The VICE Guide to Finance

Sometimes It Makes Sense to Make Less Money

Our system is broken.

by Allie Conti
Jan 5 2018, 6:35pm

Illustration by Wren McDonald

When a producer at FOX News asked me if I wanted to be an on-air guest, I should have known better. It was the spring of 2014, and I was working at an alt-weekly, making very little money and desperate for an opportunity to advance both my career and lot in life. So I said yes, and later that day, a limo came and picked me up at my crumbling apartment and drove me to a local news station where I was made-up like a contestant in a child beauty pageant. I was on Greta Van Susteren's show to talk about a story I was chasing about a couple who pretended to be Scottish royalty, though they were actually living off of entitlement programs. I didn't initially question why FOX News was interested in my reporting, though when Greta asked me if I thought what the couple was doing was morally right, it became very obvious: I was there to bash welfare on cable news and provide millions of Middle Americans with a talking point that I didn't personally agree with.

That faux Scottish couple were grifters to be sure, and in no way emblematic of the millions of hardworking Americans who need a little help to get by. But after fighting back and heading home to that rundown apartment, I couldn't help but wonder: Was our entitlement system a bit wonky, even if it wasn't in the way that the FOX News crowd liked to pretend it was? For instance, in rare cases, could it theoretically make sense to refuse a raise because it might disqualify you for benefits that are technically "worth" more than the additional income? I'm always a little wary when my income goes up, because it just increases my student loan payments, too. I'm similarly afraid that I'll go into a different tax bracket and therefore fuck myself over.

When I called up Jesse Rothstein, a public policy professor and the director of the Institute for Research on Labor and Employment at the University of California Berkeley, he told me that I was right about the general idea, though I had the specifics wrong.

"People commonly think that what happens is you go from paying 10 percent tax on all of your income to paying 15 percent tax on all of your income," he said. "But that's not how it works. You pay 10 percent on your income up to that threshold, and then you pay 15 percent above that. I think of it as a sequence of buckets. You fill it up, and once that one's full, you move on to the next one. But it's not that all of a sudden everything gets dumped into a bigger bucket. That's what you would need to have happen to trigger any sort of negative effect."

Despite the fact that I called him and essentially asked him to defend a bad-faith argument beloved by conservative assholes, Rothstein copped to the fact that sometimes it does make sense to make less money. But of course, that doesn't mean poor people who make this calculation are lazy; it means our system is terribly, terribly broken. Here's how it all shakes out:


Rothstein explained that the term I was looking for was "subsidy cliff"—or the point at which a small raise in income changes the level of benefits you're eligible for.

"It's a pretty unusual circumstance where you literally get more back by reducing your earnings," he hedged. "It's more common that you get less back than the amount of the increase in earnings." The most common place it does seem to happen, though, is with health insurance.

The way Obamacare works is that people who don't have health insurance through their employer can buy it online through a number of state exchanges. The premiums are, in principle, supposed to be made affordable through a tax credit that applies to people who are making fewer than 400 percent of what's known as the federal poverty level, or the FPL. (For these purposes, income is considered gross pay minus above-the-line deductions like contributions to a retirement account, interest on student loans, moving expenses, and more, plus tax-exempt municipal bond interest, plus untaxed Social Security benefits.)

The Obamacare subsidy is meant to phase out and not really have a cliff, though a small one does exist. Here's an example based on the below three facts:

  • In 2017, for a family of one, the FPL times four was $47,520.
  • The subsidy is based on the cost of the second-lowest-cost "Silver" plan.
  • You'll never pay more than 9.5 percent of your income.

OK, so:

  • Say the cost of a Silver Plan under Obamacare in your state is: $9,500 a year.
  • And your hypothetical income is $45,000.
  • Take 9.5 percent of that income: $4,275.
  • And do some subtraction to find out your Obamacare subsidy: $9,500 - $4,275 = $5,225.

The subsidy cliff comes when your adjusted income is $1 more than 400 times the FPL. That's when you lose the tax credit. If the credit above amounts to $5,225, basically any raise that's less than that isn't worth it for our hypothetical worker. A small cost-of-living raise that would put the worker up to $48,000 would cost him or her an insurance credit worth more than $5,000.

