Category Archives: personal finance

Obamacare 2017: Should You Pay the Premium or the Tax?

Health Insurance Marketplace Logo - Source: http://nlcblogs.nebraska.gov/nlcblog/2014/11/13/only-two-more-days-until-health-insurance-open-enrollment-november-15th-february-15-2015/

Since a handful of congressional Republicans proved to be unprincipled in failing to follow through on their campaign promises to repeal and replace Obamacare, the name by which the Affordable Care Act is better known, that extremely flawed law will still be with us in 2018. Here in 2017, that means that millions of Americans will once again have to make a choice about what is really more affordable for them: paying for subsidized health insurance premiums or paying Obamacare's extra income tax, and they'll have to do it between now and 15 December 2017.

We can help! We've been proud to offer a unique tool that subsidy-eligible American consumers can use to help decide what the right choice is for themselves in shopping for health insurance with respect to their personal financial situation and their health.

That tool will tell you whether it makes more financial sense to buy health insurance through the Obamacare exchanges or to opt out and pay higher income taxes instead, depending upon whichever of these options is less costly for you.

That a choice that millions of Americans have made after performing similar calculations on their own in recent years after comparing how actually "affordable" the costs of the Affordable Care Act's health insurance policies are with whatever additional tax they might otherwise have to pay after considering the state of their health. The New York Times described the personal finance problem that millions of Americans are facing back in 2016:

Clint Murphy let the deadline for getting health insurance by the new year pass without a second thought.

Mr. Murphy, an engineer in Sulphur Springs, Tex., estimates that under the Affordable Care Act, he will face a penalty of $1,800 for going uninsured in 2016. But in his view, paying that penalty is worth it if he can avoid buying an insurance policy that costs $2,900 or more. All he has to do is stay healthy.

"I don't see the logic behind that, and I’m just not going to do it," said Mr. Murphy, 45, who became uninsured in April after leaving a job with health benefits to pursue contract work. "The fine is still going to be cheaper."...

[...]

People, like Mr. Murphy, who earn too much to qualify for federal subsidies that defray the cost of coverage may be most likely to opt out. A recent analysis by the Kaiser Family Foundation found that more than seven million people who are eligible for exchange coverage would pay less in penalties than for the least expensive insurance available to them. More than half would not qualify for subsidies, the analysis found.

Our tool below will help you decide which option is more affordable for you in 2018. You can obtain the relevant health insurance policy cost information you need from either the Healthcare.gov web site, or more reliably, from the independent and far more transparent Health Sherpa site.

Also, if you're accessing this tool on a site that republishes our RSS news feed, please click here to access a working version of our tool.

Your Household Data
Input Data Values
Year in Which Insurance Coverage Will Apply
Your Total Household Income, or Modified Adjusted Gross Income (If Known)
Number of Household Members
Number of Children in Household
Your State's Health Insurance Exchange Data
Select Your State (Select "United States" If Your Territory Isn't Listed)
Monthly Premium for the Second Lowest-Cost "Silver" Plan Available To You
Monthly Premium for the Lowest-Cost "Bronze" Plan Available To You
Monthly Premium for the Health Insurance Plan You're Considering Purchasing

Your Annual Health Insurance Results
Calculated Results Values
Annual Premium (Full Price) of the Health Insurance Plan You're Considering Purchasing
Annual Subsidy Tax Credit You'll Receive For Buying This Health Insurance
Your Annual Out-of-Pocket Costs
For Health Insurance (Premium Only, No Co-Pays or Deductibles)
For the Alternative Tax If You Don't Purchase Health Insurance (And Not Provided by Your Employer)
Potential Savings or Costs If You Choose to Pay the Tax Instead of the Premium
Your Potential Savings (or Costs, if Negative)
The Bottom Line

For the 2018 calendar year, the default data we used in our tool is taken from approved health insurance premiums and the second lowest silver plan cost in the District of Columbia. The annual income is for a 27-year old minimum wage earner in Washington D.C. in 2017, assuming they are employed full time, year-round. As you can see from the results for that default data, if they can reasonably expect to remain healthy in 2018, they will be better off in choosing to pay the additional income tax rather than be burdened with the costly subsidized premiums of either the lowest cost "silver" health insurance plan or even the lowest cost "bronze" plan available to them.

