU to everyone for the sweet notes of congratulations on our first blogiversary post, and double thanks to the (surprisingly!) many of you who responded to the survey link. we got a ton of great input that will guide future posts — including this one! if you still want to respond, it’s open a few more days, or you can always give input in the regular comments on posts you’d like to read. we’re very suggestible. :-)

we’ve mentioned several times over the past few months that we’ve been working on a post about obamacare/aca coverage and how the subsidy limits are affecting our retirement budget projections. but in the meantime, several folks including go curry cracker have talked more about all of that, and laid out a lot more math than we would have. then last week, root of good posted their retirement budget, including details about the health care subsidy they receive, and the post received a surprising amount of vitriol from those who take issue with high net worth but low income retirees receiving subsidies for health care. so we decided to look at that side of it: the moral ambiguity of the subsidies built into the obamacare system, especially for early retirees.

here are a few facts that are important to know if you’re going to debate this stuff:

1. everyone in the u.s. is now required to have a certain level of health insurance, per the individual mandate of the affordable care act (aca). not having insurance or carrying only a catastrophic policy are no longer viable options. there is an increasingly large tax penalty imposed on those who don’t buy insurance.
2. when congress wrote the aca, they could have included means testing for net worth, but they didn’t. the only bar they established was income, specifically the modified adjusted gross income (magi) reported on your federal income tax return.
3. people who don’t receive health insurance through an employer are supposed to find an insurance plan on either the healthcare.gov exchange or your own state’s exchange (some states have them, some don’t). to even see plans available, you have to plug in your income, and it automatically tells you what your subsidy is. the subsidy isn’t something you ask for.
4. subsidies are designed to benefit people across a broad income spectrum, not just those in poverty. those earning very little have their coverage almost completely covered, while families earning six figures can still get a small subsidy. in our state, we could get a small subsidy in 2016 for the two of us with an income up to $63,000, or a massive subsidy with an income under $22,000.

to be 100 percent transparent about it, we have always planned to get obamacare coverage in early retirement, and always assumed we would qualify for a subsidy. we value our health, and would pay for health coverage no matter what, but we completely appreciate that the aca at least makes health care costs a little more predictable, and saves us potentially a lot of money. planning for long-term retirement would be awfully tough without some level of predictability. and because we value our health, opting out of health insurance altogether, and just eating the tax penalty, is not something we’d ever consider. (we’re also generally law-abiding and stuff.)

we understand that all of this might rub some people the wrong way, the thought of millionaires getting taxpayer-subsidized health care coverage. (and we won’t go into all the ways that the rich have always been subsidized by taxpayers — the mortgage interest deduction on first and second homes, no taxes on premiums paid for employer-subsidized health coverage, bank bailouts, myriad forms of corporate welfare, etc. in principle, this is nothing new.) but to be perfectly honest, we feel a little icky about it, too. we’ve always believed in paying our fair share, and have never tried to max out our tax deductions. we believe in taxes. we believe in using those taxes to help the disadvantaged and to keep our country running smoothly, not to help the rich get richer. so while receiving a health care subsidy is something we’re happy to have for budgeting and planning purposes, and to keep ourselves financially solvent in retirement (which will keep us from being a drain on society in other ways!), it’s not something that we completely love from a moral perspective.

but here’s the thing: we don’t really have a choice. we are required by law to buy health insurance on the exchange, which requires us to enter income, which then tells us our subsidy. we can’t say, “oh, no thanks, we’ll pay the whole thing.” and we can’t lie about our income, because you have to reconcile all of it on your tax return and either get an extra tax credit if you overestimated your income when you applied for coverage, or pay back part of the subsidy if you underestimated. there simply isn’t room for individual morality in the equation. the law says we get x amount, and so that’s what we get. and let’s say we could opt out without breaking the law. we’d never choose to pay the crazy high premiums for the unsubsidized plans — they would eat up more than half of what we plan to live on each year in retirement. we’d figure out something else, like signing up for the catastrophic plans that were available before the aca passed, or traveling to places like thailand to be health care tourists. right now, there are no affordable options for early retirees that come without this moral gray area weirdness. (the only actual choice would be leaving the country. full-time expats are exempted from the individual mandate. but we don’t think that’s a good enough reason to uproot ourselves from a town, state and country we love.)

