Are FIREees health insurance subsidy thieves?

FIREees get shellacked for being on the ACA’s health insurance subsidy dole. As in: “Early Retirement Dude, you thieving prick…why are you stealing my tax money to subsidize your health insurance if you’re financially independent and can afford to pay for it yourself?”

Um, yeah…about that. Let’s talk.


First disclaimer: I use “you” rhetorically in this piece; i.e., the imaginary person I’m having this conversation with.1 I don’t mean you personally—we haven’t met, but you seem nice and I’d like to hang out with you over a beer sometime.

Second disclaimer: it may sound like I’m saying, “Taking subsidies is OK because everybody does it.” But that’s not it. What I’m saying is, “The system sucks all around. Let’s not get crossed up if we’re both taking subsidies. We oughtta work together for change instead.”


Now: in calling me out for collecting a health insurance subsidy you’re assuming I collect one in the first place.

Facts:

I buy health insurance through the ACA exchange. Sticker price is $1,464 a month. For that we get Blue Cross’s “skinny” network, which is exactly what it sounds like. No out-of-network coverage, $3K deductibles, 20% to 50% co-pays. It’s not skinny…it’s emaciated. And although I have no idea how those numbers stack up against yours, let’s take it for granted that these days everybody’s coverage is emaciated too.

Against that $1,464 we get a $1,261 monthly subsidy. Net cash outlay per month = $203. Not bad, eh?

Who the fuck knows.

Certainly not me. I have no clue, literally no clue, how much our premium is actually gonna be. Hopefully somewhere between zero and $1,464.

Here’s why I’m in the dark. I’m guessing you know marketplace subsidies are income-based, such that the closer you come to zero the bigger your subsidy. But like most FIREees we live on capital gains, meaning if to meet our cash flow requirements we have to sell winning investments, we’re incurring a capital gains liability—and at the end of the year we’ll have to true up our ACA subsidy with the IRS to the tune of whatever our modified adjusted gross income dictates. Might have to send a lot back; might have to send bupkis.

The prudent thing to do, then, is assume we’re not gonna get a subsidy at all and budget accordingly. As I said, maybe we get a break and maybe we don’t. I have no way of knowing. Either way, though, there’s a good chance I’m getting the same amount of subsidy you are. Or less.


Say what?

According to the Kaiser Family Foundation:

The average annual dollar amounts contributed by covered workers for 2018 are $1,186 for single coverage and $5,547 for family coverage[.]

$5,547 divided across twelve months is $462.25, and I’d be willing to bet that by the time my family trues up with the IRS, that’s close to what we’re paying too.

“But,” you might say, “I’m working and you’re not.”

Well…yeah, that’s true, but your premise is flawed. Employers and employees collectively get a federal health insurance subsidy that’s five-ish times what exchange customers get, and rising.

For an idea of the scale of these subsidies, check out this ten-year cost projection chart from the Congressional Budget Office’s Federal Subsidies for Health Insurance Coverage for People Under Age 65: 2019 to 2029 report. (Note that “Nongroup Coverage and Basic Health Program” means subsidized coverage for exchange customers, among others.)

$287 billion in subsidies for work-related coverage; $62 billion for coverage bought through the exchange. And across time the subsidies for work-related coverage almost double, whereas the subsidies for nongroup and basic go up only 22%.

The employer subsidy works through the “health benefits exclusion,” whereby the employer-paid portion of an employee’s health insurance benefit isn’t subject to payroll or income taxes. The employee-paid portion is also pre-tax, including federal income, Social Security, Medicare, and usually state and local income.

So if you have a job that pays health insurance benefits, you’re probably collecting a subsidy. True, the subsidy takes the form of foregone federal revenue rather than a cash outlay, but from a bottom-line perspective the outcome’s the same: a smaller tax bill.2 In the absence of that smaller tax bill  you’d be paying a hell of a lot more for your health insurance.


Now: how big is the subsidy you’re getting, and how does it compare to mine?

Unlike mine, yours is straightforward to calculate. On your W-2 you’ll find box 12/code DD. That’s the total annual cost of your health insurance–i.e., your employer’s share plus your share. I was bouncing this article around with Justin McCurry, a FIRE blogger who knows his shit and writes about it at RootOfGood.com, and he shot me an example that seems reasonable: a $15K premium at a 35% marginal rate = $5,250 in subsidy.

On a year-over-year basis that’s probably less health insurance subsidy than I get…but again, I can’t be sure. And that amount doesn’t take TOTAL tax subsidies into account AT ALL.

See, my family might get a bigger healthcare subsidy than you do depending on our income for the year, but as FIREees there are scads of tax breaks and credits and such that you might qualify for even though we definitely don’t.