About This Tool

In building this tool, we've made a handful of assumptions. Here they are, along with links to our references for data:

  • The federal government's poverty income thresholds for 2017 will apply for the 2018 calendar year.
  • The Kaiser Family Foundation's description of how ObamaCare's subsides will be calculated is accurate.
  • The map of states we used to identify which are expanding their eligibility for their Medicaid programs up to 138% of the federal poverty income threshold applies for 2017. The results for states that have changed their Medicaid expansion status in years prior to 2017 will not be accurately reflected [a quick and easy workaround to get accurate results is to select a different state that shared the same status in your year of interest].
  • CNNMoney's description of how the penalty tax will work is accurate.
  • Sean Parnell of The Self-Pay Patient blog identified an exemption from the tax that we originally missed - it turns out that people who live in regions where the lowest-cost Bronze plan is more than 8% of their household income even after the subsidy will be fully exempt from the tax! (Of course, you realize that means that skipping out on not paying health insurance too until they might actually need it just became an even more attractive option for those who will be fully exempt from the tax!)
  • The default values associated with selecting the "United States" are those that will apply for a majority of the nation's population. The list of Medicaid-expansion states is that for 2017, so if you select earlier years, the results will be based on the 2017 map.
  • People will mostly act rationally where their financial incentives and the assessment of their health care needs are involved.

Beyond this, we've assumed that for some people there may be a "gray area", who would only have a small incentive to not purchase health insurance, where any benefit in doing so is not very large with respect to their household income, and where the decision to buy or not buy should instead be based upon an assessment of what the buyer's actual health care needs for their household will be in the near term, rather than purely upon its cost with respect to the ObamaCare income tax.

Mathematically, we've defined that gray area as being equal to the difference between the penalty tax they might choose to pay or an amount equal to 3.1% of their income before taxes, which closely corresponds to the average expenditure of U.S. households for health insurance, according to the Consumer Expenditure Survey report for 2012.

Legal Disclaimer

Materials on this website are published by Political Calculations to provide visitors with free information and insights regarding the incentives created by the laws and policies described. However, this website is not designed for the purpose of providing legal, medical or financial advice to individuals. Visitors should not rely upon information on this website as a substitute for personal legal, medical or financial advice. While we make every effort to provide accurate website information, laws can change and inaccuracies happen despite our best efforts. If you have an individual problem, you should seek advice from a licensed professional in your state, i.e., by a competent authority with specialized knowledge who can apply it to the particular circumstances of your case.

How Much Do You Need to Save for Retirement?

How much do you need to save for retirement to maintain your pre-retirement lifestyle?

It's an easier question to ask than to answer because there are a multitude of factors that can affect what the right answer to the question will be for you. And that assumes that whatever answer you come up with turns out to be the right answer!

Still that doesn't stop people from asking and firms offering their retirement planning services from attempting to answer in the simplest ways they can.

The latest firm to do so is Fidelity, where they've developed the concept of using age-based savings factors to help you determine if you've saved enough at various points of your life. For the simplest estimate, all you need to get started is find the appropriate savings factor that applies for your age, multiply it by your annual income, then see how the balance of your retirement savings account compares to it. The following chart is one that they have provided for that simple math.

Fidelity: Savings Factors To Help You On Your Journey to Retirement

Seems pretty simple, right? And to be fair, the math involved is pretty simple. In the following chart, we've started with the median income earned by a typical American between the ages of 25 and 29 in 2016, then showed the inflation-adjusted savings that such an individual would have to accumulated at different points throughout their life to meet Fidelity's savings targets. The income trajectory shown for the individual is also one that Fidelity assumes, which we've listed along with a number of additional assumptions Fidelity is making....

Estimated Savings Needed to Maintain Your Pre-Retirement Lifestyle (According to Fidelity)

Will all those assumptions apply to you? Maybe yes, maybe no. Just for fun, we decided to play with just one of those assumptions, where instead of Fidelity's assumed 1.5% annual inflation-adjusted raise, we wondered how differently the chart would look if the individual to whom it applied was simply earning 2016's median income for the indicated age. After all, since it is the median, 50% of Americans have annual incomes above that level and 50% of Americans have annual incomes below it, so that particular income trajectory might be considered to be more representative of what a typical lifetime income trajectory for an American randomly plucked from the population at large might have, so here that chart is.

Estimated Savings Needed to Maintain Your Pre-Retirement Lifestyle (According to Fidelity) for a Median Income Earning American

It's quite a lot different from Fidelity's assumed lifetime of annual faster-than-the-rate-of-inflation raises. So the real question is which chart better represents the kind of pre-retirement lifestyle that an American looking to retire would want or be able to maintain?

We'll leave other questions that might come up about Fidelity's assumptions, such as "can someone with this income really afford to set aside 15% of their annual income for their retirement at Age 67?", as an exercise for our readers!

What’s in the Shopping Carts of Food Stamp Recipients?

Last November, the USDA published a report that provides some insight into the kinds of food and drink items that recipients of its Supplemental Nutrition Assistance Program (SNAP), which used to be called "Food Stamps", are buying up with their government-issued EBT cards.

