Health Insurance: PERACare vs. the ACA Marketplace

First, a caveat. Health care – and health insurance – are complicated and nuanced topics that are heavily influenced by individual circumstances and options. The following post should be generally applicable for folks who are in a similar situation as we are, but you should always investigate the particulars for your situation carefully. This post is not designed to be a comprehensive look at this topic.

An important consideration – and worry – for folks when they retire is health insurance. This is especially true if you retire before the age of 65 when Medicare kicks in. Health insurance itself can be very expensive, and a major medical condition can have a dramatic impact on your financial situation even with health insurance. Colorado PERA retirees have an important benefit in addition to their defined benefit pension – PERACare. (They also offer dental and vision insurance if you want it.) PERACare is health insurance that PERA retirees can get through PERA. It is guaranteed issuance (which was very important before the Affordable Care Act, and still nice now) and is even partially subsidized as part of your retirement benefit. But it’s still pretty expensive.

For my family, we need coverage for three: myself, my wife (also a PERA retiree, so we get two subsidies), and our daughter who is in college and is considered our dependent. Our cost for the Kaiser High Deductible Health Plan ($3,500 individual, $7,000 family deductible; $6,050/$12,100 max yearly out of pocket) is $1,654 per month, which is almost $20,000 per year (and that’s after $460/month, $5,400/year in subsidies). (Dental and vision cost an additional $140/month, $1,680/year). Obviously, that’s a significant amount of money – plus whatever out of pocket costs we have (note the high deductible) and, for those who have smaller pensions than we do, can be financially crippling. But I still consider us lucky to have the option because so many other people do not.

Before the Affordable Care Act (ACA), folks who didn’t have an option such as this either had to get coverage under their working spouse’s plan, pay for a very expensive policy on their own (assuming they could even qualify for a policy), or simply go without. The ACA was a huge improvement, guaranteeing issuance and offering plans at a variety of premium levels and coverage levels. And, for folks at the lower end of the income scale (up to 400% of the federal poverty level), your costs were at least partially subsidized. The cost of your premiums were capped at a certain percentage of your income (see the left side of the table below), with very large subsidies if you were on the very low income end, and gradually tapering off to fairly small subsidies the closer you got to 400% of poverty level. But once you crossed the 400% of poverty level cliff, the subsidies dropped to $0.

source

Prior to this year, our income – like many PERA retirees – was too high to receive any subsidies, so the cost of plans through the ACA marketplace was higher than our (subsidized) cost through PERACare. So when we retired, we signed up for PERACare. But then this year the current administration passed the American Rescue Plan Act, which did many, many things, one of which was a huge change in the ACA subsidies. For all the folks up to 400% of poverty level, the subsidies increased dramatically (see the right side of the table above), and – for the first time – there is a subsidy for those making above 400% of poverty level. Which includes us. Which is the reason for this post.

Note: While the subsidy theoretically exists no matter how high your income, it effectively phases out for higher incomes because the cap is at 8.5% of your income, and eventually that exceeds the base level premium for ACA insurance.

While I was generally aware of the change in subsidies when the American Rescue Plan Act passed, I didn’t really take the time to do the math for our situation until I read this blog post. Now, I really should have already figured this out on my own because I knew all the information, but it’s one of those things that just didn’t sink in enough to make me do the work to figure it out (not that it was that much work). As you’ll see shortly, that’s going to end up costing me several thousand dollars in premium savings for the months that I didn’t take advantage of this. The reason for this post is to share this information in case this post ends up being the one that makes you do the work to figure it out.

Note: The amount of subsidy you get for an ACA marketplace plan is based on your Modified Adjusted Gross Income (MAGI) for the 2021 tax year. Technically, the subsidy is a tax credit you get when you file your 2021 taxes, but they let you estimate what your income is going to be and reduce your monthly premium throughout the entire year, then there is a “true up” when you file your taxes. So it’s important to do a fairly good job of estimating your 2021 MAGI so you don’t end up underestimating your income, which will result in overestimating your subsidy and you could end up with an unwelcome tax bill next spring. This can affect other decisions you might make during 2021, like withdrawing from your pre-tax retirement accounts or doing a Roth conversion, both of which will increase your MAGI and therefore reduce your subsidy.

So, let’s take a look at the details. When you go into the ACA Marketplace (they are by state, here’s Colorado’s), you can enter in all your information and then it will list all of the different policies you can get, along with their premiums and coverage levels. Policies are generally grouped into Bronze (lowest premium, lowest coverage), Silver (medium premium, medium coverage, and the base for which subsidies are calculated on), or Gold (highest premiums, highest coverage). Because we’ve always been on Kaiser and like it, I then narrowed it down to Kaiser choices. And then from the Kaiser choices, narrowed it down to the two that qualify as high deductible health plans that qualify for a Health Savings Account (see this post for more on the value of HSAs).

