Healthcare Does Not Cause Job Lock

Job Lock

Hello folks! Hope all is well. I usually write this intro paragraph after I’ve already written the post…and today I must forewarn you…I get a little opinionated and lippy. Bear with me as I let my opinions fly and feel free to shoot yours right back at me in the comments below, whether in agreement or otherwise!

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Healthcare does not Cause Job Lock (for early retirees)

Job Lock
The Green Swan can also be Smart A**

What is Job Lock?

According to our good friends at Wikipedia,

“the term job lock is used to describe the inability of an employee to freely leave a job because doing so will result in the loss of employee benefits (usually health or retirement related).”

The Affordable Care Act (ACA or Obamacare) has often been touted as a means to reduce job lock – making it easier for employees to switch employment, become self-employed, or even retire early.

This was recently the subject in an article I came across in the NY Times titled If Obamacare Exits, Some May Need to Rethink Early Retirement. The title was undoubtedly catchy to me, but unfortunately I thought it was a bit ridiculous and not very insightful.

My bottom line is that you are working off a flawed premise if healthcare is putting you in job lock – restricting your ability to retire early. If ACA is what led you to consider early retirement, than you shouldn’t be retiring early yet.

Background on the Article

Personally, I didn’t think the article had anything substantive in it. Feel free to read for yourself, but I found it simply referencing countless studies – a study by the US Government Accountability Office (GAO), a study by several health economists, studies from scholars, studies overseas, a study on job lock’s impact on spouses, and studies conflicting all previously mentioned studies. Like I said, it was ridiculous and meaningless.

Of course the ACA reduces job lock, you don’t need a study to confirm that! You are moving the burden of the cost of healthcare off an individual and their employer to subsidized (basically free) coverage on the insurance exchanges with the tab picked up by the government (well actually paid for by the taxes from still working and productive adults…).

Most of us can’t up and leave work right now to pursue self-employment or early retirement because our employers are paying us for our healthcare costs. Without traditional employment WE WOULD NEED TO PAY FOR IT ourselves. The way it actually works as an employee (or the way you should think about it) is that we are taking a lower salary as a trade-off to our employers picking up a piece of the tab of our health insurance plans.

We are paying for the full cost of our health insurance plans one way or another. You take that so called “job lock” away when the government offers to pay those costs instead. Although when the government pays for our health insurance they aren’t getting a productive employee like our company is, they’re getting a loafer – a drain on our country’s tax dollars, a taker instead of a contributor. Why should the government give early retirees something for free?

Employer Provided Coverage Isn’t Free

You know employer provided coverage isn’t free, you don’t need me to tell you that. You see the premium increases each year as well as the increase in deductible and max-out-of-pocket limitations.

Job Lock

But it is actually more expensive than just this. Your employer is likely picking up a piece of the tab too.

How much? Well, first check your pay stub. How much is your medical premium? In 2016, the cost of health coverage for me alone (my wife and kiddo were on a plan through her employer) was about $28 on a bi-weekly basis. That’s $728 annually ($28 X 26 pay-periods). That’s just my cost – how much did my employer pay?

In recent years employers have been required to provide this information. Check your year-end W2 statement. Look for box coded 12 DD – that is where employers are now required to report the total cost of employer provided health coverage. This includes the total of the employee and employer contributions to the cost of your medical plan.

For me, in 2016, box 12 DD reported a total cost of my health plan to be $5,205. This may seem like a small sum in total, but one thing to consider is that the plan is a high deductible plan; meaning low premiums are offset by the fact I would bear the full cost of healthcare expenses for the first few thousand dollars.

What this also means though is that my employment is worth that cost to my employer. All things equal, assuming they stopped offering healthcare plans, I should expect a $4,477 raise in salary ($5,205 – $728).

For the record, my wife and kiddo’s insurance cost Lucy $5,980 in premiums in 2016. This was not a high deductible plan, so instead premiums were high. Per box 12 DD on her W2, this insurance plan had a total cost of $12,419. Her employer payed $6,439 ($12,419 – $5,980).

In 2015, Lucy, Jr. and I were all on my high-deductible plan. Our premium costs were $2,321. Box 12 DD reported the total cost of $13,825.

Job Lock

My point is, healthcare isn’t free. Combined, Lucy and I are paying for it with reduced salaries of $10,916 along with our share of the premium costs of $6,708. A total cost of $17,624 in 2016! The way I look at it, that’s cash out of our pockets for our health insurance.