In the chart below, we've taken the Top 10 items from Exhibit 6 of the report, which lists the millions of dollars of eligible food and drink commodities that SNAP recipients were determined to have bought in transactions using their EBT cards, and shown how the spending for those items compares to the total amount of spending that was counted in the study.

The Value of What's in the Shopping Carts of SNAP Benefit Recipients, 2016

Together, SNAP benefit recipients purchases of the Top 10 food and drink categories accounted for over one-quarter of all the spending on eligible food and drink items captured in the report. The most popular category, soft drinks, alone accounted for over 5.4% of all purchases, or about $1 of every $18.38 spent.

It's important to recognize that SNAP recipients will often use a combination of their regular income and their SNAP benefits to purchase groceries. For example, a single individual in New York City who has $825 in income per month can augment that income with a monthly SNAP benefit of $194 per month (a lower amount of SNAP benefits can be obtained for such single, childless, working-age individuals with incomes of as much as $1,285 per month).

Since these benefits are exempt from federal, state and local income taxes, and are also exempt from state and local sales taxes, SNAP recipients can maximize their benefits by using them to buy items that would otherwise be subject to state and local sales taxes. For example, in New York once again, items like carbonated soft drinks, candy and grocer-prepared food like sandwiches, are subject to the state's sales tax rate of 4%, where the city of New York would pile on an additional local sales tax rate of 4.49%, which makes it possible for SNAP benefit recipients to buy 8.49% more of these kinds of groceries in New York City with their benefits than they can with their regular income.

And for that matter, that much more than what people who don't receive SNAP benefits can buy with the same amount of cash, although the amount of this kind of extra tax-free benefit will vary by state, city and county!

Data Source

Garasky, Steven, Kassim Mbwana, Andres Romualdo, Alex Tenaglio and Manan Roy. Foods Typically Purchased by SNAP Households. Prepared by IMPAQ International, LLC for USDA, Food and Nutrition Service, November 2016. [PDF Document].

U.S. Student Loan Implosion

The Consumer Federation of America recently put out a press release that reports that they've found that 1.1 million student loan borrowers in the United States have gone 270 or more days without making payments on their Federal Direct Student Loans, with more than $137 billion worth of the loans issued by the U.S. government now qualifying as being in default by that standard.

Update 27 April 2017: The figure of 1.1 million defaults only applies to the number of student loans that went into default during 2016. Altogether, through December 2016, there were a total of 4.2 million student loans in default, the combined balance of which adds up to $137 billion. We're afraid that the CFA missed noting that total figure in their press release, and we've updated our charts and analysis accordingly to reflect the corrected total of for the number of Federal Direct Student Loans in default.

Data from the CFA's press release has made the rounds among multiple news outlets, but we have a pretty basic question: Are those big numbers?

They certainly seem like big numbers, what with all the millions and billions being thrown about, but how do these numbers fit into the bigger U.S. government-issued student loan story?

We decided to dig down into the press release's details to find out. Let's start with the biggest numbers, where we discover that $137 billion worth of Federal Direct Student Loans are in default, against the larger total of $1.3 trillion worth of Federal Direct Student Loans that have been issued through the end of December 2016.

Federal Direct Student Loans, Amounts in Default and Not in Default as of December 2016

Here, we calculate that the percentage of student loans that have gone 270 or more days without having had a payment made upon them represents about 11% of the total amount borrowed. That means that some 4.2 million people whose student loans require that they make some sort of scheduled payment went more than 9 months without making any.

To tell if that's a big number or not requires that we put that number into some kind of context. Here, we'll draw on the U.S. Federal Reserve's data for the delinquency rates on loans and leases issued by all commercial banks in the U.S., where for the fourth quarter of 2016, we find that the total delinquency rate is 2.04%. That value had previously peaked at 7.4% back in the first quarter of 2010, following the bottoming of the Great Recession.

But another important thing to consider is that delinquency rate would include all private-sector issued loans and leases that have payments that are past due, including those that have gone without payment for much less than 270 days. That figure tells us that the default rate of 11% for Federal Direct Student Loans is, to put it in Trumpian terms, "Yuge!"

Going by the standard of simple delinquency, the WSJ reported back in April 2016 that 40% of student loan borrowers were delinquent on their scheduled student loan payments, meaning that they were at least 15 to 31 days behind.

The next question that we'll tackle is whether the 4.2 million student loan borrowers who have defaulted on making payments on their Federal Direct Student Loans is a lot. The following chart shows how they fit into the total number of 42.4 million Americans who have taken out Federal Direct Student Loans.

Federal Direct Student Loan Borrowers, Number In Default and Not in Default as of December 2016

Click here to see the previous version of this chart, which only broke out the 2016 defaulters.

