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.

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