If we can’t afford this otherwise, I suppose you could call that job lock…

Of Course ACA Reduces Job Lock

Yes, the ACA reduces job lock. Like I said, and I don’t need a study to show it. Reducing job lock is all good and dandy, but the ACA did it through the wrong means. It did so by making healthcare heavily subsidized (i.e. government and tax-payers pick up the tab) rather than through reforming the way health insurance is provided in America holistically (i.e. the large reliance on employer provided care).

Job Lock

The way health insurance in America was initially formed was flawed. Corporations began offering health insurance to avoid paying higher salaries, as a perk, and as a means to help retain employees.

In essence, employers filled a void of providing health insurance coverage from our government, but for the wrong reasons with what has snowballed into huge implications today.

We are reliant on health coverage via employers rather than through the free market or the government. An alternative would be universal health coverage provided by government, but paid for through a special tax on everyone in their working years (similar to how FICA taxes work today to cover Social Security and Medicare).

If the burden is to now be placed on the government to help us pay for health insurance, than a correlated tax increase is justifiable. How else will the government be paying for our healthcare? Or conversely, keep the government out of it and require everyone to buy it on the free market. Although I’m skeptical such “mandated” coverage would work in this fashion.

The Trade-Off

Theoretically, on one hand we are all being paid less in salary today. That money is instead being used by our employers to pick up a piece of our health insurance tab.

On the other hand, we could be paying that amount (or more…) via a “Healthcare Tax” to the government. For instance, this is similar to how the U.K. does it. This could bridge us from the beginning of our working years through when Medicare is currently offered at age 65. Or combine this “Healthcare Tax” with the current Medicare tax and make it one universal system from cradle to grave.

Is Health Insurance causing Job Lock for Early Retirees?

No, we as EARLY retirees should be willing and able to pay for our own healthcare, nothing in life is free. The way our system is set up today, we as early retirees can’t expect a handout in the form of a healthcare subsidy.

Early retirees shouldn’t have a subsidy, that isn’t what they are intended for, and if you want you can go cry to your Mother about it…

Sorry, like I said earlier, I’m getting lippy today…

Don’t be Naive

As someone who is considering early retirement myself, am I naïve enough to think that over the course of my (hopefully) long 50+ year retirement that the ACA or, specifically, healthcare subsidies via the exchanges, or Medicare as it is today will remain unchanged (aka free and/ or heavily subsidized for an early retiree with a relatively high net worth)? Highly unlikely!

The insurance exchanges are obviously unstable. You can see that from the massive losses health insurers have recorded due to the exchanges. That’s why you also see them in the news for pulling out beginning in 2018 unless something changes. All the big insurers have come out and made these assertions, including UnitedHealth, Aetna, Anthem, Cigna is still considering it and in all likelihood will pull out…the list goes on and on.

The exchanges were flawed in many ways and the subsidies were really expensive – that was never going to last.

Medicare as it stands today isn’t viable either! So if you are considering early retirement, I wouldn’t be banking on that in its current form.

Health insurance costs money. You, as an early retiree, should expect to pay for it. You, as an early retiree, haven’t paid ahead those costs via a “Healthcare Tax” through your working years to justify subsidized insurance on the exchanges. And as you get older you should expect to pay more for healthcare…because odds are you will be a bigger consumer of healthcare services.

The Bottom Line

Bottom line, you aren’t in job lock if the ACA subsidies go away. You’re in job lock because you can’t afford to retire yet.

You can’t afford to replace that portion of your salary currently devoted to health insurance (via the benefit your employer offers by paying for that insurance). As shown above for our family in 2016, that amounted to over $17K (likely a similar or greater amount in 2017).

That’s not job lock for early retirees. If that’s job lock, than I’m also in job lock right now because I couldn’t afford food for my family if I retired now. Healthcare is a staple to life just like food. And as I discussed above, healthcare isn’t free, just like food.

Rant Over?

Damn, that’s one hell of a rant. I guess after The Green Swan turned one year old I feel more privilege in letting some real opinions fly. But let me say “bottom line” one more time…Job Lock

The bottom line is that you are working off a flawed premise if healthcare is putting you in job lock –restricting your ability to retire early. Healthcare is not free and it is not an entitlement…especially if you are wealthy enough to consider retiring early.

The Final Final Thought

If ACA is what led you to consider early retirement, than you shouldn’t be retiring early. This is just one man’s opinion. I’m not a public policy guru, but the logic makes sense to me. I’m sure I’m wrong somewhere throughout the article and you can feel free to let me know about it in the comments below. I won’t take it the wrong way. Let’s have some healthy debate!

Part 2 in Health Series: Understanding Retiree Benefits for Early Retirees.

Part 3 in Health Series: My Vegan Proclamation

Thanks for taking a look!