Here, we discover that the 4.2 million Americans that have defaulted on their Federal Direct Student Loans is about 10% of the total number of Americans who have borrowed money from the U.S. government to pay for a university or college education in the United States, and that the 1.1 million defaults in 2016 represent 3% of the total.

What we find here is that a relatively small portion of the total population of federal student loan borrowers is responsible for the very high default rate for the Federal Direct Student Loan program. 38.2 million, or 90% of student loan borrowers, have not gone 270 days or longer without making their scheduled student loan payments to Uncle Sam's hired student loan servicers.

The combination of low number of defaulters and relatively large amount of defaulted student loans tells us that these individuals have truly racked up what might be considered to be gargantuan hefty student loan debt. Let's next find out how much debt that is.

Average Federal Direct Student Loan Balance, Number In Default and Not in Default as of December 2016

Click here to see the previous version of this chart, which divided the full $137 billion of defaulted student loans among 2016's defaulters.

The average student loan balance in the U.S. is $30,650. For Americans who haven't defaulted on their student loans, that average figure drops to $30,434. But for Americans who have defaulted on their payments to their U.S. government creditor, the average balance on their Federal Direct Student Loan is $32,714.

To put that latter number into context, consumer personal finance site Nerdwallet reports that the average amounts of debt for the U.S. households that report having the indicated kind of debt for 2016:

  • Credit cards: $16,748
  • Mortgages: $176,222
  • Auto loans: $28,948
  • Student loans: $49,905
  • Any type of debt: $134,643

The average amount of a Federal Direct Student Loan in default for a single American is nearly double the amount of credit card debt for the combined accounts of Americans living in a single household. It also exceeds the average amount of the combined auto loans held by American households.

But maybe the most scary aspect of the average balance of a defaulted Federal Direct Student Loan is that only $2,280 separates that loan gone bad from the average balance of a student loan that is not in default.

Because the U.S. Department of Education, which administers the Federal Direct Student Loan program, borrows money through the U.S. Treasury to issue these student loans, it must charge all borrowers a higher rate of interest to make up the $137 billion gap in its direct student loan program that is caused by a small minority of borrowers, or else U.S. tax revenue must either be diverted or additional money borrowed to make up the difference in paying back the U.S. government's creditors.

The U.S. student loan implosion therefore has a very real cost to both U.S. taxpayers and to Americans seeking to borrow money from the U.S. government to pay for their higher education.

Political Calculations, Mathematics Education and Obamacare

Mark Bertolini is the CEO of Aetna (NYSE: AET). Yesterday, he gave an extended interview with the WSJ's Dennis Berman on the topic of the future of health care, in which he made big news by describing the Affordable Care Act (ACA), which is more popularly known as Obamacare, by saying that "it is in a death spiral."

But the part of his comments that really stood out to us came just after the 14-minute mark of the interview, where he said:

You know that mathematics education in the United States is working when someone says, let's see, I'm going to pay this much premium, I've got a $6,000 deductible, the average deductible across the country is $3,600 dollars, it's up 15% this year alone, right, and when I go to the doctor I'm going to pay cash, nobody anticipates spending a day in the hospital or going to the doctor more than once... so premium, plus deductible, plus paying cash... why do I do this? I'll just pay the penalty and move on.

We here at Political Calculations have been happy to help provide Americans with that particular mathematics education since 17 September 2013, when we introduced our tool "ObamaCare: Should You Pay the Premium or the Tax?" (a 2017 version is also available), in which we made the kind of personal finance math described by Bertolini easy to do for any American with an Internet connection.

So, in a way of speaking, we're the solution to the game of Clue featuring the all-but-confirmed death of Obamacare: it was Political Calculations, on the Internet, with Math!

That said, we do have some thoughts on how to address the situation that Bertolini describes as the result of the adverse selection that has drawn in the sickest Americans eligible for Obamacare while driving out the healthiest Americans. In our view, that outcome will be exceptionally valuable in making good on the failed promise of Obamacare to provide people with pre-existing conditions with the ability to obtain affordable health insurance coverage. Unlike the other failed Obamacare promise that "if you like your health care plan, you can keep it", we think it may be possible to make that kind of health insurance portability a reality, so long as it can be separated from the all the other, excessively wasteful baggage of the Affordable Care Act.

If you want a teaser, we think that the solution to that issue is not subsidized health insurance, but rather reinsurance, which is an idea that we'll explore more at a later date.

In the meantime, if you'd like to see what else Aetna's CEO had to say on about the future of health care, here's the WSJ's full video of the 50-minute interview, but we'll warn you in advance that it starts off with over four and a half minutes of some especially awful background music before it gets going.