Obviously, there's only a small sliver of people who are affected by this. However, things stand to get worse for them under Trump. "If those individual insurance markets in the exchanges get more and more broken at the end of the mandate, which is part of the tax bill, that raises the unsubsidized price of getting insurance," Rothstein told me. "But it doesn't raise the cost of insurance if you have subsidies. So that basically makes the cliff bigger."

The Trump administration's systematic dismantling of Obamacare means two things. First, the tax credits for Obamacare will go up, which means that people who make under four times the federal poverty level will pay even less for insurance. That's good! But the second thing that will happen—the corollary of that—is that people who already don't qualify for the credit right now will see their premiums soar. So, take our hypothetical person who might get a cost-of-living raise of a few hundred bucks that disqualifies them from the subsidy. If the cost of a Silver Plan goes up by 37 percent, as Reuters reported it will, and they have to pay the full price, the so-called subsidy cliff will go from being a slight drop to a header off a skyscraper.

Financial Aid

The Pell grant is the bedrock of the student financial aid system, and there are instances that it makes sense to quit your job so that you can collect one. Bear with me for what sounds like a PSAT math problem, albeit one that I answer for you.

Households making less than $50,000 a year during the 2016–2017 school year were eligible to receive a Pell grant of up to $5,815, though the majority of that money goes to students with household incomes of less than $20,000. Say you were a student working a part-time job about ten hours a week that paid $8.10 an hour—the minimum wage in Florida—and netted around $4,212 a year. You'd pay no federal income tax on the amount, but you would probably knock off a few hundred bucks between Social Security and state/local taxes to make your income right around $4,000. You live with your mom who makes $17,000 a year, so your household income is right on the cusp of $20,000, plus or minus a few bucks. You could not work and theoretically get a Pell grant that's worth more than your total income.

That scenario sounds a lot like a cliff to me. To find out if there was a version of the phenomenon in student aid, I called up Mark Kantrowitz—an author and member of the board of trustees for the Center for Excellence in Education, as well as one of the leading experts in student financial aid and scholarships.

Kantrowitz said that the scenario sounded plausible, though far from common. He confirmed my suspicion that I was onto something and gave me a ton of information on how aid is calculated. Basically, the formula is the maximum Pell grant amount for a given year minus expected family contribution (EFC), which is calculated by the FAFSA using a complicated formula based on the student and parent income, assets, family size, number of children in college, age of the older parent, and various other demographic factors.

If your EFC is 90 percent of what it costs for you to go to school or more, you get nothing from the federal government. Otherwise, you get the difference. This also means that someone who might get a lot of money to go to a private school that costs $70,000 a year would get nothing to go to a public in-state school. Attending a private school (and getting education that arguably has higher value due to a litany of factors) would create a greater difference between the two values.

The education expert also pointed to evidence that a cliff is widening under our current Congress. The Affordable Care Act (a.k.a. Obamacare) set the maximum Pell grant from the year 2010 to the year 2020. Five of those years the maximum amount of the grant was supposed to increase with the inflation rate, and the other five years it wasn't supposed to increase at all. Congress could have chosen to keep it tied to inflation, though they didn't.

If the maximum Pell grant amount shrinks in real dollars because it's not going up with the cost of inflation, and the ETF goes up because it's tied to inflation, then according to the formula, the amount of money one would receive is less than it would be otherwise. If your family set aside enough money for you to have $4,000 per semester to go to school and the amount of the maximum Pell grant stagnates, your family is getting less bang for their buck.

To be clear, these scenarios only apply to a small group of people. And though it's absurd to suggest that anyone is purposefully making less money to reap governmental reward, it's plain to see that some would stand to benefit by doing so. But as Congress prepares to widen the gap between the rich and poor by redistributing even more wealth to the One Percent, it's worth looking at the middle-class people who will fall through the cracks. If the growing subsidy cliff makes the difference between someone having healthcare and not being able to pay for it, or going to an elite school or a public one, it should be talked about. If we're not prepared to make access to a doctor or higher education universal, it's worth wondering how we can abide by a system in which it sometimes makes sense to make less money.

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financial aid
subsidy cliff
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