The Green Swan

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27 Comments

  1. Couldn’t agree more Green Swan. A lot of times it seems like people use insurance as an excuse/crutch. That said, it will be very interesting to see what the new administration is able to pass.

  2. I agree with much of this. ACA certainly wasn’t a compelling reason to retire early. And it was always dubious whether it would continue. I would love to see legislation that can help keeps costs reasonable in a wider sense, without tightly controlling them. I do feel for those approaching retirement since it’s just hard to plan for that expense when you’re not sure what the landscape is going to look like. But it’s always better to over-save.

    1. There are definitely things that they can do to help keep costs reasonable and I hope they can work together to find a reasonable solution. And I think it only makes sense to keep Medicare as is for those approaching retirement. You can’t just pull the rug out on those folks.

      Thanks for the comment, Kalie!

  3. Good point! I know many early retirees are worried about the future of healthcare. Our plan is to buy a plan (whatever that will look like) and subsidize health expenses ourselves as needed. FIRE should also account for those costs, too! Luckily health problems tend to happen with age, so we’d (fingers crossed) we able to access funds in our Roth IRAs and 401ks at that time to assist with any expenses.

    1. Absolutely, great plan Mrs Picky Pincher! And good point about using retirement funds for healthcare if necessary once you are of age. You never know how much those costs will run, but part of our plan is saving up our H.S.A. for that purpose.

      Thanks for the comment!

  4. Great post! Completely agree. I never had any illusion about the ACA lasting for the 20+ years I would need it. And I have no illlusion that Medicare will be there in its current form either. Let’s just face it: healthcare is expensive. And it’s worth it, too! Happy Monday morning!!!

  5. Makes sense to me! I have to pay $1550 a month for my family of four now, why should I expect it to be any different when I retire? It’s not like the mortgage, which if I pay it off I never have to worry about again.

    As you adroitly point out, some expenses (medical insurance and food) will be with us as long as we are living. It just needs to be accounted for!

  6. 1 in 7 people could NOT get health insurance in the individual market before ACA. They were simply denied insurance. For them it was not a matter of affordability, but simply availability. If you want to retire early and are not able to purchase health insurance then thats job lock not solved by simply throwing giant piles of money at the problem.

    1. That’s right. That problem was solved by forcing the insurance companies to provide insurance for pre-existing conditions, part of ACA as you point out. That part of job lock was solved, and rightly so. But for others without pre-existing conditions looking to retire early, the subsidies aren’t a long-term solution for job lock.

      Thanks for the great comment and clarification, FreeBy50!

      1. I think the pre-existing condition issue was the biggest problem forcing job lock. That 1 in 7 figure is for the whole population and its higher the older you get. Over 40% of people in their late 40’s to 50’s have significant pre-existing conditions. Some of those conditions people could get insurance but they’d not get coverage for the preexisting condition so theres a risk carried there with no insurance. Others couldn’t have gotten insurance at all.

        1. Kaiser estimates that 27% of the population under age 65 had pre existing conditions which would have limited coverage availability before ACA.

          http://kff.org/health-reform/issue-brief/pre-existing-conditions-and-medical-underwriting-in-the-individual-insurance-market-prior-to-the-aca/

          That’s one thing for individuals to have access to coverage on the individual marketplace, but another for them to be subsidized in early retirement which is what I’m trying to address.

  7. I appreciate your view point, and I can see your point for early retirees. As one myself, I’m far more concerned about my ability to get health insurance than the ability to pay for it. As was mentioned earlier, the individual market was pretty atrocious pre-ACA.

    I also say this…employer-paid health insurance IS government-subsidized. By paying for health insurance instead of higher wages, employers save on their matching costs for social security, medicare, etc. Back when I set up a plan for the company I worked for, this was explicitly mentioned by the folks helping to set up the plan.

    1. Thanks for the great comment Emily! Total agreement here. I feel like ACA has actually created a true market for the individual insurance and improving availability is important. No qualms there.

      And I appreciate your point on how employer provided insurance is partially subsidized by the government as well. I think that is an important distinction. That’s a clear benefit to employers in offering insurance as an alternative to higher compensation otherwise, and another reason our current system for providing health insurance in the U.S. is backwards.

      But just to be clear, the employer would avoid FICA taxes that would amount 6-7% of the plan value. In other words, the government subsidy of avoiding FICA taxes is 6-7% compared to the subsidies often found on the individual market that amount to 10x that.

      Thanks again for the great comment!

  8. Swan, I’ve had a line in my “Retirement Cash Flow” projection for the years titled “Health Insurance”. It was there before Obama, and it’ll be there after Trump. Kind of a “Duh”, in my book, but amazing how few folks realize the signifcance until they’re on the doorstep of retirement.

