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The Cliff Effect: Obamacare Takes a Double Shot at the Economy and the American Dream

Subsidy Cliff Effect in Health Care InsuranceThe ‘cliff effect’ described here is something I’ve been worrying about for more than a year now.  Based on Kaiser’s calculator using my age, earnings and location, I’m in a spot where a tiny increase in income will have a dramatic effect on the subsidy I might get.  But what scares me is that it isn’t just me, it is that everyone like me will be faced with this, and many will be blindsided by it, which isn’t fair at all.  Like described below, a small shift of an annual income, say an additional $500 per year, or even $5 if I were that close to the marker (which shifts constantly), could push someone like me into the next bracket for subsidy, reducing the subisdy by thousands.  The situation below is extreme, but possible.  When I calculated it out (read more of my calculations here), I found that the subsidy drop off was much more drastic than the increase of income needed to produce it.  Which means someone can get a pay raise, only to find themselves without enough money to pay their health insurance premium anymore, let alone pay that and the rent.  This pay raise becomes a false sense of security, and most people celebrate getting a raise, which would only put them in debt in these cases.  I think this is horrible.  Only those who have benefits through their employer are safe from this cliff.


From the Foundry.  Click here to read the entire article.

Beginning in 2014, when the new health insurance exchanges will open for individuals and small businesses, subsidies will become available for those whose income falls between 134 percent and 400 percent of the federal poverty level (FPL). For a family of four living in a high-cost area, earning 134 percent of the FPL ($31,389 in 2014 dollars) would qualify them to receive $22,740 in assistance. A similar family earning an income at 400 percent FPL ($93,699) would qualify to receive $14,799 in subsidies.

The problem is that as income increases, families will experience large reductions in government assistance, which will discourage striving to earn a higher income. According to Kessler, “Economists call large, discontinuous changes in program benefits like this ‘notches.’ Although notches might be administratively convenient, they have terrible incentive effects.” One of these is “a substantial punishment on work effort.” If a member of a family of four living at 400 percent of FPL earns just $1 more, they would receive no subsidy at all, making the family almost $15,000 poorer. This “cliff effect” will have profound implications on the labor market. Heritage analysts Brian Blase and Paul Winfree write, “the subsidy structure creates incentives for individuals to engage in unproductive activities, such as working less and retiring early.” These income “cut-offs,” which already present issues in Medicaid, induce sharp reductions in the labor supply—not good when the economy is already struggling to recover.



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