How Subsidies Make Early Retirement Possible, Even Without Obamacare

Subsidies are in the air right now, with them likely going away for health insurance under the next presidential administration. And though we’re hoping we get some certainty soon about where our health coverage will come from and how we’ll pay for it in early retirement, the truth is that we’ll be completely fine. As high-net-worth, soon-to-be early retirees, we have nothing to complain about, and no leg to stand on to claim hardship. We’ll figure things out, whatever may come. Instead, our hearts are with those who can’t afford higher health care costs, and we hope that any changes in the law won’t put undue burden on them.

A Subsidy By Any Other Name

An interesting thing, though, is that we’re actually a bit relieved that we likely won’t be getting a health insurance subsidy, because we always felt a bit icky about the whole set-up. Mainly we didn’t like that we’d get a bigger subsidy than many middle class families even with our higher net worth. But there was also something about the word “subsidy” that just didn’t sit right with us, making clear that others would be paying for something we’re using in such a blatant way. Turns out, that’s no accident. “Subsidy” was chosen as the word to go with Affordable Care Act premium assistance on purpose.

And “subsidy” is just one word for a concept that most of us embrace openly and unquestioningly: the idea of incentives for things that provide a social good of one sort or another.

We call these subsidies lots of different things — public services, tax credits, tax refunds, tax deductions, public assistance, etc. 

In our case, we get lots of tax benefits that we accept without question, like the mortgage interest tax deduction, and a tax write-off for the property tax on our bigger-than-we-need house. It’s easy to see the logic behind wanting to incentivize home ownership, to ensure that we take literal ownership in our communities, which theoretically makes them stronger and safer. It’s just like we incentivize having kids via the child tax credit, because it’s clearly a social good to have future taxpayers who will pay for our Social Security and Medicare.

But giving us a bigger write-off for buying more house than we need only serves to drive up home prices and create more sprawl, it doesn’t create more social good. Our tax and safety net system is neither consistent nor fair, nor always based on good economic reasoning. But it is rife with manipulative language that affects how we feel about things — and by extension, how we feel about the people who benefit from them.

So what we call things matters. Calling something a subsidy feels icky, but calling it a “library book” or the “401(k)” makes it feel entirely different, even though it’s essentially the same — using public funds in the interest of the public good, even if doing so doesn’t benefit everyone equally. It’s not by accident that ACA assistance was deemed a “subsidy” while the mortgage interest subsidy is called a “tax deduction,” or the tax break on the money you invest in your IRA is called “retirement savings.” One makes you feel bad for taking something, while the other absolves you of guilt because you’re simply giving a bit less. (Consider: If you own your home and take the mortgage interest deduction, you live in “subsidized housing.” Does that change how you feel about the deduction? Words are chosen on purpose.)

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In Defense of Subsidies

Today, I’m sharing a journey through my life, viewed through the lens of the many subsidies that have gotten me where I am today, though almost none of them are actually called subsidies. Much like our recent Of Boosts and Bootstraps post, this is all about choosing the lens through which we see things, and how that lens matters to our public policy.

I’m Completely Self-Made… If You Don’t Count All the Subsidies

In many ways, I’m the embodiment of the American Dream: the child of an immigrant mother and of a father whose family has been in the country for centuries. Both of my parents grew up very poor, yet advanced to the middle class by the time I was born. And I’ve been able to continue that trajectory, making my way into the upper middle class or possibly even upper class, depending how you define that, without financial assistance from my family.

As I’ve shared before, I always worked hard in school and could claim that everything I’ve earned has been all me. But not only was it not all me in a hard work sense — I had lots of help and support from many, many people along the way — it also wasn’t all me or all my family in a financial sense either. There were subsidies helping me along at literally every turn. Let’s take a look at them, and then discuss whether it was all worth it to society.

The Subsidies That Made My Success Possible

Before I was born, my dad’s college was paid entirely by the U.S. Army, meaning that a poor kid from a small town gained access to the middle class — made possible by federal defense spending

My parents met while my dad was stationed with the Army overseas, and my mom had a job on his base — made possible by federal defense spending

When I was born, my parents had just bought a house that was a stretch budgetarily, but was in a much safer neighborhood and better school district than where they had just lived — made possible by the mortgage interest deduction, which let them buy the stretch house

We moved several times when I was growing up, but my parents always placed a premium on school district quality, often stretching again to buy a house in a better district. Growing up, I always felt safe where I lived, which helped me stay focused on school, unlike too many kids who grow up in poor neighborhoods — made possible by the mortgage interest deduction and by unequal public school funding, which benefits some students while hurting others

My dad became disabled in his 40s when I was growing up, after my parents divorced, and he received disability insurance which is required by state law to provide a certain level of coverage, and received Social Security disability benefits, meaning that I got to stay in my good school district all the way through high school even though my caretaker could no longer work — made possible by state funding of insurance regulation, and by federal Social Security 

I received a mostly free college education from the state where we live, based on my high school academics, living in a good school district and a safe neighborhood, and not having my education derailed by poverty. I took out a small amount of loans to make up for what my scholarship didn’t cover — made possible by the mortgage interest deduction, unequal public school funding, state-funded college, extra taxpayer dollars to pay my scholarship and living expenses, and federal underwriting of my loans

Throughout my growing up years, I was fortunate enough to travel around the U.S. and to Europe several times, which broadened my perspective and made me a more grateful, compassionate human being — made possible by federal interstate highway funds, federally-funded air traffic control and federally funded international diplomacy and foreign aid

I also enjoyed learning opportunities at local libraries, and enjoyed free recreation at public parks — made possible by state and local funding of public services

