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Friday, February 1, 2013

Mulligan: ObamaCare and Retirement Savings

New York Times:  The Health Care Law and Retirement Savings, by Casey B. Mulligan (University of Chicago, Department of Economics):

Because of its definition of affordability, beginning next year the Affordable Care Act may affect retirement savings.

Employer contributions to employee pension plans are exempt from payroll and personal income taxes at the time that they are made, because the employer contributions are not officially considered part of the employee’s wages or salary (employer health insurance contributions are treated much the same way). The contributions are taxed when withdrawn (typically when the worker has retired), at a rate determined by the retiree’s personal income tax situation.

Employees are sometimes advised to save for retirement in this way in part because the interest, dividends and capital gains accrue without repeated taxation. In addition, people sometimes expect their tax brackets to be lower when retired than they are when they are working.

These well-understood tax benefits of pension plans will change a year from now if the act is implemented as planned. Under the act, wages and salaries of people receiving health insurance in the law’s new “insurance exchanges” will be subject to an additional implicit tax, because wages and salaries will determine how much a person has to pay for health insurance.

While much about the Affordable Care Act is still being digested by economists, they have long recognized that high marginal tax rates lead to fringe benefit creation. And the Congressional Budget Office has concluded that the act will raise marginal tax rates.

Were an employer to reduce wages and salaries (or fail to increase them) and compensate employees by introducing an employer-matching pension plan, the employee is likely to benefit by receiving additional government assistance with his health-insurance costs. ... Even though the Affordable Care Act is known as a health-insurance law, in effect it could be paying for a large portion of employer contributions to pension plans.

(Hat Tip: Mike Talbert.)

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Comments

"You'll have to pass the bill to find out what's in it. (Of course, what's in it is completely undecipherable and poorly thought out. It was cobbled together in a mad power grab to put those of us who know better in charge of you gun-and-religion-clingers.)"
-Nancy Pelosi (paraphrsased)

Posted by: Chuck | Feb 1, 2013 11:20:30 AM

Already happened where I work for exactly the reasons stated in the article.

Posted by: steve | Feb 1, 2013 12:09:20 PM

The high marginal rates created by ObamaCare will cause much more economic damage than the public expects, in ways both expected and unexpected. This article points out one of the ways.

The problem is the same with all government programs seeking to give everyone a middle-class lifestyle: You end up with a marginal rate "wall" that makes it very difficult to attain higher income. Incentives are destroyed, revenues decline, and the system collapses unless benefits are scaled back.

The dream of unlimited state of the art health care for everyone can never be realized. In order that incentives be maintained, people who can't afford to pay for services will need to use less in quality and quantity, just as they do for other goods and services. Price rationing is painful and distasteful, but nothing else is sustainable. That's the harsh reality that neither politicians nor the public will squarely face.

Posted by: AMTbuff | Feb 1, 2013 1:00:35 PM

Republicans should be singing the praises on Medicare Part D. The plan has come in at 60% of estimates. It highlights how well the free market can keep costs in check and provide choices to the consumer.

Posted by: Mike | Feb 3, 2013 10:58:33 AM