NCPA - National Center for Policy Analysis

Does Retiree Health Insurance Encourage Early Retirement?

January 10, 2012

In the United States, there is currently a strong link between health insurance and employment.  Most individuals can only purchase health insurance at favorable group rates through their employer and there are significant tax advantages to employer-based coverage.  This reliance on employer-provided plans makes it more difficult for workers to retire before they become eligible for health benefits through Medicare (age 65).  However, some employers extend health insurance coverage to their pre-65 retirees, and this has the effect of enabling earlier retirement, say researchers Steven Nyce, Sylvester Schieber, John B. Shoven, Sita Slavov and David A. Wise.

  • In 2010, according to the Kaiser Family Foundation, only 28 percent of large firms (with 200 or more employees) that offer employee health coverage also extended benefits to retirees.
  • Additionally, 3 percent of small firms offer similar benefits.
  • Because the Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985 allows retiring workers to maintain their former employer's health plan for up to 18 months, the age at which workers can retire without risking a gap in health care is 63.5.

In this context, there are three distinct sets of workers: workers with no post-retirement pre-Medicare coverage, workers with access to post-retirement pre-Medicare coverage, and workers who have access to and generous employer-subsidized rates (50 percent or more) for this coverage.  For the latter two groups, the greatest effects in early retirement are seen in as they near the crucial 63.5 year old mark.

  • Access-only workers have a 21.2 percent increase in the probability of turnover at age 62.
  • They also have a 32.2 percent increase in the probability of turnover at age 63.
  • Subsidized workers have even greater incentives to retire early: the subsidy raises turnover by 33.7 percent at age 62 and 43.7 percent at age 63.
  • It is estimated that, conditional on working at age 54, only 15.6 percent of individuals with subsidized coverage remain at their firm at age 65, compared to 20 percent of individuals with no retiree health coverage.

These incentives to retire early are even more relevant when it is considered that the Patient Protection and Affordable Care Act (PPACA) will broaden access to health care coverage that is not contingent on working.  This will likely have a similar effect to the "access-only" group mentioned above -- workers will be implicitly encouraged to retire earlier because the PPACA coverage will bridge the gap to Medicare.

Source: Steven Nyce et al., "Does Retiree Health Insurance Encourage Early Retirement?" National Bureau of Economic Research, December 2011.

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