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Health Insurance Costs and Early Retirement Decisions

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Document date: August 01, 1999
Released online: August 01, 1999

This project was funded by the Robert Wood Johnson Foundation, under the Changes in Health Care Financing and Organization (HCFO) initiative, grant number 29201. An earlier version of the paper was presented at the 1999 annual meeting of the Population Association of America. The authors are grateful to Linda Bilheimer, Pam Loprest, Stan Panis, Cori Uccello, Sheila Zedlewski, and especially Len Burman for helpful comments and advice.

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.


Employer-sponsored health insurance (ESI) coverage has special importance for the near elderly. Unlike elderly Americans, those in their late fifties and early sixties are not eligible for Medicare benefits, unless they are disabled. Because the risk of expensive health problems increases with age in adulthood, non-group health insurance coverage can be prohibitively expensive for the near elderly. Going without health insurance altogether can be especially risky, because the threat of serious health problems can expose uninsured near-elderly persons to catastrophic health care costs. Employers, then, may provide the only affordable source of health insurance coverage for most persons approaching the Medicare eligibility age.

Because of their importance, health benefits can be a major factor in the retirement decision. For workers receiving health benefits from their employers that do not continue after retirement, the loss of coverage can be costly and can discourage retirement before workers become eligible for Medicare. For many insured workers, coverage can continue after retirement, either in the form of retiree health insurance (RHI) subsidized by the employer or through federally-mandated continuation coverage, for which the former employee bears the entire cost. However, coverage can be quite expensive when not subsidized by an employer, and subsidized RHI coverage can be substantially more costly than the benefits received by an active employee. Thus, even for workers with RHI, the health insurance costs associated with retirement can be large and can act as powerful disincentives to early retirement. If current trends continue and RHI coverage becomes less available and more costly in the future, health insurance costs may emerge as an even more important factor in the early retirement decision in coming decades.

This paper estimates the effects of health insurance costs on early retirement for a sample of full-time workers ages 55 to 61. Although previous studies have examined the relationship between post-retirement health insurance options available to the worker and retirement decisions, they have not considered the role of the cost of health insurance in the early retirement decision. Given the wide variation in cost sharing across different health insurance plans, it is important to model explicitly the impact of costs, especially in light of evidence that RHI coverage has become more expensive in recent years. By quantifying the effects of health insurance costs on labor supply decisions, we were able to estimate not only the impact of RHI coverage on early retirement rates, but also to simulate the effects of different health reform initiatives that have recently been proposed. In particular, we examined the potential impact on retirement of Medicare buy-in options, tax deductions and tax credits for insurance premium expenses, and extensions of the federally-mandated period during which employers must provide continuation coverage to their former workers.

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Topics/Tags: | Economy/Taxes | Employment | Health/Healthcare

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