We’re ineligible for 401(k) contributions, HSAs, and other job-related tax perks. We’ve paid off our house, meaning we don’t get a home mortgage interest deduction. We’re ineligible for the earned income tax credit. We only have one kid and not the proverbial 2.3, which means we’re not consuming our “fair share” of school funding. She’s not gonna qualify for a Pell grant. We’re not old enough for a property tax exclusion. We’re not eligible for Medicare. We haven’t yet collected a dime of Social Security. Etc., etc.

How much is all that worth to the employed in general? Totally impossible to tell. One thing’s clear, though: you and I are cross-subsidizing quite a bit…only for different things. And as you’ll see, it’s quite possible I’m subsidizing you more than you’re subsidizing me.


Who pays the ACA subsidy bill? Probably neither of us.3

-50% is paid by savings in Medicare payments to insurers and hospitals.

-25% is paid by taxes on certain medical device manufacturers and drug companies.

-The rest is paid by tax increases on “high-income” individuals/households/etc.;4 penalties on those who don’t comply with the law by purchasing complying health insurance;5 penalties on employers who meet the ACA’s requirement tests who nonetheless don’t provide coverage to qualifying employees, and others.

Point being, if we’re not subsidizing each other’s health insurance but I’m subsidizing your retirement accounts and house payment and the schooling of your children and such, why are we even going through all this back-and-forth over health insurance in the first place?


I’m convinced the reason people have such a specific problem with FIREees taking health insurance subsidies is that it’s easy to press the healthcare hot button in elections.

People get outraged about our broken system to the point where anybody they perceive to be getting a better deal from the government than they are must somehow be cheating.6 Outrage is by definition divisive and today’s politics are the politics of division. Just look at your Facebook feed…assuming you can stand to.

We’re trained to loathe sideways and downwards and admire upwards in large part because history has shown that pitting a social class against itself is an extremely effective means to power. As I’ve said before, we’re the instrument of our own fucking oppression, and I despise it.

Despise it to the point where I need to step away from this laptop for a soothing bang on the vape. Back in a sec.


[An hour and forty-seven minutes later.]

Allllllllll-righty, then. Sorry, but in mid-puff I got seized by the scruff of my neck and dragged away to the Den of Iniquity for a while. You know how it is.

I hope.

Anyway, I guess you could argue that there needs to be an asset test for health insurance subsidies. An obvious problem with that, though, is that you end up incentivizing crummy personal financial management.

Two families earn the same income. The first lives extravagantly from paycheck to paycheck and has zero financial assets; the second practices frugality and budgets and saves and has a big wad of bills stashed away. You’re gonna make the ant pay off the grasshopper’s credit cards?

This’ll sound as arrogant and self-righteous as all hell, and I apologize for it…but it’s a fact that getting on the FIRE track is all about becoming an ant.


Taxation. I’m constantly amazed by the cognitive dissonance in the debate over taxation. It’s not uncommon to simultaneously believe the following:

A) One should pay one’s own way through life, and

B) Minimizing one’s tax liability is smart and praiseworthy and even a civic duty.

Sure, those are noble principles…but they’re to a great degree mutually exclusive.

For instance, say you’re teaching your kids to pay their own way through life. By that ethic you oughtta calculate the dollar value of your consumption of public services—schools, police and fire and military protection, roads, public parks, etc.—and send the government a check for that amount every year regardless of whether it’s higher than the actual liability shown on your return.

Do you?

It’s a gross oversimplification, but 2018’s $4.11 trillion in federal expenditures divided by the US’s 140.9 million taxpayers equals $29,169 apiece.7 So if you’re a two-income family, don’t forget to send in your fifty-eight thousand bucks. And don’t forget to send your checks to your city/county/state, either.

But if you also believe it’s smart and praiseworthy to engineer your tax liability down to the lowest possible number, don’t get heated up when, say, rich folks offshore their income by manipulating the tax system using methods they can afford and you can’t. And especially don’t get heated up about companies like Exxon successfully lobbying the federal government for billions in tax breaks. And especially especially don’t get heated up because you yourself probably paid more federal income tax than Amazon.


So in the end it’s clear that we all cherry-pick what’s most advantageous to us even though we’re prone to pointing the Finger of Shame at others.

A Whoopi Goldberg line: “Let them with no dogshit on their shoes walk on the white carpet.”8 But the thing is…in the current health insurance crisis we’ve ALL got dogshit on our shoes, and the white carpet doesn’t even exist.

