Entitlements, the ACA Individual Mandate and Intergenerational Transfers

Young adults in their early 30’s have faced a much more difficult labor market over the past decade than earlier generations; the age 25-34 cohort experienced an unemployment rate two percentage points higher and an employment rate three percentage points lower than the same age cohort over the decade from 1993 to 2003.  The severe recession and weak labor market recovery has caused younger adults to delay career advancement, family formation, and home purchases.  Despite the struggles that younger workers have faced over the past decade, they are being taxed to support entitlement programs that transfer income to wealthier retirees.  In addition, beginning in 2014 many of these younger workers will also be forced to purchase more health insurance, and more expensive health insurance, than they would choose without a federal mandate.

The Affordable Care Act (ACA) requires some relatively healthy adults to purchase more expensive and comprehensive health insurance than they would otherwise choose.  Many relatively healthy adults prefer a less expensive catastrophic health plan with higher deductibles and fewer benefits.  However, for adults age 30 and above a high deductible catastrophic plan does not fulfill the individual mandate of the ACA.  The ACA requires healthier and younger adults to purchase more insurance than they want, for higher premiums than they would voluntarily select, to subsidize the provision of health insurance to wealthier, older and less healthy adults.  This intergenerational transfer from young to old compounds the intergenerational transfers in the Social Security and Medicare programs.

A 34 year-old employee who worked full-time from 2003 to 2013, earned the median wage, and experienced the average amount of unemployment*, has contributed over $39,200 to Social Security and almost $9,200 to Medicare in the past decade.  Had these resources been devoted to a Standard and Poors 500 index fund, the effective annual rate of return on contributions would have been 5.67%.  Thus, despite the biggest financial crisis and stock market crash since the Great Depression, the median 34 year-old full-time employee would have more than $51,900 in an individual Social Security account and $12,100 in an individual Medicare account.  The expected return that a worker age 25 to 34 can be expected to receive on their Social Security and Medicare taxes is difficult to assess because the programs are largely pay-as-you-go.  Nonetheless, it is quite clear that workers under the age of 35 won’t earn an annual return anywhere near 5.67% on their tax contributions to these entitlement programs.

The individual mandate in the Affordable Care Act (ACA) puts an additional burden on younger workers by forcing them to overspend on health insurance.  The ACA requires that all insurance plans offer the following “essential benefits”:

• Emergency services
• Hospitalizations
• Laboratory services
• Maternity care
• Mental health and substance abuse treatment
• Outpatient, or ambulatory care
• Pediatric care
• Prescription drugs
• Preventive care
• Rehabilitative and rehabilitative (helping maintain daily functioning) services
• Vision and dental care for children

Prescription drug benefits, vision and dental care, and substance abuse treatment are the types of benefits that should be optional for those who prefer to spend less on their health insurance coverage.  The supposed purpose of the individual mandate is to prevent free-riding, so that uninsured adults don’t seek expensive medical care in emergency rooms.  A mandate for health insurance to cover vision tests or teeth cleaning is a mandate for adults to buy pre-paid health care plans, restricts freedom and solves no free-rider problem.  The uninsured aren’t coming to emergency rooms to get a new prescription for eyeglasses or to have a cavity filled.

Our entitlement programs are in need of reform because they discourage saving and transfer resources from younger workers to wealthier older workers and retirees.  The individual mandate in the ACA, combined with the requirement that all insurance plans offer comprehensive benefits, doubles down on the policy of subsidizing programs for older Americans by taxing younger workers.  It seems logical that younger voters would be opposed to this type of policy.  Nonetheless, polls show that voters age 18 to 29 have the highest support for the ACA while voters age 65 and above have the highest disapproval rates for the ACA.

Young workers are being taxed to support unsustainable entitlement programs that benefit the current generation of retirees.  The ACA taxes younger workers by requiring them to purchase more insurance and more expensive insurance than they want.  These policies seem especially deleterious for a generation that has faced much higher jobless rates over their first decade in the workforce than any generation since the Great Depression.

*The typical full-time worker age 25-34 earned $655 per week over the past decade and faced an unemployment rate of 7%, on average.

Jobs Endangered by a $15 Minimum Wage in Seattle

Both candidates in the Seattle mayoral race support an effort to raise Seattle’s minimum wage to $15 per hour.  Mayor Mike McGinn says he would even support an effort to set the minimum wage even higher.  Mayor McGinn and challenger Ed Murray are foolish if they believe that the Seattle mayor or City Council can ignore the laws of supply and demand.  A mandate that workers in lower paying occupations receive higher wages will lead to substantial job losses in these occupations.  The labor force in the city of Seattle is about one-third of the King County labor force and one fifth of the labor force in the Seattle metro area. This means that when Seattle laws make it more expensive to operate a restaurant, coffee shop, retail outlet or other business inside city limits, businesses will relocate to the suburbs and shoppers and customers will follow.

