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ObamaCare Work Disincentives Will Add $200 Billion To Cost

ObamaCare work disincentives will add at least $200 billion to the law's cost in the coming decade — including a hit of more than $100 billion to Social Security, Congressional Budget Office estimates imply.

The CBO only tallies ObamaCare's direct effects on revenue and spending in assessing its net budget impact, but this indirect economic cost can be roughly estimated using the figures in the agency's latest budget and economic outlook.

The key data point: The Affordable Care Act will reduce employee compensation by more than $1 trillion from 2017 to 2024.

That will cut payroll tax and federal (not to mention state) income-tax revenue, while boosting outlays for the refundable Earned Income Tax Credit. Interest expense also will rise.

Making Work Not Pay

The nature of Affordable Care Act subsidies — they rise as income falls and decline as income rises — will make work "less attractive" by "creating an implicit tax on additional earnings," the CBO said.

That disincentive will lead some people to choose to work less, or not at all, in part because subsidized health care will let some to get by with less work.

In addition, the CBO expects ObamaCare to depress wages for lower earners as employers pass along the cost of the law's employer insurance mandate by holding back on wage increases. Lower wages, in turn, will provide another reason for some to opt for less work, the CBO says.

While compensation is expected to be lower "almost entirely" because people will choose to supply less work, the CBO also expects that some employers "will respond to the penalty by hiring fewer people at or just above the minimum wage.

In its February report, the budget scorekeeper nearly tripled its estimate of ObamaCare's work-diminishing effect, saying that it would cut employment by 2 million full-time-equivalent workers in 2017 and 2.5 million in 2024.

This equates to a 1.5% to 2% drop in total hours worked. Since the affected workers would, on average, have relatively modest incomes, the resulting drop in aggregate compensation would be somewhat smaller, averaging 1% over the eight-year stretch. (The income effect would be smaller from 2014-16, as ObamaCare ramps up and the economic recovery chugs ahead.) Using the CBO's economic baseline, that 1% drop in compensation translates to $1.02 trillion from 2017 to 2024.

On average, nearly one-fifth of compensation comes via fringe benefits such as untaxed health insurance. But for the generally lower-income workers responding to ObamaCare's disincentives, more than 90% of compensation would likely be subject to the combined 15.3% payroll tax for Social Security and Medicare.

That means ObamaCare work disincentives would lower revenue for these two programs by nearly $150 billion from 2017-2024, including about $120 billion for Social Security.

In February, the CBO also raised its estimate of EITC outlays by $39 billion over the 2014-23 period because it now expects ObamaCare to indirectly reduce the wages of households receiving the refundable credit to a greater degree than previously seen.

The wider deficits caused by the drop in payroll-tax revenue and higher EITC spending would add nearly $20 billion in interest costs over the decade.

Then there is the impact of work disincentives will have on income-tax revenue. While the CBO hasn't offered any specifics, evidence suggests the toll won't be negligible. The typical low-income ObamaCare beneficiary may not pay much in income taxes, but some of the law's strongest disincentives will apply to some in the middle class.

The cut-off for subsidy eligibility at 400% of the poverty level can raise the implied marginal tax rate above 100% for those earning slightly more. for a narrow slice of earners Further, the subsidies are greatest for workers in their early 60s, which will make it more economical for some to claim Social Security at the earliest eligibility age, 62, and retire early.

ObamaCare's progressive subsidies and employer penalties were aimed at holding down the cost. Yet the evidence that the law will depress wages and tax revenue shows the downside of ignoring work incentives.

ObamaCare's work-depressing effect comes when labor-force growth is already set to slow to a historically low level. On top of that, the prolonged labor market weakness 2007 has led some to permanently exit the workforce and boosted the natural rate of unemployment, the CBO says.

The cumulative impact of all these factors is most visible in the continued deterioration of Social Security's financial outlook. The retirement program's annual cash deficit will spiral from $68 billion in 2013 to $320 billion in 2024, the CBO projects