The situation therefore persists, which leads me to believe that divisive politics aren’t helping us. That’s why you won’t find me participating in divisive politics.9 I’ve done my best to lay this stuff out neutrally, but in today’s political climate much better pundit-type thinkers than me have tried that and failed. So it’s clear to me–and to you too, I hope–that less knee-jerk reaction and more brain-jerk reaction is our best hope for cooling down our national dialogue so we can do some productive work on our systemic failures. And if worst comes to worst and we can’t make progress on those failures…well, sitting around the fire together singing kum-by-yah is always a damned sight better than being at one another’s throats.

Salud.

Footnotes

  1. Great. Now I’m having conversations with imaginary people. I need a LOT more medication than they’ve got me on, but since my health insurance specifically excludes the treatment of illness from its coverage…
  2. To illustrate: pretend you usually work overtime to meet your monthly budget. This month, however, you chose not to. You’re therefore in the hole even though you didn’t spend any more than you would’ve otherwise.
  3. Or at least on the surface of it. A goodly slice of the costs I’m describing in this section gets passed on to the consumer, but now we’ve gotten ourselves into a breakdown in which any amount of number-crunching is meaningless. Too many arguable assumptions. We could spend all day pulling figures out of our asses.
  4. I.e., those with incomes of more than $250,000 a year
  5. Which to my way of thinking is the same principle as ticketing safe drivers who refuse to buy auto insurance in mandatory-insurance states…something very few people get activist about.
  6. Which is a direct goddamn legacy of all that fucking Reaganite racist misogynistic bullshit “welfare queen” rhetoric.
  7. Insert many disclaimers here.
  8. Have I used that line in this blog before? Yeah. Frequently, as it turns out.
  9. Or at least not in this article, as my Twitter followers will have observed.

Author: ER Dude

Sick of your job? After a thirteen-year career, Early Retirement Dude fled corporate America for good. You can do it too! Visit http://EarlyRetirementDude.com or email EarlyRetirementDude@gmail.com.

15 thoughts

  1. “We’re trained to loathe sideways and downwards and admire upwards in large part because history has shown that pitting a social class against itself is an extremely effective means to power” – I wish I could write something that eloquent.

    Health care / health insurance / health policy is important, but I think there’s a point of unhealthy obsession with it whenever I talk to people about early retirement. I always get the “what are you going to do about healthcare” and I remind people self insured people have been buying insurance for years.

    Socialized medicine sounds great for FI, but its still just math. The FIRE number may go down by say, $250,000, but you get a bunch more scraped off in payroll taxes in the socialized medicine countries and its still a wash.

    The benefits employers/employees get are significant. I’m doing a little free consulting for a friend who employs around 1,000 people and when we get around to pay, we might negotiate a “full-time, minimum wage” setup, get paid $15,080/year but have access to the corporate insurance pool and all those sweet *subsidies*. Might make more sense for both sides instead of paying me as a 1099.

    Go enjoy a run

    1. >I wish I could write something that eloquent.

      You can. 🙂

      >get paid $15,080/year but have access to the corporate insurance pool and all those sweet *subsidies*.

      Make it $19K so you can max out that 401(k) too?

  2. The system is the system, supposedly devised by the people, for the people, etc.

    If one is following the rules, then one can hardly be faulted for the results.

    FIREees sacrifice much (by modern consumptive standards) to get where they are. I think the detractors moan and complain because they are not willing to do the same.

    I found this post to be exceptionally crafted. Thank you!

    1. >I found this post to be exceptionally crafted.

      Hi there. Thanks! Comments like this always make my day.

      >I think the detractors moan and complain because they are not willing to do the same.

      Often the case, which by extension is why I think it’s important for us to take the high road. (Not saying you aren’t, of course.) Unfortunately I see a lot of mutual back-patting going on in our movement, and it may be making many people think we’re a bunch of arrogant assholes. Definitely a contributing factor to why so many are turned off to us.

  3. Great job explaining the health insurance, it’s such a complex issue that most people don’t even understand how complex it is. Not to mention the changes that happen, to both the tax and health care systems year over year. It’s easy to simplify something to make it fit ones preferred agenda.

    Believe it or not in Canada with our socialized medicine it is just as complicated. Federally and provincially regulated and funded with a number different rules. Plus there are even premiums we have to pay. For example my Ontario Health Premium rate was $900 on top of the other taxes and coverage I pay through work. They added this Ontario Health Premium back in 2004 based an individual’s taxable income to help pay for the skyrocketing health care costs. Health care accounts for 38.7% of the Ontario government expenses.

