Blog: Steven Pierce

There's symphony in numbers. Steve Pierce, president of piercefinancial and board member of the Ann Arbor Symphony Orchestra, talks this week on the self -employment penalty paid by entrepreneurs and compares the financial collapse to milking a duck.

The Squelching of Self-Employment

The federal government should encourage policies that foster self-reliance, self-employment and new business formation.  This would be especially helpful now, as the economy continues to suffer from high unemployment and constrained consumer spending that accounts for 70% of our economic output.  Instead, "government" has been slow to adapt to the fast-changing, shrunken economy, and has dragged its feet on confronting bloat, entitlements, and personnel benefits.  What some might argue are government's "best intentions", its laws have unintended consequences that hurt the very sector critical to creating and maintaining prosperity.  Here are my thoughts on a couple things.

You should know that I'm self-employed with a bias towards self-reliance.  Recently, my incentive to maintain my "consumer-driven," HSA-eligible, lower cost, higher deductible health insurance and its companion Health Savings Account (HSA) – was reduced twice.  First, the effect of the "Patient Protection and Affordable Care Act (PPACA) of 2010" led to a 55% increase in my Blue Cross Blue Shield of Michigan (BCBSM) policy premium.  

The passage of the Patient Protection and Affordable Care Act (PPACA) marked an historic occasion for our country...  PPACA requires some changes to your MyBlue individual health care plan...  As a result of these additional health care benefits, your rate will change.  The new rate for your health care coverage will be effective January, 2011.  Your next invoice will reflect the new rate. ?    
  –Excerpts from BCBSM notice, dated November 30, 2010

In late April, I received a second notice that my premium would increase again by an undisclosed sum.  BCBSM attributed this second increase in five months to costs exceeding premiums.  They either didn't know what the damage would be, or didn't want to say.

In 2003, the federal government passed a law that permits individuals to save their own money by purchasing less generous "HSA-eligible" high-deductible health care (HDHC).  The personal cost savings that results may be invested in tax-advantaged Health Savings Accounts (HSAs) to pay the out-of-pocket costs of less coverage.  Withdrawals from HSAs are made by debit card (or check) as needed.  Deposits are tax-deductible and may be stored in cash or invested in mutual funds.  Any remaining balances grow without tax liability and may be withdrawn at age 65 to help pay for retirement.  The legislation is "win-win" because it encourages participants to seek cost-effective treatment to save their own money and keeps treatment costs honest.  It also addresses Americans' epidemic nest egg underfunding.

However, as legislation drives up the price of lower cost plans (HDHC), the savings over higher cost plans shrinks, leaving less money available to deposit into HSAs and making more-generous plans more attractive.  Thus, the personal incentive granted by this Federal legislation to shop for cost-effective treatment is greatly reduced, leaving us with no "skin in the game" and no regard for the cost of treatment save for the out-of-control premium costs that continue to result.  

So, one of the initial barriers to entry, or disincentives to become self-employed, is health care costs.  Right out of the gate my preferred provider organization (PPO) plan cost $1,000 per month for my family at a time when my business was very young and my revenue was low.  At the same time, Michigan had a taxpayer-subsidized plan that cost around $200 per month. 

You might imagine when paying 100% of health coverage costs at amounts such as these, it's hard to muster sympathy for those requested to pay just 10-12% of their coverage.  Paying just 10-12% of my coverage would be a huge windfall for me.

It was also interesting to see Gov. Rick Snyder considering HSA plans for state employees. The thought was that Michigan would pay both the HDHC premium, or the insurance cost, and would put an amount equal to the employee's annual deductible in an HSA savings account. You might guess that my response was that the more removed a person is from the cost, the less they care about savings.  And, if it wasn't their money going into the HSA, their incentive not to spend it would be greatly reduced.  It's the same argument as "rent vs. own".  If you rent an apartment, you'll care a lot less about the hole in the wall than you would if it was your own wall...

Another entrenched disincentive for self-employment is self-employment tax, which effectively punishes the self-employed by making them pay more as a percentage of their salaries, or nearly twice as much, in FICA (Federal Insurance Contributions Act) tax as an individual employee.  FICA tax pays for Social Security and Medicare.  It's crazy for the government to maintain such a tax policy that punishes personal risk.

I could go on, but let me say that I believe that our new shrunken economy and our present paradigm call for dramatic action by the government.  I think that federal and state governments should pull out all the stops to create economic growth.  They are so insulated from economic pain, that they've slowly simmered into economic crisis, and they're biting the hand that feeds them by punishing the self-employed and taking the little accountability that entered the health care system back out of it.  With individuals without any "skin in the game", we should expect costs under new health care legislation to continue to rise unless drastic measures are adopted.  "Desperate times call for desperate measures," and I don't know if governments have the business knowledge or the political will to take the bold action that's required.