Wednesday, June 05, 2013


In a bit of counter-intuitive legerdemain, Michael Hilzik of the L.A. Times says "Social Security should be expanded, not cut."  The premise of his article is that Americans have done such an awful job of saving for their own retirement and are now so dependent on anticipated Social Security benefits that, gosh darn it, it's up to the government to come to the rescue.  (You'll never guess where we're going to get all the money for this expansion.  Oh, you did.)

But this got me thinking: since the decline of defined benefit plans and the rise of defined contribution plans (e.g. 401(k)s), Americans have been warned and cajoled and urged to save for their own retirements.  But they don't because the abstract of the future is so less tangible than the consumer goods of today.  So young workers save grudgingly, if at all.

The success of Obamacare fulcrums on a critical funding mechanism: the so-called "young invincible" workers have to enter the insurance pool to subsidize older (and sicker) Americans.  But what happens when these kids experience the rate shock of health costs that may more than double?  Will they sign up?  I would guess the young'uns would have even less incentive to join the health insurance pools than they would fund their own retirement plans.

Here's why: for 401(k)s or 403(b)s, your contribution is going into an investment account that will belong to you, no matter what.  Your investments in Enron might have tanked but a conservatively balanced portfolio in index funds will return a solid 6% or so a year.  It's your money.  The new "affordable" care law requires a large hike in premiums for a comprehensive policy when most 20-year-olds can get by with cheap catastrophic coverage.  There is very little value to a expanded policy.  It's a car you are (likely) never going to pull out of the driveway.

So younger workers are likely to do...nothing.  They'll do nothing because signing up for insurance is a pain, they can sign up instantly if they need it, the tax penalty is almost certainly going to be less than the cost of insurance, and the penalty can only be assessed if these kids expect a refund on their tax returns.  A simple re-filing of a W-2 form will fix that.  But mostly they won't do anything for the same reason they don't fund retirement plans: when you're a "young invincible" the prospect of an expensive disease is as far-flung as retirement at age 65.

I know this to be true because the kids aren't buying insurance now:
Most young childless adults in most states could purchase catastrophic insurance right now for about the cost of a cell phone data plan.  They have not done so.  Maybe this is because they don't realize how cheaply they can acquire bare-bones coverage.  Or maybe they have a hard time fitting even $100 a month into a tight budget. The monthly take-home for someone making $32,000 a year and living in a major city is probably something under $2,000.  As I well recall, carving an extra $100 out of that is not easy. 
And $200 is less easy on top of crushing student loan debt and virtually no jobs.  As Megan McArdle notes, this is the genesis of the death spiral:
Without the subsidies from "young invincibles" paying $150 a month for almost nothing, the older, sicker part of the insurance pool will have to pay more.  The healthier ones may eventually decide that they simply can't afford it; better to pay the fine, tolerate the tiny risk of a huge ER bill, and count on the fact that you can always sign up for insurance if you get sick.  Rinse and repeat until the only people in the market are incredibly expensive to cover.
What's it going to be kids?  Take your lumps now and pay up for expensive coverage or take your chances?  If retirement plan funding is the guideline, it's going to be a rough ride for Obamacare.

Extra - Weekly Standard: "CBO: Uninsured under Obamacare never falls below 30 million."  Well, at least it was expensive.

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