The economics of a minimum wage for a city is quite simple.  Employers in Seattle are price takers in the market for unskilled and less skilled labor.  It doesn’t matter how inelastic the demand for less skilled labor is in the aggregate, all that matters is the elasticity of demand for workers within city limits.  A large increase in the cost of hiring dishwashers or cashiers within Seattle merely shifts demand for these services to businesses outside city limits where the minimum wage is $9.15 and costs are lower.  The $15 minimum wage will destroy jobs in Seattle but will increase employment in some businesses in the suburbs.  The best substitute for shopping or dining in the city is shopping or dining in the suburbs.  Customers will be inconvenienced, unskilled workers in the city will be harmed and have to commute further to work.  However, business owners and unskilled workers in suburban areas could benefit from a $15 minimum wage in Seattle.

Mayors and mayoral candidates who support large increases in the minimum wage should also be required to specify which jobs in their cities would be endangered by their policies.  Following the International Union for Conservation of Nature which designates species as endangered, vulnerable or near threatened, I believe that politicians should acknowledge when their policies threaten the viability of certain jobs.  Politicians should also be required to use the same sort of designation to indicate the severity of the threat posed by their actions.  Politicians can make jobs extinct by raising the minimum wage so much that workers are priced out of the market for their services.

I propose that in Seattle:

• A job is endangered if 90% of current workers earn less than the proposed $15 minimum wage.
• A job is vulnerable if 75% of current workers earn less than the proposed $15 minimum wage.
• A job is near threatened if 50% of current workers earn less than the proposed $15 minimum wage.

The Bureau of Labor Statistics (in its OES data) lists 637 detailed occupations in the Seattle metro area.   In 120 of those occupations, employing 27.7% (over 390,000 workers) of the workforce, the median wage less than $15 per hour.  The following tables provides examples of occupations that are most at risk due to a $15 minimum wage.

There are 16 endangered jobs in Seattle.  These jobs are endangered because at least 90% of workers earn less than $15 per hour.  The following table lists some of the most common endangered jobs.  For example, there are 25,930 food preparation and servers in the Seattle metro area and 90% earn $14.07 or less.  A $15 minimum wage will likely cause restaurants in Seattle to lose business to suburban competitors.  Other jobs on this list are endangered by information technology.  For example, as the cost of hiring hotel and motel clerks increases, more businesses will use kiosks and encourage customers to check-in online.

Endangered Jobs in Seattle At Least 90% of Employees Earn Less   Than $15.00 per Hour
Occupation Title	Number of Workers	90th Percentile Wage
Food Preparation and Servers, Including Fast Food	25,930	$14.07
Personal Care Aides	9,100	$14.11
Dishwashers	5,080	$12.72
Dining Room Attendants and Bartender Helpers	5,010	$14.94
Home Health Aides	4,120	$14.65
Hosts and Hostesses, Restaurants and Lounges	2,930	$14.30
Hotel and Motel Desk Clerks	2,070	$14.82
Baggage Porters and Bellhops	1,070	$13.75

There are 33 vulnerable jobs in Seattle.  These jobs are vulnerable because at least 75% of workers earn less than $15 per hour.  The following table lists some of the most common vulnerable jobs.  For example, there are 12,590 cooks in the Seattle metro area and 75% earn $14.59 or less.  A $15 minimum wage will likely cause restaurants in Seattle to lose business to suburban competitors.  Other jobs on this list are vulnerable to technological change.  For example, as the cost of parking lot attendants and ticket takers increases, more businesses will use kiosks and other devices to substitute capital for labor.

Vulnerable Jobs in Seattle At Least 75% of Employees Earn Less   Than $15.00 per Hour
Occupation Title	Number of Workers	75th Percentile Wage
Restaurant Cooks	12,590	$14.59
Food Preparation Workers	7,300	$13.71
Maids and Housekeeping Cleaners	7,280	$13.82
Counter Attendants, Cafeterias and Coffee Shops	6,900	$12.38
Packers and Packagers	5,740	$12.40
Childcare Workers	4,620	$12.28
Amusement and Recreation Attendants	2,990	$12.56
Cleaners of Vehicles and Equipment	2,740	$14.65
Parking Lot Attendants	2,670	$12.28
Taxi Drivers and Chauffeurs	2,230	$14.58
Ushers and Ticket Takers	1,510	$13.64
Manicurists and Pedicurists	1,370	$11.59
Lifeguards	1,220	$11.79
Laundry and Dry-Cleaning Workers	1,120	$14.15

There are 71 near threatened jobs in Seattle.  These jobs are threatened because at least half of workers earn less than $15 per hour.  The following table lists some of the most common threatened jobs.  For example, there are 47,390 retail sales workers in the Seattle metro area and half of them earn $12.13 or less.  A $15 minimum wage will likely cause shops and stores in Seattle that employ these workers to lose business to suburban competitors.  Other jobs on this list are threatened by technological change.  As the cost of stock clerks and order fillers increases, more businesses will use computer and information technology to substitute capital for labor.