    Plan on the cost, and don’t retire until you have enough $$ to cover your expenses. (Oh, and BTW, you’d better plan a high inflation rate for that line item, it’s going nowhere but up).

    1. Awesome Fritz. I’m with you on that, it seems like a “duh” thing but I think it has to do with the entitlement culture that seems pervasive in America (at least it seems pervasive in recent years). Too many expect things for free… No surprise that you are all over it. Thanks for sharing!

  9. Health care is one of those areas that I’m trying to estimate conservatively as we approach FI, so thanks for the thoughts on this. We are funding my husband’s HSA and are working to do what we can to live a healthy lifestyle to ideally avoid unnecessary medical issues. However, health care is different than other expenses because it is far more difficult to price out your care. I know there is work being done to make the costs more transparent, so I think that would go a long way in helping ease concerns about future changes to health insurance.

    1. The uncertainty of needing care or contracting an illness or disease makes estimate healthcare impossible. Having the cushion in an HSA will definitely help. We put a lot of emphasis on a healthy lifestyle as well, doing all we can to help reduce our use of healthcare. I just watched two life-changing documentaries on the matter, Forks over Knives and Food Choices. They definitely make you think, you should check them out if you haven’t already.

  10. I’ll be honest and say up front that I did not read the NYT article that you linked, but I remember the debate around job lock when the bill was first being proposed and passed. The vast majority of the job lock that was eliminated was from pre-existing conditions. A lot of people had enough money to retire early or to start their own business, but could only get insurance from a large employer until they qualified for Medicare. You had a lot of people that were just working because it was the only way to get coverage. That was the job lock.

    That said, I agree that you should not be retiring early if your retirement is dependent on subsidies. And I agree that an employer-based healthcare system is bizarre and leads to strange incentives. I think the question is how do we fix it? Obama himself (if I recall correctly) said it would be better if we got rid of the employer-based system entirely, but doing that would change the health insurance plans of far too many people who have no interest in change.

    Maybe we should create a think tank of FI bloggers to work on policy prescriptions.

    1. Right Matt, and thanks for emphasizing that point as Emily did in the comment above as well. That is a big part of it, and eliminating that job lock is great. The NYT article talks in context that eliminating or rolling-back ACA would re-introduce job lock for early retirees in general, not those solely with pre-existing conditions. And I don’t see how legislature will get passed if it takes away the mandate to cover pre-existing conditions anyway, but I could be wrong.

      I don’t recall if Obama said that or not, he may have, but I would agree with that sentiment. At this point, I think the best solution would be a sole-payer system (i.e. the government), but that would obviously require nationalizing the health insurers and many other drastic changes. That’ll be impossible and never happen though, I just can’t foresee that.

      We can all dream, but until then we’ll just have to keep dealing with the reality of living in a messed up healthcare system. Thanks for the great comment, Matt.

  11. How do you guys estimate your healthcare cost for your early retirement? I’m not retire yet, but this part is probably the biggest unknown. I mean not only the premium, the whole cost for let’s say 30 years? It’s definitely not a trivial question, and I feel like it is possible to run out of money even if you have a lot of assets.
    I also agree that the US can’t afford anymore entitlement. But good healthcare usually bring a good return ROI (healthier people, more productive,etc…). I grew up in a universal healthcare system and I’m glad my parents live in one (otherwise that might mean extra financial burden for me).

    1. Tough question and I can’t say I’ve diligenced this a ton. There are too many unknowns to make an educated guess. I talk about it a bit in my recent post on Our Retirement Lifestyle (http://thegreenswan.org/our-retirement-lifestyle), but it’s just a swag. My advice is to make a conservative estimate, assume a high single-digit inflation, and build in cushion in case health deteriorates and/or you face a significant illness/disease.

      That’s great your parents are set! I’m jealous :).

  12. It will definitely be something to keep an eye on as the administration continues to debate a new bill!

    Seems like we have much to keep up with as the new administration works on changing up the game eh?

  13. Good post GS. I agree FIRE shouldn’t be based on any concessions or subsidies. Having said that, it is important to have a reasonable handle on health insurance because it can quickly get out of hand to mess with even the ‘best laid plans’ of FIRE. For example. an early retirement plan that estimates say $500/month for health insurance can be stretched to $750/month perhaps but if the insurance doubles or more to >$1000/month, it will hurt any SWR plan. Handling some uncertainty in healthcare costs can be modeled, but this cannot be open-ended to the point where there is no limit.

    1. Yes absolutely, good point. I don’t see healthcare price inflation slowing its fast pace much. I think it’ll continue to outpace general inflation so worth modeling that in and keeping cushion in the SWR.

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