So, with those parameters, my choices are a Bronze policy (KP CO Bronze 6500/35%/HSA) and a Silver policy (KP CO Silver 3500/20%/HSA). The Silver policy is very, very, very similar to the coverage I’m currently getting through PERACare (with PERACare having slightly better prescription drug pricing), so that’s pretty close to an apple-to-apples comparison. The cost (after subsidy) of the Silver policy for three of us through the ACA Marketplace? $1,326 per month. That’s a $328/month, or almost $4,000 per year savings over my PERACare policy, for essentially the same coverage. Wow.

But if I then consider the Bronze policy, which does have a higher deductible and a higher maximum yearly out of pocket cost, the premium drops to $996/month, which is almost a $7,900 per year savings over my PERACare policy (and a $330/month savings over the Silver policy through ACA). We are taking on more risk with the Bronze policy (because of the higher deductible and higher out of pocket max), but that will only affect us if we have a really bad year (and even then the premium savings covers about two-thirds of the difference). The vast majority of years (and hopefully every single one of them, we’ll come out ahead of the silver policy).

Normally open enrollment for ACA policies is in the fall (effective January 1st of the following year), but the American Rescue Plan Act extended open enrollment through August 15th. If we enroll now, our plan will start August 1st and last the rest of this calendar year (and we can drop our existing coverage through PERACare). (If I had been on the ball, I probably could have done this by May 1st, so we’ve missed out on 3 months of savings due to my inattention.) Then this fall, during open enrollment, I can choose to enroll in the same Bronze plan through the ACA marketplace (at whatever the 2022 rates are), switch to the Silver plan if we decide we want to, switch to any of the other ACA plans, or even switch back to PERACare. That’s an important point to keep in mind, you are making decisions one year at a time here. So if you figure out you made a poor decision, or if your health care needs change, you are only “stuck” with your current plan for the rest of that calendar year, and then you can change to a plan that better meets your need going forward.

So, if you are a Colorado PERA retiree, or any retiree who is getting health insurance from someplace other than the ACA Marketplace, it’s probably worth your time to explore the ACA plans, see what your costs might be after the new subsidies, and see if it might make sense to switch. (And, if you choose a plan that is HSA eligible, put those premium savings into your HSA until you max it out.)

Final Note: Currently the American Rescue Plan Act’s changes to the ACA marketplace are only in effect for 2021 and 2022. The current administration wants to make those changes permanent, but we’ll see what happens. If this is something you would like to see made permanent, contact your Congressperson and Senators.

Are the WEP and GPO “Fair”?

Like many teachers, the first time I heard about the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO), my first response was, “That’s not fair!” Why should my Social Security benefit (by WEP) or Social Security Survivor’s Benefit (by GPO) be reduced simply because I worked as a public employee and earned a pension benefit? As with many things, once I learned a bit more I realized that the issue was a bit more complicated and nuanced than I first thought. The following are some brief thoughts about the WEP and GPO (but please realize these are complicated topics and this will not be a thorough exploration of either of them).

First, a reminder. When Social Security was created (in 1935), it was designed to be part of a “three-legged stool” to provide “economic security” to folks when they could no longer work. Those three legs were a company-provided pension plan (still relatively new at that point but very popular, even though many folks didn’t have one), Social Security (Title II portion), and the person’s own savings. It was never designed to be perfect, or to provide for a “comfortable” retirement as we think of it these days, but to alleviate poverty and suffering in old age.

“Security was attained in the earlier days through the interdependence of members of families upon each other and of the families within a small community upon each other. The complexities of great communities and of organized industry make less real these simple means of security. Therefore, we are compelled to employ the active interest of the Nation as a whole through government in order to encourage a greater security for each individual who composes it . . . This seeking for a greater measure of welfare and happiness does not indicate a change in values. It is rather a return to values lost in the course of our economic development and expansion . . .”

Franklin D. Roosevelt: Message of the President to Congress, June 8, 1934.

The Windfall Elimination Provision (WEP) is a provision of the Social Security rules that can reduce (but not eliminate) your Social Security benefit if you are eligible for a pension and did not pay into Social Security during the time you were earning that pension. This most often affects public employees (like teachers) in states where the pension plan is designed as a Social Security replacement plan. This is true of Colorado PERA and many other state plans, but not all state plans – some teachers pay into both their pension plan and Social Security simultaneously. For states where teachers pay into both, their pensions are typically much lower because they are designed to supplement Social Security (and the contributions they and their employers make to the plan are typically much lower). In states like Colorado where the pension is a replacement plan, the pension benefits are larger (as are the contributions), because the assumption is that you will not be receiving any Social Security, so therefore your pension – along with your savings – must be enough to live on in retirement.