    I agree we should not be at each others throats ,but trying to discuss and improve the systems. I don’t see how we could get to debate at a national level since the details needed are too hard to pass on to the majority of people due to lack of attention span. Hence the pollical agendas of using this type of issue to divide and gain support using 10 second sound bits and tag lines.

    1. >They added this Ontario Health Premium back in 2004 based an individual’s taxable income

      What’s the situation up there in the frozen tundra vis-à-vis managing your income down to zero? Is it a possibility if you’re living off investments?

      1. >What’s the situation up there in the frozen tundra vis-à-vis managing your income down to zero?

        If your income is zero you would be getting a free ride and not have to pay premiums. Government health insurance plans gives you access to emergency and basic medical services. You may also need private insurance to pay for things that government plans don’t fully cover.

        >Is it a possibility if you’re living off investments?

        Depends on you income you make off of your investments, the more income the more you pay! In theory if you kept your income under the thresholds you would still be able to pay zero.

        Canada does not have a single national health care plan, but rather a national health insurance program, which is achieved through a series of thirteen interlocking provincial and territorial health insurance plans, all of which share certain common features and basic standards of coverage, with slight differences.

        1. …now that I think about it. Health care in Canada is never a totally free ride since the money spent on health care would be coming from general government revenue. So to pay zero you would have to pay no income tax and also not purchase anything with sale taxes to truly pay zero!

  4. Wow, I am always impressed by how complicated this system is. As someone who is not part of it even reading about is a hard task 🙂

    Our situation here, over the pond, is much simpler. We have “free” public healthcare. This “free” service costs 5.15% of your gross salary (both for the employer and the employee). The standard of the service is exactly equal to the ticket price… Since I am employed and paying this tax it adds up to a lower five-digit euro amount. What did I get for this? Approximately three, ten-minute doctor visits over the years when I was able to get an appointment at all… If you can afford and you insist to get a service where they are looking at you like a human being you are better to forget about public healthcare and just pay the bill for the private doctors and buy your medication on your own. That’s where we are at the moment.

    PS: even if the case would be that FIREees would have an unfair advantage… I cannot really blame anyone who takes advantage of a fucked up system, but that is just my two cents…

    1. Are you still in Serbia? I ask because I have good friends who emigrated to Spain a couple of years ago, and they rave about how good the healthcare system is. Their daughter needed shoulder surgery and they got excellent timely care and the bottom-line cost was something like fifty bucks. So it sounds like there’s quite a spread between the two systems.

      1. Yes, we are but that can change in the not so distant future.
        It is interesting, I heard some folks raving about good healthcare in some northern/western countries but never heard such compliments from Spain.
        It seems we still have hope in our good old Europe.

  5. Can i ask a simple question that I can’t seem to find a simple answer to? When you retire early, you live off of dividend/interest income (ideally) and capital gains (if necessary). How do you calculate your income / tax bracket? Is it literally the sum of your dividends/interest income and capital gains for the year? Let’s say I want to live approx. at my current expenditure level and I’ve amassed the investment portfolio to do so… does that mean my income/ tax level in retirement is the same as it is today, just that the income switches from salary to investment? I know the rate of taxation is slightly different based on the income source, but is that generally the math?

    1. >Is it literally the sum of your dividends/interest income and capital gains for the year?

      Straight answer: yes. Remember that “capital gains” also includes “capital losses” and that it’s possible to manage through strategic sales your capital losses to zero or even less, such that you can offset your dividend/interest income in the current year and carry losses over to subsequent years.

      Also remember that ACA subsidies are calculated against modified adjusted gross income. Here’s an article that explains that: https://www.healthinsurance.org/glossary/modified-adjusted-gross-income-magi/

      >does that mean my income/ tax level in retirement is the same as it is today, just that the income switches from salary to investment?

      More or less. As you point out, tax rates for capital gains are lower than for salary income.

  6. -Excellent topic and great job with the explanation!!! Thank you Dude.
    -Just to add, if congress and illegals are getting free health care, NO America citizen should feel bad about getting subsidies or free healthcare. Congress can fix the problem overnight but because they are power drunk, buying votes, and corrupt they will not.
    -I don’t believe in free anything because there is nothing free in life especially if we have to give up our freedom and privacy.
    -No one should be asked to pay anything more than $100 monthly for health care and there should be ZERO subsidies. These massive subsidies are free tax payers money to the insurance companies and to some healthcare leaders or politician.
    -Like many, I paid plenty of taxes for about 30 years and do not appreciate the abuse of our money by dishonest law makers .
    -It is not just the health care system that is broken but practically all our systems are broken… Education, Legal, Financial, Manufacturing, Farmers, Government, Media…. The cable news and some social media companies gets subsidies and they are all still corrupt.

    QED!

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