Saturday, May 19, 2018

Obama care and Delaying Social Security

Taking social security early may mean losing your Obamacare subsidy.

A reader writes that he and his wife are debating whether to take Social Security early or not.  And one thing that is affecting their decision is the Obamacare subsidy.  If they take Social Security early, they may lose all or part of their Obamacare subsidy - meaning they may have to pay tens of thousands of dollars for ObamaCare, each year.

One problem with Social Security is that the age cutoffs are completely detached from that of Medicare.  At the present time, you can collect Social Security early at age 62 or wait until the full retirement age of 66 or 67 depending on the year you were born.  You can even delay it until age 70 and get increased benefits for each year you delay.

Unfortunately, Medicare is locked in at age 65, which used to be the age for "full" Social Security, but now no longer aligns.  Thus, if you take Social Security early, you still have to fund your own health insurance somehow, unless you qualify for Medicaid.  But in order to qualify for Medicaid you have to be living below the poverty line, which collecting Social Security may push you above.

As I noted before, there are many reasons to take Social Security early.  If you work out the numbers as an accountant friend of mine did, if you live to be the average age you'll end up collecting more money if you collect early - in terms of the overall payout from the Social Security Administration. On the other hand if you delay collecting Social Security, your monthly payout will be more, and if you end up living to an old age this might be a more advantageous situation to you.  If only we knew how old we will be when we die we can make a logical choice.  But that's a piece of information most of us don't want to know.

The problem with Obamacare, as I noted before, is that it kicks in once you make a dollar more than the poverty line.   Below that you're forced to go on Medicaid.  But once you make a dollar more than the poverty line, you can get a enormous subsidy and enormous subsidy from the government to pay for Obamacare.   The subsidy starts at about 100%, and then tapers off linearly to about 50%, based on your income level.  At that point suddenly drops off to zero, which for a married couple occurs at about $70,000 income.

When the law was written, no one anticipated the premiums with me so expensive and thought the taper to 50% would be sufficient, even with the sharp cliff at the end.  But since the law was enacted, premiums have skyrocketed.  Ours started at about $12,000 a year, quickly increased to $18,000, and now are running about $24,000 year, which is a staggering sum of money.  Without the government subsidy, we could not afford this kind of insurance.

Initially, my thought was that as soon as I qualified for Social Security I would take it.  But if I did take Social Security early, it would increase my annual income to the point where I might have to give up some or all of my Obamacare subsidy.  It could end up creating a unique situation where it pushes my income over the cutoff level and all the money I collected in Social Security would just be spent entirely on Obamacare premiums.

For our reader, who is a few years older than me, this is a decision that he has to make very shortly. And all I can suggest is to do the math and figure out which scenario ends up working to your advantage.  If delaying Social Security until age 66 (only four short years) means you retain your Obamacare subsidy, then it would make sense to delay collecting Social Security.  On the other hand, there are folks who need the money now, as they have no other means of support and retirement. It's a tough question to answer.

For me, I'm not sure need answer the question right now.  I have a feeling Obamacare will change dramatically in the next five or six years, before I have to make this decision and as a result there's no need for me to decide now.  It might very well turn out that the health insurance landscape is dramatically altered between now and age 62 or 67.

But this convoluted system that we have illustrates the problem with the carrot-and-stick approach to government.  When the government creates incentives by giving away money or creates penalties by increasing taxes for certain situations and scenarios and behaviors, it forces people to do odd things in order to optimize their outcome. And often these odd things are not the optimal situation for the individual or society as a whole, nor are they what the individual or society would like to occur.

Free market fans and libertarians would argue that if we didn't have such carrot-and-stick approaches that people would do what was the best optimal outcome for themselves.  Once these government distortions in the marketplace are removed, a new equilibrium would be achieved.

It's a nice theory and a nice fantasy, but a neglects human nature.  Human nature being what it is, many people would elect to have no health insurance at all and then throw themselves on the mercy of charity when they end up in the hospital with severe illness or injury.  In the classic example, many young people go out buy a new motorcycle instead of using that money to pay for health insurance premiums.  They wreck the motorcycle, end up in the hospital, and now are a liability to the state.

Meanwhile, the responsible citizen who eschews buying a motorcycle or other expensive toy and instead spends his money on health insurance ends up being punished, as a big portion of his health insurance premiums end up paying for the people who are irresponsible.

Unless we're willing to take the libertarian argument to its logical conclusion - and deny medical coverage to people without health insurance or ability to pay, the system simply wouldn't work.  But since we are compassionate society, we can't let people bleed to death at the door to the hospital simply because they don't have an insurance card (or are we doing that already?).

I guess the point is, the theories and incentives or lack thereof on either side of the political spectrum end up having unintended consequences.  And there are no easy answers.