At the beginning of 2013, a temporary reduction in the Social Security tax rate expired and the amount of take home pay for those with jobs dropped by 2 percent. The result was a noticeable drop in disposable income.
Disposable income has been growing steadily since 2010. There was a large increase in December 2012 as businesses rushed to pay dividends and bonuses ahead of higher tax rates in 2013. Growth then fell below trend as the Social Security tax increase pushed income down.
Unfortunately, many consumers are set to take an even bigger hit under Obamacare next January.
Most reports address health insurance costs in generic terms or with percentages. Families USA recently provided a concrete example for a single woman in Colorado making $23,000 a year. Assuming she pays only Social Security taxes, her take home pay amounts to about $1,800 per month.
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Under Obamacare, this single woman will now be required to have health insurance. She will qualify for a federal subsidy, but it will not cover everything. Families USA estimates her health plan would cost $5,000 a year and the subsidy would cover 71 percent of the cost. This newly insured, single, young woman would face an out-of-pocket cost of $121 a month, or 6.7 percent of her take home pay.
This reduction in disposable income will not be uniform like the Social Security tax increase was. It will be regressive, most likely hitting lower-income households the hardest. Many of these families and singles currently lack insurance, and some may have decided that they need the money for rent, food or utilities more than health insurance. The right to make that decision will now be taken away from them.
As designed, Obamacare is lowering the disposable income of those who can least afford it. The working poor will have to divert money from everyday expenses to health insurance. The impact will likely be felt at retailers, restaurants and other businesses that depend on consumer spending.
Investors should expect to see earnings drop in the first quarter of 2014 and companies will be able to forecast that. That means inventories are likely to decline in the fourth quarter of 2013 and new orders should be dropping before then. This slowdown is entirely predictable, and investors should consider scaling back their exposure to the stock market.
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