All the while, I was kept safe wherever I went by local and state police who patrol our roadways for speeders and drunk drivers, and by the men and women who serve in our armed forced to make the world a safer place — made possible by federal defense funding and by state and local funding

Once I started working, I was able to save much faster thanks to tax benefits bestowed upon me, like retirement savings and health insurance benefits being considered pre-tax, and by the Social Security earnings limit that says I don’t keep paying into Social Security after earning above a certain amount — made possible by the laws around 401(k)s, IRAs and health insurance and the Social Security earnings cap

My dad and Mr. ONL’s parents all have military/VA pensions and health care, in addition to Social Security, that ensure that we will never be in a position of having to support them on our own, and giving us tremendous peace of mind — made possible by federal defense and veterans funding, and federal Social Security

We own a rental property with a respectable cap rate, thanks to the many tax write-offs we are afforded as landlords such as depreciation — made possible by federal tax code that incentivizes rental property ownership

We will have our house paid off next year, as well as have an amount saved that is significantly higher than it would be without the tax breaks we receive, allowing us to retire at an absurdly early age — made possible by the mortgage interest tax deduction, 401(k) and IRA laws, property tax deductions, charitable tax deductions, etc.

When we retire and begin selling shares of our index fund investments, most of that income will only be taxed at the highly discounted long-term capital gains rate, meaning that our dollars will stretch much farther — made possible by lower federal and state tax rates on long-term capital gains, and higher income thresholds for taxes on dividends

In short, subsidies have been an ever-present force in my life, undoubtedly a force for tremendous good. Without them, I most likely would have grown up poor like my parents did, probably would have received a far worse education, and who knows what I’d be doing now. That path into the middle class would have been far less open to my parents and me, and moving up into the upper middle class or higher would be vanishingly difficult to imagine. In addition, we’d still be years away from early retirement if subsidies hadn’t helped us save faster, assuming we could have ever gotten into our professions without the boosts that got us there.

What You Have Gotten In Return

I take seriously my responsibility to recognize what I’ve received, and to pay it forward. So, for the record, here’s a brief rundown on what society has received in return for heavily subsidizing my life to this point:

Thanks to growing up in safe neighborhoods and good schools, I’ve stayed out of jail and prison, saving society approximately $30,000 per year.

Thanks to growing up in the middle class, not poor like my parents, I never experienced food insecurity or the obesity that often follows it, saving society my share of the $150+ billion that obesity costs taxpayers every year, not counting the food stamps I likely would have needed while growing up.

Because I grew up in safe neighborhoods and wasn’t forced out of my good school district by my dad’s disability, I went on to earn a valuable degree from a prestigious university, and went into a lucrative career path that has allowed me to pay federal and state income taxes for 15 post-college years so far, most of those in a middle or high income bracket.

I’ve more than paid back the sticker cost of my education to my state through income tax, as well as paid large amounts in sales and property tax, thanks to the purchasing power of my high income, and especially when paired with Mr. ONL’s higher income, equally made possible by subsidies.

I’ve made a point of donating to a range of charities on a recurring basis, with my excess earnings made possible by subsidies, advancing a number of important social and environmental causes. After we retire, we’ll continue donating money to these causes as well as donate much more of our time and experience to expand their work.

After we retire next year, we will still continue to pay a range of taxes, including property tax on our primary home and rental property, sales tax on items we buy, a small amount of income tax, use taxes on gasoline and utilities, and other travel taxes (airport fees, etc.).

Because we have been able to save aggressively, thanks to educational subsidies and to subsidized retirement savings, we should never require public assistance such as SNAP (formerly food stamps), housing assistance, true Medicaid coverage (for very low-income, not Medicaid expansion subsidies), or any of the very limited number of programs still available to adults living in poverty. Depending on what shape Medicare and Social Security are in by the time we get to our 60s or 70s, we may still take those benefits, but we’d be just as happy not to need to.

So, what do you think? Were all the subsidies I’ve received in my life ultimately in service to the social good? Was I a good investment?

Early Retirement… Already Made Possible By Subsidies

When we’ve talked about the ACA and subsidies, we’ve occasionally gotten comments along the lines of “It’s ridiculous that millionaires are receiving subsidies for their health care.” And while we agree that there should have been some sort of asset test built into the law to exclude high net worth families from claiming the same subsidies that low net worth and low-income families can receive, the larger fact is that high net worth people have so much of their existence already subsidized every day. This article by the Washington Post highlights only a few of those ways that rich people benefit from government hand-outs, though none of them are called “subsidies” for obvious reasons. And for those of us who now find ourselves higher up the income ladder than where we grew up, our very existence as high net worth people was already made possible by subsidies, as I described above.

Drawing the line here, saying “No, this ACA subsidy is bad, but all the others are fine,” is arbitrary, and ignores how much of our lives are subsidized in reality, especially for the rich. (Consider: Tesla drivers literally pay nothing toward maintaining the roads that they use every day, because roads are funded by gas taxes. Guess who drives the least fuel-efficient cars on the road and therefore pays the most to maintain them? People who are forced to drive old cars because they can’t afford new ones. The poor subsidize the rich in more ways than most of us can imagine.)

So even though ACA subsidies are going away, every early retiree — as well as virtually every person in the country — lives a life filled with subsidies, tax breaks and public services without which life would look very different. The next time you hear someone bashing subsidies, remind them what the word really means.

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Are You a Good Investment?

What are some subsidies that have helped you along on your path to success? Has seeing my list helped you rethink any part of your past, present or future? Do you think you’ve ultimately been a good investment? And what about me — have I been a good investment of society’s dollars? Let’s chat about it all in the comments. :-)