Never turn down free money, you hear people sometimes say, right?
And if free money were a more common thing, why, then you’d hear it said a whole lot more, but it ain’t (because, you know, TANSTAAFL and if-it-looks-too-good-to-be-true and such) so you don’t.
But free money does in fact exist here and there.
The classic case of free money in our modern world is the 401k match that many employers provide to their employees. With a 401k match, the employer agrees that, to the extent a given employee contributes part of his or her compensation to a 401k plan, then the employer will throw in some new money on top, no strings attached (well . . . mostly no strings attached).
A typical Silicon Valley 401k match goes like this:
For every two dollars of your compensation that you contribute to your 401k plan, we, the company, will increase your compensation by one dollar and we’ll put that one dollar into your 401k plan (yea, sorry: that one dollar of new money can only go into the plan). But we will cap how much money we put in, and that cap will be 3% of any given paycheck. So if you contribute, say, 2% of your paycheck, then we will contribute to your 401k plan, over and above your normal compensation, a dollop of new money equal to 1% of that paycheck. Likewise, if you do 4%, we will do 2% and if you do 6% we will do 3%. And, importantly, if you contribute 6.0000001%, we will still do 3% because we will never go above 3%. And the same goes for 100% and everything in between, so if you do, say, 10% we’ll still only do 3%, etc., etc., etc.
So that new money on top — usually simply called the match — is, for most intents and purposes, free money. And, if you’re paying attention when you decide how much you want to contribute to your 401k and how fast you want to do it, then the match will equal 50% of what you yourself contribute.
That money can really add up, as in: you put in $10k of your own, and the company puts in $5k of free money. And that means that, if you end up in your later years with, say, $450k in your 401k, then fully $150k of that total came from the match. That’s a lot of free money, eh?
A quick aside: given that there are dollar limits on how much you contribute to a 401k in any given year, do you see how dialing in a 10% contribution, like in the example above, could thwart your ability to maximize your match? People — especially high earners — get this wrong all the time, leaving thousands of dollars of free money on the table, which is like having dollar bills falling out of your pocket every step you take as you walk a mile. Do it often enough, and the impact is more along the lines of twenty- or hundred-dollar bills falling out of your pocket while you take that walk, departing your life forever, to be picked up by some schmo who is not you. To avoid taking a hike on all that free money, the thing to do — especially if you’re a high-earner — is to never dial in a per-paycheck contribution to your 401k that’s greater than 6%. Please contact me if you want a further explanation.
Now some will say that free money is very bad for people. And I agree that sometimes it is. The lottery winner’s curse comes to mind.
But sometimes free money really, truly is great — a pure gift horse into whose mouth you should not look!
This is one of those times: 401k match dollars are free money, and they’re of the good sort. You can think of it this way: there’s precious little unanimous agreement in the world of financial planners and money managers and investment advisors and everyone else who helps people be smart about their money, but when it comes to 401k matches, we pretty much all agree that free money of the 401k match variety is a very good thing indeed.
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Ahh, but wouldn’t’ch’ya know it, in the political sphere free money can be seen as a different thing entirely.
Not to worry, though: I’m not here to talk about makers and takers and moochers and moochees. Nope. Instead, I want to take that whole debate up several notches, way beyond the level of the individual and way above the level of counties and parishes and such, all the way up to the level of state governments and their financial relationship with the federal government, by looking at Medicaid expansion and the controversy surrounding it.
A few days ago I wrote about Medicaid expansion, and noted in passing that many states — half — had decided to forgo Medicaid expansion, all of which is amounting to one big huge experiment in public health and fiscal strength and the manner in which the Medical Services Industrial Complex (the MSIC) operates.
Here is a map showing the choices states have made as of one month ago:
So that’s about as even-steven as it could be, right? It’s gonna be quite a set of 50-states-plus-D.C. Petri dishes when all is said and done! And I, for one, can’t wait to see the results, though I’m mindful that millions of lives will be exposed to the nasty fuzz growing in some of those Petri dishes, while millions of other lives will be nicely ensconced and whistling a happy tune in other, fuzz-free, Petri dishes.
Which will be which? Place your bets now! And do share your predictions with others — in writing and with a specific time-frame — so that we can all objectively know whether you were right (at the end of this piece I do just that).
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Like a 401k match, Medicaid expansion involves a whole lot of free money, if you view it from the level of the state itself. The free money in this context, though, doesn’t flow from employer to employee, but, rather, from the federal government to any state government choosing to expand its Medicaid eligibility to include individuals and families not previously covered.
