The Secret Tax on Young Workers That is Keeping Obamacare Afloat

There is no such thing as a free lunch. It’s a popular adage, but also a bedrock principle of economics. As Frederic Bastiat wrote in 1848, “Government is that fiction whereby everybody endeavors to live at the expense of everybody else.” In other words, it is nothing but pure myth that government can provide goods or services, or pursue its policy ends, at nobody’s expense. Taxpayers, which is to say people, are always on the hook, it’s just that the federal government has grown increasingly adept at hiding this fact.

One recent, prominent example of such behavior was the Affordable care Act provision whereby health insurers were required to cover “adult children” through age 26 on the insurance plan of their parents. The ostensible goal of this provision was to reduce the ranks of the uninsured, though it became clear that its true purpose was to reduce health care costs for older workers by mandating a healthier “risk pool.”

This provision was sold to the American public as an unassailable good, a provision that would insure young adults against catastrophe at no expense to the taxpayer. But a simple grasp of economics tells us that this cannot be so. There is no such thing as a free lunch.

Fortunately, we also have a study that not only tells us that the provision isn’t free, but does some empirical work into just how much it costs. In a working paper, Gopi Shah Goda and Jay Bhattacharya of Stanford and Monica Farid of Harvard found that workers’ take-home-pay took a substantial hit as a result of the new mandate on employers.

“We find evidence that employees who were most affected by the mandate, namely employees at large firms, saw wage reductions of approximately $1,200 per year,” the researchers write.

The rationale is simple. As young adults entered, or remained in the market place for longer than previously allowed, the cost of parents’ underlying policy went up. Since most insurance is provided by employers (due to a wrongheaded incentive in the federal tax code that does not treat employers’ contribution as income), they faced a choice of taking a financial hit or passing along the added costs to workers. Unsurprisingly, businesses (which are best thought of as just a collection of people) dialed back cash wages in order to afford the newly mandated benefit that the federal government was requiring them to offer.

This is a trade-off. Workers aren’t getting something for nothing, but neither are they paying for something that they’re not getting. The rub is that nobody seems to think about it that way.

“The dependent care mandate remains the most popular provision of the ACA,” the authors conclude, “so perhaps it is not surprising that workers might be willing to pay for it, though perhaps they are not aware of the size of the bill.”

But are young adults willing to pay for it? Many of them are healthy and low-risk, which means that it may have made sense for them to opt for a catastrophic plan rather than remain on their parents insurance. Unfortunately, that’s not really an option anymore, and what a shame.

In essence, the ACA forces them to swap the inexpensive option of a catastrophic plan for a relatively robust, but very pricy option. Although $1,200 per year doesn’t sound like a lot to some people (though it probably sounds like a ton to most fresh-out-of-college young adults), the idea of paying that each year for a lifetime seems daunting. As it stands, that means nearly $60,000 dollars in lost lifetime wages (assuming current insurance prices) for an extra four years of being able to stay on a parents plan.

How many young people would honestly make that choice? I dare to say not many, which is why the government had to hide it from them and convince young adults that not only was there not a choice to be made, but that they were getting an awesome benefit for free. What a sham. What a shame.