Pssst. Hey, Millennial. It's me...Uncle Boomer. Can I come down? Your Mom said you'd be in the basement. "Junior's Subterranean Penthouse," your Dad called it.
Almost Happy Birthday. 26 years old! Whatcha doing? Watching Healthcare.gov grind away? Sweet! Oh yeah. No more parents' health insurance for you. The Affordable Care Act (ACA) says you're a big boy now.
So how much will that "affordable" (wink-wink) policy set you back?…WHOOOOOA!…The deductible? O...M...G! So much for that iPhone you've been saving up for since you dropped your last one in the deep-fryer at work. How much is your student loan payment per month? Ooooh. Well, maybe you can find a used brick or burner to serve your telephonic needs. (If you choose the burner option, you might want to be careful who you buy it from.)
Bummed? Well, the ACA does require 26-year-olds to way overpay for insurance so 60-year-olds—like your parents and me—can way underpay. You say you understand why? Seriously?
Ahhh. Dad explained it while you helped him shop for organic, locavore, free-range tempeh. "That's how all insurance works," Dad said. "Lucky people with low expenses pay lots so the insurer can pay lots to unlucky people with high expenses. It's that way with all kinds of insurance. You're lucky to be young, with few medical expenses. I'm unlucky to be older, with worn-out knees from marathon-running."
And you believed him…OK. Your Dad means well. But he doesn't know squat about insurance. You overpaying so he can underpay is not "how all insurance works." You need a little education, Sparky.
The Skinny on Insurance
Twenty-six-year-olds who own 1,000-square-foot fixer-uppers don't pay the same homeowners insurance premiums as 60-year-olds with 10,000-square-foot McMansions. "One day, you'll be 60 years old with a big house" doesn't imply, "so pay big bucks now to subsidize unlucky me and my grand digs." But that's Dad's argument about health insurance.
Twenty-six-year-olds pay way less for life insurance than 60-year-olds. That's because there's next-to-no chance the 26-year-old will die soon, while there's a reasonably good chance the 60-year-old will keel over one afternoon while eating potato chips and watching TVLand. That's not "lucky" versus "unlucky." That's just "young" versus "not young."
In a big life insurance pool with young and old, healthy and sick, what's effectively going on is this: Healthy 26-year olds pay low premiums so when one of them dies, the many lucky ones (the breathing) pay a benefit to the family of the few unlucky ones (the not-breathing). Similarly, the 60-year-olds in the pool pay high premiums to pay benefits to the quite-a-few unlucky ones' families. The 26-year-old who buys inexpensive life insurance and then becomes unhealthy continues paying the healthy-person premium because he was cautious and decided to buy when he was healthy. That's cautious, not lucky. On paper, they're all mixed in one big pool, but it's really a bunch of separate pools, each with its own payouts and premiums.
No one says a healthy 26-year-old should subsidize the life insurance for the 60-year-old because 26 is lucky and 60 is unlucky. No one says young fixer-upper-dwellers should subsidize old McMansion magnates. But that's exactly what your Dad says about health insurance.
Think about this while watching Healthcare.gov's error messages spinning round and round.
Here's the real problem. Mom and Dad and I and all our friends didn't believe anything our parents told us. Boring old World War II/Great Depression stories all day. Yadda yadda yadda. We did what we wanted. Lived for the moment. Abused our bodies. Didn't save. And we did OK. How? Most of us slid into an economy loaded with the wealth our boring, hard-working parents had created. We had a half-century partaaay.
You, Millennial—you and your crowd believed everything Mom and Dad told you: "Ivy League is a must...Borrow the money...Top schools get you where you want to go...College is the time to explore your own mind and have fun...Major in whatever interests you—not in what interests other people."
And best of all, "You should overpay for health insurance so we elders can underpay. Cuz one day you'll be unlucky enough to be our age."
One More Thing
Gotta go, Millennial. Appointment with the orthopedist. But before I leave...I know you and your pals love Baby Boom pop culture. 60s rock. Beards. Retro clothes. All that good stuff. Well, you can find wisdom in my generation's favorite movie—Animal House. Standing next to a semi-demolished automobile, Otter tells Flounder that his grievous error was, "You trusted us." He adds, "Hey, make the best of it! Maybe we can help."
Come to think of it, Otter's words eloquently define my generation's philosophy of governance.