Near Threatened Jobs in Seattle At Least 50% of Employees Earn Less   Than $15.00 per Hour
Occupation Title	Number of Workers	50th Percentile Wage
Retail Salespersons	47,390	$12.13
Cashiers	26,110	$11.70
Stock and Material Movers	19,290	$13.76
Stock Clerks and Order Fillers	16,860	$13.84
Janitors	16,300	$13.74
Nursing Assistants	9,400	$14.43
Receptionists	9,270	$14.82
Security Guards	8,790	$14.02
Landscaping Workers	8,730	$14.36
Bartenders	7,610	$12.43
Counter and Rental Clerks	7,440	$13.57
Hair Stylists	5,500	$14.31
Bank Tellers	4,550	$13.58
Preschool Teachers	3,480	$13.69
Cafeteria Cooks	3,200	$14.82
Meat, Poultry and Fish Cutters	3,050	$11.43
Bakers	1,950	$13.56
Sewing Machine Operators	1,460	$11.65
File Clerks	1,360	$14.47

The mayoral candidates in Seattle may think they help workers in their city who are struggling in today’s economy by advocating a $15 minimum wage.  In fact, the mayoral candidates’ policies will harm the workers they would like to help.  These candidates tell Seattle residents that if they can’t find an employer willing and able to pay at least $15 per hour for their services, they will be prohibited from working inside city limits.  A $15 minimum wage in the city will cause Seattle residents to commute to the suburbs to work in stores, shops and restaurants. The only voters and businesses that should support this silly policy are those located outside Seattle city limits.

How Long Until The Next Debt Ceiling Debate?

Everyone understands that the federal government debt ceiling will eventually be increased, but much of the policy discussion in the past week has focused on the harm from a default that could be triggered by a delayed increase in the ceiling.  Few journalists are asking by how much the debt ceiling will be increased and when Congress is likely to confront this problem again.  The debt ceiling was increased 50 times between June 1965 and 2002 and ten times in the past decade.  The following chart plots the number of years between each increase in the debt limit.

Debt ceiling increases have become larger in magnitude and less frequent.  From 1965 to 2002 the average debt ceiling increase was effective for 277 days, on average.  Over the past decade the average debt ceiling increase was effective for 380 days, an increase of 37% over the prior four decades.  Overall, 78% of increases in the debt ceiling were effective for one year or less, 50% required a subsequent increase in less than 8 months, and 25% required another increase within four months.  Only four increases in the debt ceiling were effective for at least two years.  If this Congress were to raise the debt limit comparably to the median previous Congress, it will need to address the question of another debt increase on about June 10 of next year.

Debt ceiling increases in the past decade have been more than twice as large, relative to GDP, as they were between 1965 and 2003.  The following chart plots the magnitude of each increase in the debt ceiling from 1965 to the present.

From 1965 to 2002 the average debt ceiling increase was equivalent to about 3.46% of GDP.  The past ten increases raised the debt ceiling by an average of 7.09% of GDP.  The distribution of previous debt increases is skewed; about half raised the debt limit by less than 2% of GDP and one-quarter by less than 1.2% of GDP.  If this Congress were to increase the debt limit comparably to the median previous Congress, in terms of the share of GDP, expect a $325 billion increase or enough to cover the deficit for about six months.

Many taxpayers and voters would like to avoid another government shutdown knowing that a shutdown means that monuments will be barricaded, citizens will be inconvenienced, and furloughed federal workers will receive back pay for days that they didn’t work.  While default on federal debt obligations is not an option, it may make sense for conservatives who prefer smaller government to link a larger than typical increase in the debt ceiling to tax and entitlement reform.  Half of debt ceiling increases since 1965 were effective for less than 8 months and many only covered the federal deficit for about four months.  A larger than typical increase in the ceiling would mean that another government shutdown wouldn’t occur for at least a few years.  Taxpayers should support such a large increase in the debt ceiling if it is accompanied by entitlement reform and tax reform that promotes economic growth.  If future tax and spending reform is not linked to the increase in the debt limit, expect another debate over debt, spending and taxes in 4 to 8 months when the Congress will need to raise the debt limit once again.

Note: The data on federal debt limit increases I used was found here and here.