Similarly, the Government Pension Offset (GPO) can reduce or eliminate Social Security Survivor’s Benefits. Some folks are eligible for Social Security benefits earned by their spouse if their spouse dies first, but if your pension (again, only if you also didn’t pay into Social Security simultaneously) is large enough, it can reduce or even completely eliminate those survivor benefits.

On first blush, this seems to be very unfair. Many teachers (and other public employees) work enough (typically forty quarters = 10 years of wages) under Social Security covered employment while in high school, college, and before, during and after their teaching careers to earn a Social Security benefit. If we pay into the system just like everyone else, why should our benefits be reduced simply because for some part of our career we also paid into another system? As it turns out, there is actually some really good logic behind this (although not everyone will agree), so let’s briefly take a look.

The first thing to keep in mind is that as long as you qualify for a Social Security benefit, WEP can reduce but not eliminate it. The maximum your benefit can be reduced by WEP is $480 per month (in 2020) and the reduction cannot exceed 50% of your pension benefit. Second, if you have 30 or more years of substantial Social Security covered earnings, WEP won’t affect your benefit at all. (If you have less than 30 years, the more years you have, the lower the WEP reduction is.) You can use this calculator (you have to enter in your yearly Social Security earnings) to estimate your benefit, or visit Open Social Security (where you enter in your PIA as calculated by Social Security).

So why does this provision exist? It’s because Social Security does not pay the same percentage of replacement income to everyone. Because it is designed as “social insurance” and to alleviate “poverty and suffering” in old age, it pays a higher percentage of one’s career average indexed earnings if you make less money, and a lower percentage if you make more. You can download the latest report (pdf) from Social Security, but the replacement percentage can be as high as 78% (for very low earners) to as low as (27% of the maximum Social Security covered wage, currently $142,800) for very high earners, with most folks earning in the 35-45% range.

Because of the way the formula is constructed, many folks who receive a public pension get treated like a very low wage earner and therefore get a higher benefit, even though they were not a very low wage earner. For example, let’s say you have eleven years of Social Security covered earnings and therefore qualify for a Social Security benefit. But those eleven years were mostly low-wage years, years you worked part-time in high school and college, and maybe summer jobs as a teacher. The Social Security formula then takes those eleven years of low earnings and adds in another twenty-four years of $0 earnings, as your benefit is based on your average indexed monthly earnings over the highest 35 years of earnings. To the formula, you look like someone who has made poverty level wages your entire life and, as a result, the formula will spit out a very high replacement percentage of those artificially low earnings.

The WEP formula simply tries to adjust that so that you earn a fair replacement percentage based on the wages you actually earned under Social Security. So while it feels like you are getting “penalized” for being a public employee and earning a pension, what’s really happening is that the WEP is trying to “adjust” for you getting a larger Social Security benefit than was designed.

GPO works the same way, except applied to your possible survivor benefit (survivor’s benefits were added in 1939, they were not part of the original Social Security Act) from your spouse. Survivor’s benefits were designed for families where only one spouse worked (paid work), or one spouse earns vastly more than the other. If the high earner dies first, the survivor’s benefit is designed to support the spouse who didn’t work for pay or worked for low wages. (Back in the day, this was often the stay-at-home Mom who worked very hard at home raising the family and running the household, but didn’t get paid to do that work. That still applies some today, but also includes stay-at-home Dads as well as folks who earn a lot less than their spouse or perhaps stay home for a few years.) Again, the formula for the survivor’s benefit incorrectly sees you as a low wage earner and spits out a higher benefit than intended, so the GPO tries to adjust for that.

There has often been legislation proposed to repeal the WEP and/or GPO, but it typically doesn’t get very far, both because of the faulty formula it is trying to adjust for and because of the impact on the federal budget. Right now there is legislation (pdf) before Congress that attempts to modify the WEP formula as there are cases where it adjusts incorrectly, and that has a much greater likelihood of passing (it also has a hold-harmless clause so that they use whichever formula – old or new – gives you the higher benefit).

While not everyone will agree, I generally think the WEP and GPO are fair to public employees in the context of how Social Security was designed and is implemented (especially if the formulas are adjusted by legislation to fix any incorrect adjustments). It’s a separate discussion whether pension plans as well as Social Security, Medicare and other safety-net programs are adequate in the first place.