so what if we did have a choice? in some parallel universe where we could set the rules, we’d rather see one of three differences:

1. when congress wrote the law, we’d rather they had included asset testing, and not just income means testing. but then again, asset-tested programs tend to lead to invasiveness and even harassment, not to mentions tons of bureaucracy and red tape. (matt taibbi has an incredibly powerful description of how this happens in his book the divide: american injustice in the age of the wealth gap). as a country, we have a history of not doing much means testing on programs meant to serve large swaths of the population: there’s no means testing whatsoever on social security benefits, and medicare only recently added an income test but still has no asset test, and even that only affects the top 5 percent of earners. so this change is unlikely ever to happen.
2. we’d rather if congress had included a single-payer option, like a medicare expansion to those under 65 (not just the medicaid expansion that accompanied the aca, which many states have opted out of). we’d happily pay medicare premiums, even those for higher earners under medicare part b, or higher yet premiums than those given that we won’t yet be at traditional retirement age. but needless to say, this is politically unpopular among those who favor smaller government.
3. the choice we’d most like to have would be an option for high-asset individuals to prove that we can afford to pay cash for our preventive care, and then be allowed to buy a catastrophic coverage policy so we can still avoid bankruptcy from a car accident or cancer, or other serious medical issues. that seems like the best solution for people in our financial situation. but, the whole idea with the aca is that we can lower the health care costs for everyone by getting as many people into the insurance pool, so risk is distributed more broadly. letting people opt out doesn’t serve that goal. and we want to be team players in keeping health care costs under control.

every alternate option we might prefer comes with a big “but.” so our only option after we retire is to buy insurance on the exchange and take the subsidy, regardless of how we feel about it. we can take comfort in knowing that we’ve paid plenty in our high earning years, so are paying it forward to some extent, and we don’t ever plan to take other social benefits other than medicare (and maybe social security, but we’re not banking on that). but we still don’t love the idea of being a net drain on tax funds instead of net contributors. what’s our other option, though? keep working forever, just to avoid taking a health care subsidy, something that wealthy retirees have been doing since the advent of medicare? that’s kind of ridiculous.

plus, there’s a major good side to all of this, which we can’t ignore. subsidized health care coverage is probably the single biggest reason why more of us can even afford to retire early now, compared to the system before. isn’t that sort of exactly what the american dream is all about? there are tons of ways that tax dollars support people in reaching the dream — funding public schools, paying for infrastructure that lets customers get to your business, subsidizing commodity crops so that many foods stay affordable, subsidizing transportation so that products stay cheap, etc. — so we could see this as just another version of that. and it’s clearly a good thing that the aca has resulted in many fewer uninsured people in america, which means that more people are getting preventive care that will help them live better and longer lives, and as a society we’re bearing less of a burden for the health care costs of uninsured patients who can’t afford to pay. for us, it’s pretty much priceless to know we’ll have health insurance in retirement without going broke. we can’t overstate how much that fact alone is worth to our peace of mind.

then again, who knows? we’ll have a new president in a year, and the aca rules could change, or the whole thing could go away. that fact has always been a part of our retirement planning timeline — we wanted to work through 2017 so we’d know what the health care landscape would ultimately look like, so we could plan accordingly before we quit our jobs.

it seems to be a given among those who are already retired that they get subsidized coverage through the aca. and among the aspiring early retirees who we’ve seen mention it, there seems to be a consensus that taking the subsidies is the way to go. but we’re curious: does anyone else feel some level of moral ickiness in accepting the subsidy? has anyone actually opted out of the subsidy on moral grounds, and just sucked up the high cost of an unsubsidized plan? or do you think it’s a non-issue to take the subsidy because those are the rules of the system we have right now, and there’s no other affordable option? we’d love to know what you guys think about this thorny subject. let us know in the comments!