NCPA - National Center for Policy Analysis

Affordable Care Act Could Encourage Early Retirement

June 11, 2013

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. Employment-based health insurance can make it more difficult for individuals to retire before they become eligible for health insurance through Medicare at age 65, say researchers in the Journal of Public Economics.

However, some employers extend health insurance benefits to their retirees, and individuals who are eligible for such retiree health benefits need not wait until age 65 to retire with group health coverage.

  • Retiree health coverage has its strongest effects at ages 62 through 64.
  • Coverage that includes an employer contribution is associated with a 6.3 percentage point (36.2 percent) increase in the probability of turnover at age 62; a 7.7 percentage point (48.8 percent) increase in the probability of turnover at age 63; and a 5.5 percentage point (38.0 percent) increase in the probability of turnover at age 64.
  • Conditional on working at age 57, such coverage reduces the expected retirement age by almost three months and reduces the total number of person-years worked between ages 58 and 64 by 5.6 percent.

The 2010 Patient Protection and Affordable Care Act will considerably weaken the link between employment and health insurance by making group coverage available to all individuals regardless of employment.

  • Many individuals will also receive explicit subsidies to purchase group coverage, and older individuals will also likely receive substantial implicit subsidies through a legal limit on their premiums relative to those paid by younger individuals.
  • One possible consequence of this reform is that it may encourage earlier retirements, as all older workers will be able to maintain group coverage (often with generous subsidies) even if they retire before Medicare eligibility.

Source: Sita Nataraj Slavov et al., "Does Retiree Health Insurance Encourage Early Retirement?" Journal of Public Economics, June 4, 2013.


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