Having just looked around the Internet for a concise summary of the nuts ‘n bolts of how Medicaid expansion is changing eligibility requirements, it appears that it is . . . complicated and not terrifically amenable to concise summary. So I’ll just note that, in the soon-to-be-past, people who were kid-free often were not eligible for Medicaid, and by also noting that the income a family could have and still be eligible for Medicaid couldn’t exceed 100% of the federal poverty level (a/k/a FPL), while, starting 1/1/14, that exact same family can have income up to 133% of the federal poverty level and still be eligible for Medicaid.
So, you might wonder, what exactly do those percentages mean in terms of dollars and cents, and at what income level are we officially impoverished?
In 2013, the 100% level for a family of four has been $23,550 and the 133% level has been $35,325. Think about that: using these 2013 numbers, a family of four on Medicaid couldn’t make more than ~$23k, while under the expansion it can make up to ~$35k.
At that level, with that many mouths to feed and bodies to clothe and square feet of shelter to possess, you’d better believe that the $12k bump in allowable income for recipients is a big deal, as in: much more medical care for those in the 100% to 133% of FPL range.
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And what of the free money part? Where does that come in?
Under Obamacare, from the year 2020 and on the federal government is obligated to pay 90% of the increased costs resulting from each state’s Medicaid expansion while, between now and then, the federal government is obligated to pay nearly all of those costs, including absolutely allof those costs — as in 100% — for the first three years of the expansion (2014 through 2016).
So, guvnuh, riddle yourself this: if (a) you can provide Medicaid coverage to tens of thousands of new people in your state, and (b) the federal government is going to pick up all of the tab from that expansion for now, and 90% of the tab forever, and (c) from that increased healthcare the state will have (i) healthier residents, and (ii) a ton of money sloshing around in the bottom of the boat . . . er . . . uh . . . stimulating the entire state economy, would you do it?
The vote is in, and so far it’s a tie.
For a — shall we call it a reasoned argument? — answering this question in the negative, please see the piece entitled “The Great Medicaid Swindle” by Nick Gillespie, of Reason.com but here publishing in The Daily Beast (arguing that Medicaid is a failed program and that the federal government will renege on its obligation to reimburse 90% of the cost over the long run).
And I think it’s obvious — and about to get a whole lot more obvious — how I answer this question.
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So how can Medicaid dollars act like a shot of fiscal stimulus?
Although it seems lost on many, every dollar expended for medical care someone receives is also a dollar somebody else receives for medical care s/he helps deliver. And, though I’ve never called myself an economist, I’ll go ahead and act like one anyway, by positing here my hunch that the multiplier for a medical-services-for-dollars transaction is at least 1.1, which would mean that, for every ten dollars a state receives from the feds to fund Medicaid expansion, eleven dollars of economic activity occur within the state.
In that way, free-dollars of the Medicaid expansion variety flowing from the federal government to the states are better than free-dollars of the 401k match variety flowing from employers to employees because 401k match free-dollars tend to only grow well over long time horizons (because it usually takes a while to grow your match dollars by, say, 10%), while the Medicaid expansion free-dollars tend to grow, according to my hunch, by 10% pretty much just as soon as they enter the state.
So as more impoverished people receive medical care in a given state, medical services providers must hire more people to provide that care. And those who are hired are apt to turn around and spend their wages at a grocery or buy their kids new clothes, etc., and are likely to do so particularly quickly if they were previously under- or unemployed and/or living financially close to the bone. The impact of their new income on their spending will, therefore, be quite significant, which means that others near them will have more money flowing into their own personal coffers. And ’round and ’round those dollars go, in a virtuous circle that has been sorely lacking for going on six years now.
And oh yea, one very important factor to consider, and one which can get lost in all the politics and skirmish, is this: in this scenario far fewer people are going without medical care, which, you know, has some bearing on each of us because, as a group, sick people are, at best, unpleasant to be around, and, at worst, really, really bad for your own health or that of your loved ones.
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So I just have-ta say that I’m mighty happy to be living in a state shown in blue in the map above!
And I also have to say that predictions do matter, and that predictions are not serious predictions unless (a) they’re written down, and (b) they are pegged to a specific time frame, and (c) they are shared with others.
To comply with those requirements, I’ll add a time frame and be much more specific: I think that, within three years (a) we’ll have statistically significant evidence from the federal government statisticians and/or legitimate medical services researchers like the Henry J. Kaiser Family Foundation that overall medical outcomes in the states that chose to expand Medicaid were better than those that did not, and (b) we’ll have decent evidence that the Medicaid expansion was economically stimulatory.
And I also predict that, if the Democrats retain the Whitehouse in 2016, then fewer than ten states will have not opted in to Medicaid expansion by 2018.
Last but not least, what with this whole Medicaid expansion tug o’ war feeling like a huge experiment with poor people’s wellbeings at stake, and what with the newest Hunger Games movie premiering today, I also just have to add this:
Let the games begin!