Do Out-of-Pocket Health Care Costs Delay Retirement?

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.

The text below is an excerpt from the complete document. Read the full paper in PDF format.

Abstract

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.

Introduction

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 health care.

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 retirement.

(End of excerpt. The entire paper is available in PDF format.)

Usage and reprints: Most publications may be downloaded free of charge from the web site and may be used and copies made for research, academic, policy or other non-commercial purposes. Proper attribution is required. Posting UI research papers on other websites is permitted subject to prior approval from the Urban Institute—contact publicaffairs@urban.org.

If you are unable to access or print the PDF document please contact us or call the Publications Office at (202) 261-5687.

Disclaimer: 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. Copyright of the written materials contained within the Urban Institute website is owned or controlled by the Urban Institute.