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Rising health care costs threaten financial security at older ages and lead many older Americans to delay retirement. Continued work reduces the risk of high out-of-pocket health care costs for workers receiving health benefits from their employers. Working longer also increases retirement incomes, making health care costs more affordable. This report shows that men with very high expected health care costs after age 65 retire 11 months later than those with very low health care costs. For women, the difference is 12 months.
Rising health care costs threaten many older Americans’ financial security. Health care costs
have been increasing rapidly in recent decades, and much of these costs are paid by consumers of
all ages. Medical expenses now consume a substantial share of household spending in retirement
and that share is likely to rise in the future as costs continue to escalate. Cutbacks in employersponsored
retiree health benefits add to the difficulty that many older Americans face paying for
People may respond to these financial pressures by delaying retirement. For those
receiving health benefits from their employers, continued work reduces the risk of high out-ofpocket
health care costs. Working longer also increases retirement incomes—making health care
costs more affordable—by raising people’s earnings, boosting their Social Security and
employer-sponsored pension wealth, and improving their ability to save, as well as by reducing
the number of years over which retirement wealth must be spread (Butrica et al. 2004).
Employment rates for older men, in fact, have been rising in recent years, after falling sharply for
most of the last century (Purcell 2006). Future increases in health care costs could further delay
retirement in coming years.
This paper examines the impact of expected future out-of-pocket medical spending on
retirement decisions. We estimate retirement hazard models as functions of the increase in
premium costs that result when retiring workers lose their employer health benefits and expected
future health care costs after age 65, which we base on age, health insurance coverage, and
health status while working. The results show that the premium costs associated with retirement before age 65 and expected out-of-pocket health care costs after age 65 substantially delay
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