US presidential candidate Andrew Yang is proposing a universal basic income (UBI) policy, which he refers to as the 'Freedom Dividend' - in the form of the administration of $1,000 a month to every American adult over the age of 18. The Freedom Dividend is meant to offset the threat to employment and the deterioration of the middle class that some are expecting from the looming industrial revolution in automation. The policy sounds great on paper, but we need to analyze if it actually makes financial sense in comparison to some of the economic policies offered by the other presidential candidates in the US 2020 federal election.

Healthcare Spending: Sensitivity Analysis

$1,000 a month leads us to a value of $12,000 a year being given to each American. Currently there is also an inflation rate in the US of ~2% on the US dollar. If we utilize time-value of money tables, and assume a 2% discount rate (from inflation) on an annuity for 50 years ($12,000 a year x 31.424), this leads us to a lifetime income from UBI of $377,088, with inflation taken into consideration.

Alternatively, the present value of a constant perpetuity (constant payment given in perpetuum) is given by PV = cash payment (C)/interest rate (i), in which PV = C/i = $12,000/0.02 = $600,000 lifetime income from UBI.

If you take into consideration the average annual cost of healthcare insurance in America - $10,000 a year - you are left with a lifetime total of about $500,000 if you consider a person starts spending on healthcare from age 18 and lives to around 70 (since the average human lifespan around the world is around 70). This figure is a liberal one since inflation will affect how much healthcare insurance will cost each year. So with that said, compounding 2% inflation per annuity at 50 years (lifetime) produces a lifetime total of $845,790 in healthcare spending ($10,000 x 84.579 according to the time-value tables).

When you subtract the inflation-adjusted lifetime cost of healthcare ($845,790) from the lifetime amount for UBI ($377,088 - $600,000), you are left with a net present value of about -$245,790 to -$468,702.

Food and Shelter Costs: Sensitivity Analysis

However, with that said, we still have to factor in the costs of food and shelter, the two other basic necessities without which life is either not possible in the case of the former, or very difficult in the case of the latter.

Food spending is about $7,000 a year in America, leading to a figure of about $350,000 per lifetime (minus inflation, and assuming paying for food from age 18 to 70). If we add inflation at 2% per annuity, for 50 years, it leads to a lifetime figure of $592,053 ($7,000 x 84.579 according to the time-value tables).

As for shelter, if we go by the most conservative median value by state for annual rent cost (West Virginia) - $681 monthly x 12 months = ~$8,000 - and multiply that for a lifetime (minus inflation, assuming paying for rent from age 18 to 70, and ignoring any changes in rent costs over the years), then that leads us to a lifetime value of $400,000 on rent alone. If we add inflation to rent prices at 2%, this leads to a lifetime cost of $676,632 ($8,000 x 84.579 according to the time-value tables).

So, if we add both inflation-adjusted food ($592,053) and shelter ($676,632) lifetime values together ($1,268,685), and subtract this value from the net present values of -$245,790 and -$468,702 (for UBI with healthcare spending into consideration), we are left with net present values of -$1,737,387 to -$1,514,475.

Employment Considerations

The above values are with the assumption that a person obtaining UBI is also unemployed (since the crux of the argument behind UBI is that automation will cause unemployment).

We may assume however, that a person somehow obtains a job even with automation in consideration, and makes a wage of at least $9 an hour (so ~$20,000 a year in net income). If we subtract 12% federal payroll tax from this (not including any state taxes), we are left with an annual income of $17,600. If we then also assume work from age 18 to 70 (~50 years), and account for a 2% discount rate (from inflation) on the annuity, this leads to a lifetime net income of ~$553,062 ($17,600 a year x 31.424).

If this net income is added to the net present values of UBI with food, shelter, and healthcare costs in consideration (-$1,737,387 to -$1,514,475 at the low end), we are left with slightly more favourable final net present values of -$961,412 to -$1,184,325.

UBI + Private Healthcare vs. No UBI + Universal Single-Payer Healthcare

Alternatively, we could simply abandon UBI (i.e. not vote for Andrew Yang) and go with Bernie Sanders' plan for universal single-payer healthcare (Medicare for All), though it is unclear at this time how much more/less the average individual would pay in taxes to offset the current cost of private healthcare insurance, though some studies - even from libertarian sources like the Mercatus Center (which don't view Keynesian economics favourably) indicate that the US will save trillions in dollars in healthcare spending overall over the next 10 years if it adopts a single-payer healthcare plan.

With that said however, we could assume that one fund Medicare for All through a 7.5% federal increase in payroll tax (as is Bernie Sander's policy proposal), while abolishing costs for healthcare premiums and copays under the private system.

If one is making $9/hour ($20,000 a year), this would increase the payroll tax rate applied on this annual net income from 12% to 19.5%. Net income would therefore be a lower value of $16,100 per year. When we also assume work from age 18 to 70 (~50 years), and account for a 2% discount rate (from inflation) on the annuity, this leads to a reduced lifetime net income of ~$505,926 ($16,100 a year x 31.424).

However, single-payer healthcare would also reduce healthcare costs to $0. And we are also assuming that under Sanders' policies there would be no additional UBI given to citizens. The addition of lifetime net present values for food ($592,053) and shelter ($676,632) costs - as indicated earlier - would lead to a figure of $1,268,685 required in living expenses. If we then add $0 in healthcare costs, and subtract lifetime spending ($1,268,685) from lifetime net income ($505,926), we produce a total net present value of -$762,759.

Taking into consideration that a person has a job that pays $9/hour, with UBI and a private healthcare system, it would lead to lifetime debts of -$1,184,325 at the high end, and -$961,412 at the low end. In comparison, a person with a job that pays $9/hour without UBI, and with a single-payer universal healthcare system, would lead to a lifetime debt of -$762,759. This presents a 21% reduction in lifetime debt under a universal healthcare system without UBI at the low end, and a 36% reduction at the high end. In other words, a universal healthcare system without UBI seems to be more cost-effective compared to UBI with a private healthcare system.

Conclusions

In conclusion, our analysis suggests that a universal single-payer healthcare system without UBI (as proposed by the US presidential candidate Bernie Sanders; Elizabeth Warren seems to have backtracked from the policy, and now only supports a public option) is superior for the average individual than UBI with a private healthcare system. UBI is also only an effective solution if you have a job (albeit even a low-wage job) during the age of automation, which somewhat defeats the purpose of it since job loss is expected due to automation. In addition, UBI also notably does nothing for job creation to combat this expected job loss (though it's possible that other avenues such as investment into a green economy to combat climate change could lead to job creation - which, to be fair, is a policy that is part of Andrew Yang's presidential campaign).

Alternatively, UBI with a single-payer universal healthcare system could potentially lead to even further cost savings and wealth accumulation for the middle class. This is notably the type of UBI being discussed for implementation in the social democracies of the Nordic countries. To our knowledge however, Andrew Yang proposes the retaining of the current private healthcare system in America while - somewhat confusingly - calling it 'Medicare for All'.